UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-38247
AYTU BIOPHARMA, INC.
(www.aytubio.com)
Delaware |
| 47-0883144 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
(720) 437-6580
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | AYTU | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 9, 2022, there were 38,574,875 shares of the registrant’s common stock outstanding.
AYTU BIOPHARMA, INC. FOR THE QUARTER ENDED MARCH 31, 2022
INDEX
PART I—FINANCIAL INFORMATION
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: our anticipated future cash position; the planned expanded commercialization of our products and the potential future commercialization of our product candidates; our planned product candidate development strategy and research and development expenses; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; our plan to acquire additional assets anticipated increases to operating expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
This Quarterly Report on Form 10-Q refers to trademarks, such as Adzenys, Aytu, Aytu BioPharma, Cotempla, FlutiCare, Innovus Pharma, Neos, Poly-Vi-Flor, Tri-Vi-Flor, Tuzistra, and ZolpiMist which are protected under applicable intellectual property laws and are our property or the property of our subsidiaries. This Form 10-Q also contains trademarks, service marks, copyrights and trade names of other companies which are the property of their respective owners. Solely for convenience, our trademarks and tradenames referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.
3
AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share)
(Unaudited) | ||||||
March 31, | June 30, | |||||
| 2022 |
| 2021 | |||
Assets | ||||||
Current assets |
|
|
| |||
Cash and cash equivalents | $ | 27,613 | $ | 49,649 | ||
Restricted cash |
| — |
| 252 | ||
Accounts receivable, net |
| 27,613 |
| 28,176 | ||
Inventory, net |
| 13,891 |
| 16,339 | ||
Prepaid expenses |
| 7,942 |
| 9,780 | ||
Other current assets |
| 888 |
| 1,038 | ||
Total current assets |
| 77,947 |
| 105,234 | ||
Property and equipment, net |
| 3,479 |
| 5,140 | ||
Operating lease right-of-use asset |
| 3,561 |
| 3,563 | ||
Intangible assets, net | 74,428 | 85,464 | ||||
Goodwill |
| 8,637 |
| 65,802 | ||
Other non-current assets | 774 | 465 | ||||
Total non-current assets |
| 90,879 |
| 160,434 | ||
Total assets | $ | 168,826 | $ | 265,668 | ||
Liabilities | ||||||
Current liabilities |
|
|
| |||
Accounts payable and other | $ | 11,130 | $ | 19,255 | ||
Accrued liabilities |
| 53,470 |
| 51,295 | ||
Accrued compensation |
| 5,258 |
| 5,939 | ||
Short-term line of credit | 3,385 | 7,934 | ||||
Current portion of debt |
| 100 |
| 16,668 | ||
Current portion of operating lease liabilities |
| 1,203 |
| 940 | ||
Current portion of fixed payment arrangements |
| 2,903 |
| 3,134 | ||
Current portion of CVR liabilities |
| 156 |
| 218 | ||
Current portion of contingent consideration |
| — |
| 4,055 | ||
Other current liabilities | 2,755 |
| — | |||
Total current liabilities |
| 80,360 |
| 109,438 | ||
Debt, net of current portion | 14,167 | 180 | ||||
Operating lease liabilities, net of current portion |
| 2,406 |
| 2,624 | ||
Fixed payment arrangements, net of current portion |
| 4,237 |
| 6,324 | ||
CVR liabilities, net of current portion |
| 564 |
| 1,177 | ||
Contingent consideration, net of current portion | 371 | 8,002 | ||||
Other non-current liabilities | 5,577 | 355 | ||||
Total liabilities |
| 107,682 |
| 128,100 | ||
Commitments and contingencies (Note 13) |
|
|
|
| ||
Stockholders’ equity |
|
|
|
| ||
Preferred Stock, par value $.0001; 50,000,000 shares authorized; no shares issued or outstanding as of March 31, 2022 and June 30, 2021 |
|
| ||||
Common Stock, par value $.0001; 200,000,000 shares authorized; shares and 33,355,935 and 27,490,412, respectively, as of March 31, 2022 and June 30, 2021 |
| 3 |
| 3 | ||
Additional paid-in capital |
| 331,912 |
| 315,864 | ||
Accumulated deficit |
| (270,771) |
| (178,299) | ||
Total stockholders’ equity |
| 61,144 |
| 137,568 | ||
Total liabilities and stockholders’ equity | $ | 168,826 | $ | 265,668 | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements
4
AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 | ||||||
$ | 24,199 | $ | 13,483 | $ | 69,221 | $ | 42,150 | |||||
Cost of sales |
| 11,513 | 13,935 |
| 31,780 | 24,249 | ||||||
Gross profit | 12,686 | (452) | 37,441 | 17,901 | ||||||||
Operating expenses | ||||||||||||
Research and development |
| 3,726 | 390 |
| 10,742 | 859 | ||||||
Selling and marketing | 9,743 | 6,597 | 28,700 | 18,128 | ||||||||
General and administrative | 7,615 | 6,001 | 23,784 | 16,948 | ||||||||
Acquisition related costs | — | 1,537 | — | 2,849 | ||||||||
Restructuring costs | — | 4,818 | — | 4,875 | ||||||||
Impairment expense |
| 45,196 | 4,286 |
| 64,649 | 4,286 | ||||||
Amortization of intangible assets |
| 1,061 | 1,585 |
| 3,214 | 4,754 | ||||||
Total operating expenses |
| 67,341 |
| 25,214 |
| 131,089 |
| 52,699 | ||||
Loss from operations |
| (54,655) |
| (25,666) |
| (93,648) |
| (34,798) | ||||
Other income (expense) |
|
|
|
|
|
|
| |||||
Other income/(expense), net |
| (55) | (425) |
| (75) | (1,555) | ||||||
Gain (loss) from contingent consideration | 1,257 | 631 | 761 | (2,680) | ||||||||
Gain (loss) on extinguishment of debt | 169 | — | 169 | (258) | ||||||||
Gain on derivative warrant liability |
| 211 | — |
| 211 | — | ||||||
Total other expense |
| 1,582 |
| 206 |
| 1,066 |
| (4,493) | ||||
Loss before income tax |
| (53,073) |
| (25,460) |
| (92,582) |
| (39,291) | ||||
Income tax benefit |
| — | — |
| (110) | — | ||||||
Net loss | $ | (53,073) | $ | (25,460) | $ | (92,472) | $ | (39,291) | ||||
Weighted average number of common shares outstanding | 29,689,856 | 18,092,465 |
| 27,211,708 |
| 14,490,219 | ||||||
Basic and diluted net loss per common share | (1.79) | (1.41) | (3.40) | (2.71) | ||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
5
AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Three Months Ended March 31, | |||||||||||||||||||
Additional | Total | ||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity (Deficit) | ||||||
Balance, December 31, 2021 | — | $ | — | 30,010,468 | $ | 3 | $ | 323,231 | $ | (217,698) | $ | 105,536 | |||||||
Stock-based compensation | — | — | 107,767 | — | 1,270 | — | 1,270 | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | 3,237,700 | — | 7,034 | — | 7,034 | ||||||||||||
Tax withholding for stock-based compensation | — | — | — | — | (2) | — | (2) | ||||||||||||
Warrants issued with debt refinance | — | — | — | — | 379 | — | 379 | ||||||||||||
Net loss | — | — | — | — | — | (53,073) | (53,073) | ||||||||||||
Balance, March 31, 2022 | — | $ | — | 33,355,935 | $ | 3 | $ | 331,912 | $ | (270,771) | $ | 61,144 | |||||||
Balance, December 31, 2020 | — | $ | — | 17,882,893 | $ | 2 | $ | 246,532 | $ | (133,841) | $ | 112,693 | |||||||
Stock-based compensation | — | — | — | — | 1,382 | — | 1,382 | ||||||||||||
Issuance of common stock for business acquisition, net of issuance costs | — | — | 5,471,804 | 1 | 53,102 | — | 53,103 | ||||||||||||
Estimated fair value of replacement equity awards | — | — | — | — | 432 | — | 432 | ||||||||||||
Contingent Value Rights payouts | — | — | 103,190 | — | 1,000 | — | 1,000 | ||||||||||||
Net loss | — | — | — | — | — | (25,460) | (25,460) | ||||||||||||
Balance, March 31, 2021 | — | $ | — | 23,457,887 | $ | 3 | $ | 302,448 | $ | (159,301) | $ | 143,150 | |||||||
Nine Months Ended March 31, | |||||||||||||||||||
Additional | Total | ||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity (Deficit) | ||||||
Balance, June 30, 2021 | — |
| $ | — |
| 27,490,412 |
| $ | 3 |
| $ | 315,864 |
| $ | (178,299) | $ | 137,568 | ||
Stock-based compensation | — | — | 404,739 | — | 4,018 | — | 4,018 | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | 5,460,784 | — | 11,659 | — | 11,659 | ||||||||||||
Tax withholding for stock-based compensation | — | — | — | — | (8) | — | (8) | ||||||||||||
Warrants issued with debt refinance | — | — | — | — | 379 | — | 379 | ||||||||||||
Net loss | — | — | — | — | — | (92,472) | (92,472) | ||||||||||||
Balance, March 31, 2022 | — | $ | — | 33,355,935 | $ | 3 | $ | 331,912 | $ | (270,771) | $ | 61,144 | |||||||
Balance, June 30, 2020 | — |
| $ | — |
| 12,583,736 |
| $ | 1 |
| $ | 215,024 |
| $ | (120,010) | $ | 95,015 | ||
Stock-based compensation | — |
| — | — |
| — |
| 2,345 |
| — | 2,345 | ||||||||
Issuance of common stock, net of issuance cost | — | — | 5,169,076 | 1 | 29,487 | — | 29,488 | ||||||||||||
Issuance of common stock for business acquisition, net of issuance costs | — | — | 5,471,804 | 1 | 53,102 | — | 53,103 | ||||||||||||
Issuance of common stock related to debt conversion | — |
| — | 130,081 |
| — |
| 1,058 |
| — | 1,058 | ||||||||
Estimated fair value of replacement equity awards | — |
| — | — |
| — |
| 432 |
| — | 432 | ||||||||
Contingent Value Rights payouts | — |
| — | 103,190 |
| — |
| 1,000 |
| — | 1,000 | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| (39,291) | (39,291) | ||||||||
Balance, March 31, 2021 | — | $ | — | 23,457,887 | $ | 3 | $ | 302,448 | $ | (159,301) | $ | 143,150 | |||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements
6
AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Operating Activities |
|
|
| |||
Net loss | $ | (92,472) | $ | (39,291) | ||
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
| ||
Depreciation, amortization and accretion |
| 8,005 |
| 5,878 | ||
Impairment expense | 64,649 |
| 4,286 | |||
Stock-based compensation expense |
| 4,018 |
| 2,485 | ||
(Gain) loss from contingent considerations |
| (761) |
| 2,680 | ||
Amortization of senior debt (premium) discount | (268) | 115 | ||||
(Gain) loss on sale of equipment | (44) | 112 | ||||
Gain on termination of lease | — | (343) | ||||
(Gain) loss on debt extinguishment | (193) | 258 | ||||
Inventory write-down | 352 | 7,227 | ||||
Gain on derivative warrant liability | (211) | — | ||||
Other noncash adjustments |
| (152) |
| 335 | ||
Changes in operating assets and liabilities: | ||||||
Accounts receivable |
| 647 |
| 1,764 | ||
Inventory |
| 91 |
| (4,390) | ||
Prepaid expenses and other current assets |
| 1,406 |
| 7,673 | ||
Accounts payable and other |
| (8,099) |
| (6,156) | ||
Accrued liabilities |
| 1,252 |
| (2,293) | ||
Other operating assets and liabilities, net | 52 | (27) | ||||
Net cash used in operating activities |
| (21,728) |
| (19,687) | ||
Investing Activities |
|
|
|
| ||
Contingent consideration payment |
| (3,138) |
| (683) | ||
Cash received from acquisition | — | 15,722 | ||||
Cash payment for business acquisition | — | (15,399) | ||||
Other investing activities |
| (69) |
| 4 | ||
Net cash used in investing activities |
| (3,207) |
| (356) | ||
Financing Activities |
|
|
|
| ||
Proceeds from issuance of stock |
| 12,700 |
| 32,250 | ||
Payment of stock issuance costs |
| (782) |
| (4,430) | ||
Payment made to fixed payment arrangement | (3,277) | (3,034) | ||||
Proceeds from short-term line of credit | 112,463 | — | ||||
Payments made on short-term line of credit | (117,012) | (5,968) | ||||
Payments made to borrowings |
| (16,075) |
| (318) | ||
Proceeds from borrowings | 15,000 | — | ||||
Payment for debt issuance costs | (363) | — | ||||
Other financing activities | (7) | — | ||||
Net cash provided by financing activities |
| 2,647 |
| 18,500 | ||
Net change in cash, restricted cash and cash equivalents | (22,288) | (1,543) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 49,901 | 48,333 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 27,613 | $ | 46,790 | ||
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||
Cash and cash equivalents | $ | 27,613 | $ | 46,538 | ||
Restricted cash | — | 252 | ||||
Total cash, cash equivalents and restricted cash | $ | 27,613 | $ | 46,790 | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
7
AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT’D
(In thousands)
(Unaudited)
| Nine Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Supplemental cash flow data | ||||||
Cash paid for interest | $ | 3,080 | $ | 449 | ||
Non-cash investing and financing activities: | ||||||
Warrants issued | $ | 3,177 | $ | 1,628 | ||
Other noncash investing and financing activities | $ | 473 | $ | 66 | ||
Fixed payment arrangements included in accrued liabilities | $ | — | $ | 1,575 | ||
Issuance of common stock for note conversion | $ | — | $ | 1,058 | ||
Contingent value rights payout | $ | — | $ | 1,000 | ||
Issuance related to acquisition of Neos | $ | — | $ | 53,241 | ||
Fair value of non-cash assets acquired | $ | — | $ | 104,322 | ||
Fair value of liabilities assumed | $ | — | $ | 88,700 | ||
Estimated fair value of replacement equity awards | $ | — | $ | 432 | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
8
AYTU BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business, Financial Condition, Basis of Presentation
Aytu BioPharma, Inc. (“Aytu”, the “Company” or “we”), is a pharmaceutical company focused on commercializing novel therapeutics and consumer health products and developing therapeutics for rare pediatric-onset or difficult-to-treat diseases. The Company operates through two business segments (i) the BioPharma segment, consisting of prescription pharmaceutical products (the “Rx Portfolio”) and (ii) the Consumer Health segment, which consists of various consumer healthcare products (the “Consumer Health Portfolio”). The Company also has two product candidates in development, AR101 (enzastaurin) for the treatment of vascular Ehlers-Danlos Syndrome (“VEDS”) and Healight (endotracheal ultraviolet light catheter) for the treatment of severe, difficult-to-treat respiratory infections. The Company was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado and was re-incorporated as Aytu BioScience, Inc in the state of Delaware on June 8, 2015. Following the acquisition of Neos Therapeutics, Inc. (“Neos”) in March 2021, the Company changed its name to Aytu BioPharma, Inc.
The Rx Portfolio primarily consists of (i) Adzenys XR-ODT (amphetamine) extended-release orally disintegrating tablets and Cotempla XR-ODT (methylphenidate) extended-release orally disintegrating tablets for the treatment of attention deficit hyperactivity disorder (“ADHD”), (ii) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, and (iii) Karbinal ER, an extended-release antihistamine suspension containing carbinoxamine indicated to treat numerous allergic conditions.
The Consumer Health Portfolio consists of over twenty consumer health products competing in large healthcare categories, including diabetes management, pain management, digestive health, sexual and urological health and general wellness, commercialized through direct-to-consumer and e-commerce marketing channels.
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets, while also developing a therapeutic pipeline focused on rare pediatric-onset conditions and difficult-to-treat diseases.
As of March 31, 2022, the Company had approximately $27.6 million of cash and cash equivalents. The Company’s operations have historically consumed cash and are expected to continue to consume cash. The Company incurred a net loss of approximately $53.1 million and $25.5 million during the three months ended March 31, 2022 and 2021, respectively, and $92.5 million and $39.3 million for the nine months ended March 31, 2022 and 2021, respectively. The Company had an accumulated deficit of $270.8 million and $178.3 million as of March 31, 2022 and June 30, 2021, respectively. Cash used in operations was $21.7 million and $19.7 million during the nine months ended March 31, 2022 and 2021, respectively.
As the Company does not have sufficient cash and cash equivalents as of March 31, 2022 to cover its cash needs for the twelve months following the filing date of this Quarterly Report on Form 10-Q, there exists substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include adjustments that might be necessary if the Company is unable to continue as a going concern.
Management plans to mitigate the conditions that raise substantial doubt about its ability to continue as a going concern are primarily focused on raising additional capital through public or private equity or debt offerings or monetizing assets in order to meet its obligations. Management believes that the Company has access to capital resources, however, the Company cannot provide any assurance that it will be able to raise additional capital, monetize assets or obtain new financing on commercially acceptable terms. If the Company is unable to secure additional capital, it may be required to curtail its operations or delay the execution of its business plan. Alternatively, any efforts by the Company to reduce its expenses may adversely impact its ability to sustain revenue-generating activities and delay the progress of its developmental product candidates or otherwise operate its business. As a result, there can be no assurance
9
that the Company will be successful in implementing its plans to alleviate this substantial doubt about its ability to continue as a going concern.
Basis of Presentation. The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q represent the financial statements of the Company and its wholly owned subsidiaries. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2021, which included all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended March 31, 2022 are not necessarily indicative of expected operating results for the full year or any future year.
2. Significant Accounting Policies
Use of Estimates
Management uses estimates and assumptions relating to reporting amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, revenue recognition, allowance for doubtful accounts, determination of variable consideration for accruals of chargebacks, administrative fees and rebates, government rebates, returns and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, the value of goodwill, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities, purchase price allocations, and the depreciable lives of long-lived assets. Because of the uncertainties inherent in such estimates, actual results may differ from those estimates. Management periodically evaluates estimates used in the preparation of the financial statements for reasonableness.
Prior Period Reclassification
Certain prior year amounts in the consolidated balance sheets, statements of earnings and statements of cash flows have been reclassified to conform to the current year presentation, including a reclassification made in the presentation of the U.S. Food and Drug Administration (the “FDA”) fees for commercialized products. This was previously included in general and administrative expenses and is currently recorded as a component of cost of sales on the condensed consolidated statements of operations. These reclassifications did not impact operating results or cash flows for the three and nine months ended March 31, 2022 and 2021 or its financial position as of March 31, 2022 or June 30, 2021.
Income Taxes
The Company calculates its quarterly income tax provision based on estimated annual effective tax rates applied to ordinary income (or loss) and other known items computed and recognized when they occur. There have been no changes in tax law affecting the tax provision during the nine months ended March 31, 2022. The impairment of goodwill during the three months ended September 30, 2021 decreased net deferred tax liability by $0.1 million resulting in an income tax benefit of $0.1 million during the three months ended September 30, 2021. The income tax provision did not impact the amount of deferred taxes due to a full valuation allowance and the goodwill being recorded as a deferred tax liability.
Recent Adopted Accounting Pronouncements
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be
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discontinued if contract modifications are made on or before December 31, 2022. The Company adopted the guidance effective March 31, 2022 for the accounting of its LIBOR indexed revolving loans by prospectively applying the interest rate. The Company elected not to reassess the discount rate of its leases. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial position and results of operations.
Recent Accounting Pronouncements Not Yet Adopted
Debt—Debt with Conversion and Other Options. In June 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40)— “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by removing major separation models currently required. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The amendments in this update are effective for public entities that are smaller reporting companies, as defined by the Securities and Exchange Commission (”SEC”), for the fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted through a modified retrospective or full retrospective method. The Company will adopt the guidance on July 1, 2022, and does not expect the adoption of the standard to have any material impact on the Company’s consolidated financial position and results of operations.
Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” requiring the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of ASU 2016-13 is to provide additional information about the expected credit losses on financial instruments and other commitments to extend credit. The standard was effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. The Company will adopt ASU 2016-13 for the fiscal year ended June 30, 2024. The Company is evaluating the impact of adoption of this standard and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations.
For a complete set of the Company’s significant accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no significant changes to the Company’s significant accounting policies during the nine months ended March 31, 2022.
3. Acquisitions
Neos Acquisition
On March 19, 2021, the Company acquired Neos, a commercial-stage pharmaceutical company. Neos merged into, a subsidiary of the Company with and all outstanding Neos common stock was exchanged for approximately 5,472,000 shares of the Company’s common stock (“the Neos Acquisition”). The Company incurred (i) approximately $2.9 million of acquisition related costs, recognized as part of operating expense, and (ii) $0.1 million of issuance costs, recognized as a component of stockholders’ equity.
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The following table summarizes the fair value of assets acquired and liabilities assumed;
| March 19, 2021 | ||
(In thousands, except share and per-share) | |||
Considerations: | |||
Fair Value of Aytu Common Stock | |||
Total shares issued at close |
| 5,471,804 | |
Fair value per share of Aytu common stock |
| $ | 9.73 |
Fair value of equity consideration transferred |
| $ | 53,241 |
Cash | 15,383 | ||
Estimated fair value of replacement equity awards | 432 | ||
Total consideration transferred |
| $ | 69,056 |
March 19, 2021 | |||
(In thousands) | |||
Total consideration transferred |
| $ | 69,056 |
Recognized amounts of identified assets acquired and liabilities assumed |
| ||
Cash and cash equivalents |
| $ | 15,722 |
Accounts receivable | 24,696 | ||
Inventory | 10,984 | ||
Prepaid expenses and other current assets | 2,929 | ||
Operating leases right-to-use assets | 3,515 | ||
Property, plant and equipment | 5,519 | ||
Intangible assets | 56,530 | ||
Other long-term assets | 149 | ||
Accounts payable and accrued expenses | (56,718) | ||
Short-term line of credit | (10,707) | ||
Long-term debt, including current portion | (17,678) | ||
Operating lease liabilities | (3,515) | ||
Other long-term liabilities | (82) | ||
Total identifiable net assets |
| 31,344 | |
Goodwill |
| $ | 37,712 |
The fair value of the identifiable intangible assets acquired were as follows:
The fair value of the Neos trade name, in-process R&D and developed product technology, which is the proprietary technology for the development of Adzenys XR-ODT, Adzenys ER, Cotempla XR-ODT and generic Tussionex, were determined using the relief from royalty method. The fair value of developed technology right, which is a proprietary modified-release drug delivery technology, was determined using multi-period excess earnings method. The fair value of RxConnect was determined using cost to recreate method. The finite-lived intangible assets are being amortized over a range of between 1 to 17 years.
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Unaudited Pro Forma Information
The following supplemental unaudited proforma financial information presents the Company’s results as if the Neos Acquisition had occurred on July 1, 2020.
The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable; however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2020, or of future results of operations:
| Nine Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Pro forma | ||||||
Unaudited |
| Unaudited | ||||
(In thousands) | ||||||
Total revenues, net | $ | 69,221 | $ | 74,582 | ||
Net loss | $ | (92,472) | $ | (55,712) | ||
Rumpus Acquisition
On April 12, 2021, the Company entered into an asset purchase agreement with Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (together “Rumpus”) pursuant to which the Company acquired commercial global licenses, relating primarily to the pediatric-onset rare disease development asset enzastaurin, or AR101. AR101 is initially being studied for the treatment of VEDS. This asset was acquired for an up-front fee of $1.5 million in cash and payment of aggregated fees of $0.6 million. Upon the achievement of certain regulatory and commercial milestones, the Company is obliged to pay up to $67.5 million in earn-out payments, which are payable in cash or shares of common stock, generally at the Company’s option. AR101 is an orally available investigational small molecule, serine/threonine kinase inhibitor of the PKC beta, PI3K and AKT pathways (see Note 13 – Commitments and Contingencies).
4. Revenue Recognition
Contract Balances. Contract liabilities primarily relate to advances or deposits received from the Company’s customers before revenue is recognized. As of March 31, 2022 and June 30, 2021, contract liabilities of $0.1 million and $0.2 million, respectively were included in accrued liabilities in the consolidated balance sheet.
The Company disaggregates its revenue into three product portfolios. The primary care portfolio is composed of ZolpiMist and Tuzistra. The pediatric portfolio is composed of Adzenys XR-ODT, Cotempla XR-ODT Poly-Vi-Flor, Tri-Vi-Flor, Karbinal ER and a generic Tussionex. The Consumer Health portfolio is composed of over twenty consumer health products competing in large healthcare categories.
As part of the realization of post-acquisition synergies and product prioritization, the Company has implemented a portfolio rationalization plan whereby it will discontinue or divest non-core products including Cefaclor, Flexichamber, Tussionex, Tuzistra XR, and Zolpimist, effectively eliminating the primary care portfolio. These products, collectively, contributed $1.7 million in net revenue and $0.6 million in gross loss during the nine months ended March 31, 2022 (see Note 8 – Goodwill and Other Intangible Assets).
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Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three and nine months ended March 31, 2022 and 2021 were as follows:
Revenues by Geographic location. The following table reflects the Company’s product revenues by geographic location as determined by the billing address of customers:
5. Inventories
Inventories consist of raw materials, work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. In the event that such items are identified and there are no alternate uses for the inventory, the Company will record a charge to reduce the value of the inventory to net realizable value in the period that the impairment is first recognized. The Company incurred charges of $2.0 million and $7.0 million of inventory during the three months ended March 31, 2022 and 2021, respectively, and $2.4 million and $7.2 million during the nine months ended March 31, 2022 and 2021, respectively. In the three and nine months ended March 31, 2022, the inventory charge of $2.0 million was related to the decision to discontinue or divest certain non-core products (see Note 4 – Revenue Recognition and Note 8 – Goodwill and Other Intangible Assets). The write-down for each of the three and nine months ended March 31, 2021 was primarily due to the changing market conditions for the Company’s Covid-19 test kits.
Inventory balances consist of the following:
March 31, | June 30, | |||||
2022 | 2021 | |||||
(In thousands) | ||||||
Raw materials |
| $ | 1,796 |
| $ | 2,269 |
Work in process | 2,222 | 3,346 | ||||
Finished goods |
| 9,873 |
| 10,724 | ||
Inventory, net | $ | 13,891 | $ | 16,339 | ||
6. Property and Equipment
Properties and equipment are recorded at cost and depreciated on a straight-line basis over the assets estimated economic life. Leasehold improvements are amortized over the shorter of the estimated economic life or remaining lease term.
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Property and equipment consist of the following:
Depreciation and amortization expense was $0.5 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, and $1.3 million and $0.1 million for the nine months ended March 31, 2022 and 2021, respectively. During the nine months ended March 31, 2022 and 2021, the Company recognized a gain of $44,000 and a loss of $0.1 million on the disposal of equipment, respectively.
During the three and nine months ended March 31, 2022, in connection with the decision to divest Tussionex, the Company recorded a $0.2 million impairment charge related to manufacturing equipment associated with this product. There was no such impairment expense during the three and nine months ended March 31, 2021.
7. Leases
The Company has entered into various operating lease agreements for certain of its offices, manufacturing facilities and equipment, and finance lease agreements for certain equipment. These leases have original lease periods expiring between 2022 and 2024. Most leases include one or more options to renew and the exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease until it is reasonably certain that the Company will exercise that option. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
In connection with the Neos Acquisition, Aytu assumed an operating lease ROU asset and of $3.5 million, which represented the present value of the remaining lease payments as of the acquisition date, for the office space and manufacturing facilities at Grand Prairie, Texas. As the lease agreement does not provide an implicit rate, a borrowing rate of 6.7% to determine the present value of future lease payments. The finance leases are related to equipment finance leases with fixed contract terms and an implicit interest rate of approximately 5.9%.
In May 2021, the Company entered into a commercial lease agreement for 6,352 square feet of office in Berwyn, Pennsylvania that was to commence on December 1, 2021 and end on January 31, 2025. On July 19, 2021, the Company and the lessor amended the agreement to move the commencement date from December 1, 2021 to September 1, 2021. The Company recorded an operating lease ROU asset and lease of $0.5 million in the consolidated balance sheet representing the present value of minimum lease payments using an estimated borrowing rate of 6.25%.
In October 2021, the Company’s Innovus subsidiary entered into a commercial lease agreement for 6,580 square feet of warehouse in Oceanside, California that commenced on December 1, 2021 and ends on December 31, 2026. The Company recorded an operating lease ROU asset and lease of $0.3 million in the consolidated balance sheet representing the present value of minimum lease payments using Innovus’ estimated borrowing rate of 18.0%.
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The components of lease expenses are as follows:
Supplemental balance sheet information related to leases is as follows:
Remaining lease term and discount rate used are as follows:
Supplemental cash flow information related to lease is as follows:
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As of March 31, 2022, the maturities of the Company’s future minimum lease payments were as follows:
8. Goodwill and Other Intangible Assets
During fiscal 2022, the Company’s market capitalization has significantly declined. During the three months ended September 30, 2021, the decline was considered a qualitative factor that led management to assess whether an impairment had occurred. Management’s evaluation indicated that the goodwill related to one of its reporting units within the BioPharma segment was potentially impaired. The Company then performed a quantitative impairment test by calculating the fair value of the reporting unit and compared that amount to its carrying value. Significant assumptions inherent in the valuation methodologies include, but were not limited to prospective financial information, growth rates, terminal value, discount rates and comparable multiples from publicly traded companies in our industry. The decline in market capitalization was an indicator of increased risk thereby increasing the discount rates in the valuation models. The Company determined the fair value of the reporting unit utilizing the discounted cash flow model. As of September 30, 2021, utilizing the risk adjusted weighted-average discount rate, the fair value of the reporting unit was less than its carrying value. The Company recognized an impairment loss of $19.5 million in the BioPharma segment related to the goodwill associated with the Cerecor Inc. acquisition. As of September 30, 2021, a quantitative test indicated there was no impairment to the Consumer Health reporting unit as it resulted in an implied fair value of $5.9 million compared with the $0.5 million carrying value.
During the three months ended March 31, 2022, the continued decline of the Company’s market capitalization was considered a qualitative factor that led management to reassess whether an impairment had occurred. Management’s evaluation indicated that the goodwill related to one of its reporting units within the BioPharma segment was potentially impaired. The Company then performed a quantitative impairment test by calculating the fair value of the reporting unit and compared that amount to its carrying value. Significant assumptions inherent in the valuation methodologies include, but were not limited to prospective financial information, growth rates, terminal value, discount rates and comparable multiples from publicly traded companies in our industry. The decline in market capitalization was an indicator of increased risk thereby increasing the discount rates in the valuation models. The Company determined the fair value of the reporting unit utilizing the discounted cash flow model. As of March 31, 2022, utilizing the risk adjusted weighted-average discount rate, the fair value of the reporting unit was less than its carrying value. The Company recognized an impairment loss of $37.7 million in the BioPharma segment related to the goodwill associated with the Neos Acquisition.
The Consumer Health segment, which has $8.6 million goodwill from the February 2020 acquisition of Innovus Pharmaceuticals, Inc. (the “Innovus Acquisition”), reported $2.2 million negative carrying value as of March 31, 2022, and as such there was no goodwill impairment during the three months ended March 31, 2022.
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The change in carrying amount of goodwill by reportable segment is as follows:
The Company currently holds the following intangible asset portfolios as of March 31, 2022: (i) Product technology rights, acquired from the November 1, 2019 acquisition of a line of prescription pediatric products (“Pediatric Portfolio”) from Cerecor, Inc. and the Neos Acquisition in March 2021; (ii) Proprietary modified-release drug delivery technology right as a result of the Neos Acquisition; (iii) Acquired product distribution rights and commercial technology consisting of RxConnect and trade names as a result of the Neos Acquisition, and patents, trade names and the acquired customer lists from the Innovus Acquisition; (iv) Acquired in-process R&D from the Neos Acquisition related to the NT0502 product candidate for the treatment of sialorrhea.
The following table provides the summary of the Company’s intangible assets as of March 31, 2022 and June 30, 2021, respectively.
June 30, 2021 | |||||||||||
Weighted- | |||||||||||
Gross | Average | ||||||||||
Carrying | Accumulated |
| Net Carrying | Remaining | |||||||
| Amount |
| Amortization |
| Amount |
| Life (in years) | ||||
(In thousands) | |||||||||||
Licensed assets | $ | 3,246 | $ | (1,430) | $ | 1,816 | 3.92 | ||||
Acquired product technology right | 45,400 | (4,160) | 41,240 | 12.88 | |||||||
Acquired technology right | 30,200 | (501) | 29,699 | 16.75 | |||||||
Acquired product distribution rights | 11,354 | (2,073) | 9,281 | 8.57 | |||||||
Acquired in-process R&D |
| 2,600 |
| — |
| 2,600 | Indefinite-lived | ||||
Acquired commercial technology | 630 | (178) | 452 | 0.75 | |||||||
Acquired trade name | 400 | (56) | 344 | 1.75 | |||||||
Acquired customer lists | 390 | (358) | 32 | 0.01 | |||||||
Total | $ | 94,220 | $ | (8,756) | $ | 85,464 | 13.47 | ||||
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The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
| March 31, | ||
(In thousands) | |||
2022 (remaining 3 months) | $ | 1,624 | |
2023 | 6,490 | ||
2024 | 6,477 | ||
2025 | 6,282 | ||
2026 | 5,938 | ||
2027 | 5,908 | ||
Thereafter | 39,109 | ||
Total future amortization expense | $ | 71,828 | |
Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately 1 to 20 years depending on the license, patent or other agreement. Renewals are accounted for when they are reasonably assured. Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of intangible assets was $2.0 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively, and $6.1 million and $4.9 million for the nine months ended March 31, 2022 and 2021, respectively.
During the three and nine months ended March 31, 2022, in connection with the decision to discontinue commercializing or divesting certain products within the BioPharma segment that have minimal revenue and gross margin contribution, the Company recorded $4.9 million impairment expense for the write-down of intangible assets consisting of (i) $2.6 million for AcipHex, (ii) $1.4 million for ZolpiMist, (iii) $0.5 million for Tussionex, (iv) $0.2 million for Cefaclor and (v) $0.2 million for the Neos tradename.
During the three and nine months ended March 31, 2021, in connection with the divestiture of Natesto, the Company recorded $4.3 million impairment expense as a result of the impairment of the associated licensed intangible asset.
9. Accrued liabilities
Accrued liabilities consist of the following:
*Other accrued liabilities consist of credit card liabilities, taxes payable, accounting fee, samples expense and consultants’ fees, none of which individually represent greater than five percent of total current liabilities.
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10. Line of Credit
Upon closing of the Neos Acquisition in March 2021, the Company assumed obligations under the secured credit agreement that Neos had entered into with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLC) (“Eclipse”) as agent for the lenders (the “Eclipse Loan Agreement”). Under the Eclipse Loan Agreement, Eclipse extended up to $25.0 million in secured revolving loans to Neos (the “Revolving Loans”), of which up to $2.5 million was available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans thereunder accrued at variable interest through maturity at the one-month London Interbank Offered Rate (“LIBOR”), plus 4.50%. The Eclipse Loan Agreement included an unused line fee of 0.50% of the average unused portion of the maximum revolving facility amount during the immediately preceding month. Interest is payable monthly in arrears. The original maturity date under the Eclipse Loan Agreement was May 11, 2022.
In connection with the Avenue Capital Agreement, described in Note 11 below, the Company entered into a Consent, Waiver and Second Amendment to Eclipse Loan Agreement, dated as of January 26, 2022 (together, the “Eclipse Second Amendment”). Pursuant to the Eclipse Second Amendment, Eclipse (i) consented to Aytu and certain of its subsidiaries joining as obligors to the Revolving Loans provided by the Eclipse Loan Agreement, (ii) consented to the Company entering into the Avenue Capital Agreement, (iii) extended the maturity date of the Eclipse Loan Agreement to January 26, 2025, (iv) removed the requirement for the Company to comply with the ongoing fixed charge coverage ratio financial covenant applicable to the borrowers under the Eclipse Loan Agreement, (v) consented to the first priority lien granted by Aytu in favor of the Avenue Capital Agent, (vi) reduced the maximum availability under the Revolving Loans from $25.0 million to $12.5 million minus a $3.5 million availability block, (vii) increased the availability block from $1.0 million to $3.5 million, (viii) consented to the full repayment under the Deerfield Facility, defined below, and (ix) made certain other modifications to conform to the Avenue Capital Agreement and to reflect the consummation of the transactions thereof, in each case subject to the terms and conditions of the Eclipse Second Amendment.
The Company incurred $0.1 million in legal and other fees related to the Eclipse Second Amendment, all of which were recorded as deferred financing costs and are being amortized on a straight-line basis over the remaining term of the Eclipse Loan Agreement as interest expense. The unamortized cost of $0.1 million as of March 31, 2022 was included in other noncurrent assets in the condensed consolidated balance sheets.
In the event that, for any reason, all or any portion of the Eclipse Loan Agreement is terminated prior to the scheduled maturity date, in addition to the payment of all outstanding principal and unpaid accrued interest, the Company is required to pay a fee equal to (i) 2.0% of the Revolving Loans commitment if such event occurs on or before January 26, 2023, (ii) 1.0% of the Revolving Loans commitment if such event occurs after January 26, 2023 but on or before January 26, 2024, and (iii) 0.5% of the Revolving Loans commitment if such event occurs after January 26, 2024 but on or before January 26, 2025. The Company may permanently terminate the Eclipse Loan Agreement with at least business days prior notice to Eclipse.
The Eclipse Loan Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the agreement, including covenants and restrictions that, among other things, require the Company to satisfy certain capital expenditure limitations and other financial covenants, and restrict the Company’s ability to incur liens, incur additional indebtedness, make certain dividends and distributions with respect to equity securities, engage in mergers and acquisitions or make asset sales without the prior written consent of Eclipse. A failure to comply with these covenants could permit Eclipse to declare the Company’s obligations under the Eclipse Loan Agreement, together with accrued interest and fees, to be immediately due and payable, plus any applicable additional amounts relating to a prepayment or termination, as described above. As of March 31, 2022, the Company was in compliance with the covenants under the Eclipse Loan Agreement as amended.
The Company’s obligations under the Eclipse Loan Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of Eclipse on the ABL Priority Collateral, and a second priority lien in favor of Eclipse on the Term Loan Priority Collateral, as each is defined in the Replacement Term Loan Intercreditor Agreement, as defined in the Eclipse Loan Agreement, as amended by the Eclipse Second Amendment.
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Total interest expense on the Revolving Loans, including amortization of deferred financing costs, was $0.1 million and $0.4 million for the three and nine months ended March 31, 2022, respectively. Interest expense was $28,000 for the period beginning March 19, 2021, the date the Neos Acquisition was closed, through March 31, 2021. As of March 31, 2022 and June 30, 2021, the outstanding Revolving Loans under the Eclipse Loan Agreement, as amended, were $3.4 million and $7.9 million, respectively.
11. Long-term Debt
Deerfield Debt. Upon closing of the Neos Acquisition, the Company assumed a senior secured term credit facility (the “Deerfield Facility”) with Deerfield Private Design Fund III, L.P. and Deerfield Partners, L.P. (collectively, “Deerfield”) with an outstanding balance of $16.6 million.
The Company evaluated and determined that the fair value of the remaining outstanding debt was $17.4 million as of the March 19, 2021 acquisition date. Accordingly, the Company recorded a premium of $0.8 million, which was the difference between carrying amount and the fair value of the debt and was being amortized into interest expense using the effective interest method over the remaining term of the debt.
On January 26, 2022, the Company repaid the remaining principal outstanding in full, plus exit fees and accrued interest under the Deerfield Facility. The Company recognized a gain of $0.2 million during the three months ended March 31, 2022 related to the extinguishment of the Deerfield Facility. Total interest expense on the facility, net of premium amortization, was $0.8 million for the period from July 1, 2021 through full repayment on January 26, 2022.
Avenue Capital Loan: On January 26, 2022 (“Closing Date”), the Company entered into a Loan and Security Agreement (the “Avenue Capital Agreement”) with Avenue Venture Opportunities Fund II, L.P. and Avenue Venture Opportunities Fund II, L.P. as lenders (the “Avenue Capital Lenders”), and Avenue Capital Management II, L.P. as administrative agent (the “Avenue Capital Agent”), collectively (“Avenue Capital”), pursuant to which the Avenue Capital Lenders provided the Company and certain of its subsidiaries with a secured $15.0 million loan. The interest rate on the loan is the greater of the prime rate and 3.25%, plus 7.4%, payable monthly in arrears. The maturity date of the loan is January 26, 2025. The proceeds from the Avenue Capital Agreement were used towards the repayment of the Deerfield Facility.
Pursuant to the Avenue Capital Agreement, the Company will make interest only payments for the first 18 months following the Closing Date (“Interest-only Period”). The Interest-only Period could be extended automatically without any action by any party for six months provided, as of the last day of the Interest-only Period then in effect, the Company received, prior to June 15, 2023, a specified amount of net proceeds from the sale and issuance of its equity securities (“Interest-only Milestone 1”). The Interest-only Period could further be extended automatically without any action by any party for an additional six months provided, the Company has achieved, prior to December 31, 2023, (i) Interest-only Milestone 1 and (ii) a specified amount of trailing 12 months revenue as of the date of determination.
In the event the Company prepays the outstanding principal prior to the maturity date, the Company will pay Avenue Capital a fee equal to (i) 3.0% of the loan if such event occurs on or before January 26, 2023, (ii) 2.0% of the loan if such event occurs after January 26, 2023 but on or before January 26, 2024, and (iii) 1.0% of the loan if such event occurs after January 26, 2024 but before January 26, 2025. In addition, upon the payment in full of the obligations, the Company shall pay to Avenue Capital a fee in the amount of $0.6 million (“Final Payment”). The Company accounted for the Final Payment as additional obligations on the debt, with the corresponding debit being recorded as debt discount.
The Company’s obligations under Avenue Capital Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of the Avenue Capital Agent on the Term Loan Priority Collateral, and a second priority lien in favor of the Avenue Capital Agent on the ABL Priority Collateral, as each is defined in the Intercreditor Agreement, as defined in the Avenue Capital Agreement.
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The Avenue Capital Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the agreement, including covenants and restrictions that, among other things, require the Company to satisfy certain capital expenditure limitations and other financial covenants, and restricts the Company’s ability to incur liens, incur additional indebtedness, make certain dividends and distributions with respect to equity securities, engage in mergers and acquisitions or make asset sales without the prior written consent of the Avenue Capital Lenders. A failure to comply with these covenants could permit the Avenue Capital Lenders to declare the Company’s obligations under the agreement, together with accrued interest and fees, to be immediately due and payable, plus any applicable additional amounts relating to a prepayment or termination, as described above. As of March 31, 2022, the Company was in compliance with the covenants under the Avenue Capital Agreement.
On January 26, 2022 (“Issuance Date”), as consideration for entering into the Avenue Capital Agreement, the Company issued warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price equal to $1.21 per share (the “Avenue Capital Warrants”). The Avenue Capital Warrants provided that in the event the Company were to engage in an equity offering at a price lower than $1.21 prior to June 30, 2022, the exercise price would be adjusted to the effective price of such equity offering and the number of shares of common stock to be issued under the Avenue Capital Warrants would be adjusted as set forth in the agreement. The Avenue Capital Warrants were immediately exercisable and expire on January 31, 2027. At inception and through the reclassification to equity on March 7, 2022, the Company accounted for the Avenue Capital Warrants as a liability as the number of warrants was not fixed at the Issuance Date. The fair value of the Avenue Capital Warrants was $0.6 million on January 26, 2022, with the corresponding debit being recorded as debt discount. On March 7, 2022, the Company closed on an equity offering of shares of common stock and warrants, as described in Note 14 – Capital Structure, at an offering price of $1.25 per share. As this offering precludes the Company from pursuing any equity financing prior to July 7, 2022 and the effective price of the March 7, 2022 offering was more than the exercise price of the Avenue Capital Warrants, the number of shares of common stock issuable upon exercise of the Avenue Capital Warrants were set to 867,769 at an exercise price of $1.21. As a result, on March 7, 2022, the Company reclassified the Avenue Capital Warrants from a liability to equity and recorded the $0.4 million fair value as additional paid in capital in stockholders’ equity in the Company’s financial statements.
In addition to the debt discounts discussed above, the Company also incurred $0.4 million loan origination, legal and other fees. The debt discount and issuance costs are being amortized over the term of the loan, using the effective interest method resulting in an effective rate of 15.37%. Total interest expense on the Avenue Capital loan, including debt discount amortization, was $0.4 million for the three months ended March 31, 2022.
Long-term debt consists of the following:
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Future principal payments of long-term debt, including financing leases, are as follows:
| March 31, | ||
(In thousands) | |||
2022 | $ | 100 | |
2023 | 5,924 | ||
2024 | 9,820 | ||
Future principal payments | 15,844 | ||
Less unamortized discount and issuance costs | (1,577) | ||
Less current portion | (100) | ||
Non-current portion of debt | $ | 14,167 | |
12. Fair Value Considerations
The Company’s asset and liability classified financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. The fair value of acquisition-related contingent consideration is based on Monte-Carlo models. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
Level 3: Unobservable inputs that are supported by little or no market activity.
The Company’s assets and liabilities are measured at fair value on a recurring basis and are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented.
23
Recurring Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2022 and June 30, 2021, by level within the fair value hierarchy.
| Fair Value Measurements at March 31, 2022 | |||||||||||
| Fair Value at March 31, |
|
|
| ||||||||
2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
(In thousands) | ||||||||||||
Assets: |
|
| ||||||||||
Cash and cash equivalents | $ | 27,613 | $ | 27,613 | $ | — | $ | — | ||||
Total | $ | 27,613 |
| $ | 27,613 |
| $ | — | $ | — | ||
Liabilities: | ||||||||||||
Contingent consideration |
| $ | 371 |
| $ | — |
| $ | — |
| $ | 371 |
CVR liability |
| 720 |
| — |
| — |
| 720 | ||||
Total | $ | 1,091 |
| $ | — |
| $ | — | $ | 1,091 | ||
| Fair Value Measurements at June 30, 2021 | |||||||||||
| Fair Value at June 30, |
|
|
| ||||||||
2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
| (In thousands) | |||||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 49,649 | $ | 49,649 | $ | — | $ | — | ||||
Total | $ | 49,649 |
| $ | 49,649 |
| $ | — | $ | — | ||
Liabilities: | ||||||||||||
Contingent consideration | $ | 12,057 |
| $ | — |
| $ | — |
| $ | 12,057 | |
CVR liability | 1,395 |
| — |
| — |
| 1,395 | |||||
Total | $ | 13,452 |
| $ | — |
| $ | — | $ | 13,452 | ||
Contingent Consideration. The Company classifies its contingent consideration liabilities within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.
Tuzistra
The royalty and make-whole milestone payments related to the licensing agreements with TRIS Pharma, Inc. (“Tris”) for Tuzistra XR was being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing Tuzistra (see Note 4 – Revenue Recognition), and ongoing negotiations with Tris, the Company has concluded that, as of March 31, 2022, the product milestone payments underlying the contingent consideration liability ceased to exist. As of March 31, 2022, the Company reversed the remaining contingent considerations liabilities of $8.5 million and recorded a liability of $7.6 million related to the settlement payments payable to Tris (see Note 20 – Subsequent Events) for termination of the Tuzistra licensing agreement. The amount is included in other current and noncurrent liabilities in the consolidated balance sheets, and represents the present value of future payments discounted using the Company’s borrowing rate. The Company deferred recognition of $0.9 million net gain from reversal of contingent consideration liability and the settlement payments until the termination of the original agreement and signing of the settlement agreement in May 2022, and was included in accrued liabilities in the consolidated balance sheets as of March 31, 2022.
ZolpiMist
The royalty payments related to the licensing agreements with Magna Pharmaceuticals, Inc. (“Magna”) for ZolpiMist were being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing ZolpiMist, the Company has concluded that, as of March 31, 2022, the royalty-based product milestone payments underlying the contingent consideration liability ceased to exist. As of March 31, 2022, the Company reversed the remaining contingent consideration liabilities of $0.6 million and recorded the $50,000 payment
24
due for termination of the Manga licensing agreements in other current liability in the consolidated balance sheets. The Company recognized $0.6 million gain from reversal of contingent consideration liability and the termination payment in the consolidated statements of operations for the three and nine months ended March 31, 2022.
On February 14, 2020, the Company recognized approximately $0.2 million in product related contingent consideration as a result of the February 14, 2020 Innovus Acquisition. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimated risk that the milestones are achieved. As of March 31, 2022 and June 30, 2021, the contingent consideration balance was $0.3 million.
In June 2017, Innovus entered into the Exclusive License Agreement with University of Iowa Research Foundation (“UIRD”) (the “UIRD Agreement”) for the use of patent and technology know-how as defined in the agreement. Pursuant to the agreement, Innovus will pay UIRD a milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payments of $0.2 million. The fair value was determined as the discounted value of the future contingent payment using a 26% discount rate based on the estimated risk that the milestones would be achieved. The discounted value as of March 31, 2022 and June 30, 2021, was approximately $0.1 million.
As a result of the reversal of contingent consideration liabilities, there was no gain or loss from the change in fair value of contingent consideration during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company recognized a net gain of $0.7 million from the changes in fair values of contingent considerations. During the nine months ended March 31, 2022 and 2021, the Company recognized a loss of $0.5 million and $1.7 million, respectively, from the changes in fair values of contingent considerations. The total accretion expense related to these contingent considerations was approximately $23,000 and $15,000 during the three months ended March 31, 2022 and 2021, respectively, and $0.1 million and $0.3 million during the nine months ended March 31, 2022 and 2021, respectively.
Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones related to the Innovus Acquisition. Consideration can be satisfied in up to 470,000 shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company paid the CVR holders approximately 123,820 shares of the Company’s common stock to satisfy the first $2.0 million milestone, which relates to the Innovus achievement of $24.0 million in revenues during the 2019 calendar year. On March 20, 2021, the Company paid the CVR holders approximately 103,190 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. The $1.0 million 2020 milestone for achieving profitability was not met. The $1.0 million 2021 milestones, which relate to the Innovus achievement of $40.0 million in revenues during the 2021 calendar year and $1.0 million for achieving profitability were not met. As of March 31, 2022 and June 30, 2021, the CVRs were revalued at $0.7 million and $1.4 million, respectively, using the same Monte Carlo model. During the three months ended March 31, 2022 and 2021, the Company recognized a gain of $0.7 million and a loss of $0.1 million, respectively, and a gain of $0.7 million and a loss of $1.0 million during the nine months ended March 31, 2022 and 2021, respectively, in the consolidated statements of operations related to the changes in fair values of CVRs.
Warrants. On January 26, 2022, as consideration for entering into the Avenue Capital Agreement, the Company issued the Avenue Capital Warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price equal to $1.21 per share. The Avenue Capital Warrants provided that in the event the Company were to engage in an equity offering at a price lower than $1.21 prior to June 30, 2021, the exercise price would be adjusted to the effective price of such equity offering and the number of shares of common stock to be issued under the Avenue Capital Warrants would be adjusted as set forth in the agreement. At inception and through the reclassification to equity on March 7, 2022, the Company accounted for the Avenue Capital Warrants as a liability as the number of shares was not fixed at the Issuance Date. The fair value of the Avenue Capital Warrants was $0.6 million on January 26, 2022 with hybrid approach using a combination of Black-Scholes and Monte Carlo simulation. On March 7, 2022, the Company reclassified the Avenue Capital Warrants from a liability to equity. During the three months ended March 31, 2022, the Company recognized a gain of $0.2 million in the consolidated statements of operations from changes in fair values of warrants (see Note 11 – Long-term Debt).
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Summary of Level 3 Input Changes
The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the three months ended March 31, 2022:
| CVR |
| Contingent | Warrant | |||||
Liability | Consideration | Liability | |||||||
(In thousands) | |||||||||
Balance as of June 30, 2021 |
| $ | 1,395 | $ | 12,057 | $ | — | ||
Included in earnings |
| (675) | 579 | (211) | |||||
Purchases, issues, sales and settlements: |
|
|
| ||||||
Issues |
|
| — |
| — |
| 590 | ||
Settlements* |
|
| — |
| (12,265) |
| (379) | ||
Balance as of March 31, 2022 |
| $ | 720 | $ | 371 | $ | — | ||
* Including $9.1 million reversal of contingent consideration liabilities and $0.4 million liability warrants reclassified to equity.
Significant Assumptions
Significant assumptions used in valuing CVRs were as follows:
March 31, | |||
| 2022 | ||
Leveraged Beta |
| 0.79 | |
Market risk premium | 6.22 | % | |
Risk-free interest rate | 2.12 | % | |
Discount | 19.50 | % | |
Company specific discount |
| 10.00 | % |
Significant assumptions used in valuing the warrants were as follows:
January 26, | |||
| 2022 | ||
Expected volatility |
| 56.75 | % |
Equivalent term (years) | 5.00 | ||
Risk-free rate | 1.66 | % | |
Dividend yield | 0.00 | % | |
13. Commitments and Contingencies
Pediatric Portfolio Fixed Payments and Product Milestone
The Company has two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Under the first fixed obligation, the Company was to pay monthly payment of $86,400 beginning November 1, 2019 through January 2021, with a balloon payment of $15.0 million that was to be due in January 2021 (“Balloon Payment Obligation”). A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020.
On May 29, 2020, the Company entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the Company agreed to pay $15.0 million to the investor in satisfaction of the Balloon Payment Obligation. The parties to the Early Payment Agreement acknowledged and agreed that the remaining fixed payments other than the Balloon Payment Obligation remained due and payable pursuant to the terms of the
26
Agreement, and that nothing in the Early Payment Agreement alters, amends, or waives any provisions or obligations in the Waiver or the Investor agreement other than as expressly set forth therein. The first fixed obligation was fully paid as of January 2021.
On June 21, 2021, the Company entered into a Waiver, Release and Consent pursuant to which the Company paid $2.8 million to the investor in satisfaction of the second fixed obligation. The Company agreed to pay the remaining fixed obligation of $3.0 million in six equal quarterly payments of $0.5 million over the six quarters commencing September 30, 2021.
In addition, the Company acquired a Supply and Distribution Agreement with Tris (the “Karbinal Agreement”), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement was 20 years. The Company will pay Tris a royalty equal to 23.5% of net sales.
The Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units annually through 2025. The Company is required to pay Tris a royalty make whole payment of $30 for each unit under the 70,000-unit annual minimum sales commitment through 2025. The Karbinal Agreement make-whole payment is capped at $2.1 million each year. The annual payment is due in August of each year. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million of net revenues.
Product Contingent Liability
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the acquisition, Innovus is obligated to make five additional payments of $0.5 million each when certain levels of FlutiCare sales are achieved. The discounted value as of March 31, 2022, is approximately $0.3 million.
Pursuant to the UIRD Agreement, Innovus will pay to UIRD a total milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payment of $0.2 million. The discounted value as of March 31, 2022, is approximately $0.1 million. The first milestone cash payment of $50,000 was made in July 2021.
Rumpus Earn Out Payments
On April 12, 2021, the Company acquired substantially all of the assets of Rumpus, pursuant to which the Company acquired certain rights and other assets, including key commercial global licenses with Denovo Biopharma LLC (“Denovo”) and Johns Hopkins University (“JHU”), relating to AR101. Upon the achievement of certain regulatory and commercial milestones, up to $67.5 million in earn-out payments, which are payable in cash or shares of common stock, generally at the Company’s option, are payable to Rumpus. Under the license agreement with Denovo, the Company assumed the responsibility for paying annual maintenance fees of $25,000, a license option fee of $0.6 million payable in April 2022, and upon the achievement of certain regulatory and commercial milestones, up to $101.7 million, and escalating royalties based on net product sales ranging in percentage from the low teens to the high teens. Finally, under the license agreement with JHU, the Company assumed the responsibility for paying minimum annual royalties escalating from $5,000 to $20,000 beginning in calendar year 2022, royalties of 3.0% of net product sales, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million.
On December 7, 2021, upon receiving Orphan Drug Designation (“ODD”) from the FDA for AR101, a milestone payment of $2.5 million is due and payable to Rumpus in cash or in shares of the Company’s common stock. The $2.5 million milestone payment is included in our accrued liabilities in the condensed consolidated balance sheets as of March 31, 2022, and was paid in full on April 1, 2022.
14. Capital Structure
The Company has 200 million shares of common stock authorized with a par value of $0.0001 per share and 50 million shares of preferred stock authorized with a par value of $0.0001 per share. As of March 31, 2022 and June 30,
27
2021, the Company had 33,355,935 and 27,490,412 common shares outstanding, respectively, and zero preferred shares outstanding, respectively.
Included in the common stock outstanding are 2,241,089 shares of unvested restricted stock issued to executives, directors and employees.
On June 8, 2020, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on June 17, 2020. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2020 Shelf”). As of March 31, 2022, approximately $43.0 million remains available under the 2020 Shelf.
On June 4, 2021, the Company entered into a sales agreement with a sales agent, to provide for the offering, issuance and sale by the Company of up to $30.0 million of its common stock from time to time in “at-the-market” offerings under the 2020 Shelf (the “ATM Sales Agreement”). During the nine months ended March 31, 2022, the Company issued an additional 2,430,784 shares of common stock under the ATM Sales Agreement, with total gross proceeds of approximately $5.1 million before deducting underwriting discounts, commissions, and other offering expenses of $0.2 million. As of March 31, 2022, approximately $12.2 million of the Company’s common stock remained available to be sold pursuant to the ATM Sales Agreement.
On September 28, 2021, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 7, 2021. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2021 Shelf”). As of March 31, 2022, approximately $92.4 million remain available under the 2021 Shelf.
On March 7, 2022, the Company closed on an underwritten public offering utilizing the 2021 Shelf, pursuant to which, the Company sold, (i) 3,030,000 shares of the Company’s common stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 3,030,000 shares of common stock, and (iii) common stock purchase warrants (the “Common Warrants”) to purchase up to 6,666,000 shares of common stock (the “March 2022 Offering”). The shares of common stock and the Pre-Funded Warrants were each sold in combination with corresponding Common Warrants, with one Common Warrant to purchase 1.1 shares of common stock for each share of common stock or each Pre-Funded Warrant sold. The Pre-Funded Warrants have an exercise price of $0.0001 per share of common stock and were exercised in full in April 2022. The Common Warrants have an exercise price of $1.30 per share of common stock and are exercisable six months after the date of issuance and have a term of five years from the date of exercisability. The Company raised gross proceeds of $7.6 million through the March 2022 Offering before commission and other costs of $0.8 million. The Pre-Funded and Common Warrants have a combined fair value of approximately $6.3 million and are classified as additional paid in capital in stockholders’ equity in the Company’s financial statements (see Note 16 - Warrants).
On January 26, 2022, as consideration for entering into the Avenue Capital Agreement, the Company issued the Avenue Capital Warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price equal to $1.21 per share. The Avenue Capital Warrants are immediately exercisable and expire on January 31, 2027. On March 7, 2022, the Company closed on an equity offering of shares of common stock and warrants, as described above, at an offering price of $1.25 per share. As this offering precluded the Company from pursuing any equity financing prior to July 7, 2022 and the effective price of the March 7, 2022 offering was more than the exercise price of the Avenue Capital Warrants, the number of common stock issuable upon exercise of the Avenue Capital Warrants were set to 867,769 shares at an exercise price of $1.21. As a result, on March 7, 2022, the Company reclassified the Avenue Capital Warrants from a liability to equity and recorded the $0.4 million fair value as additional paid in capital in stockholders’ equity in the Company’s financial statements (see Note 11 – Long-term Debt and Note 12 – Fair Value Considerations).
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15. Equity Incentive Plans
Aytu 2015 Plan. On June 1, 2015, the Company’s stockholders approved the Aytu BioPharma 2015 Stock Option and Incentive Plan (the “Aytu 2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015 Plan will be added back to the shares of common stock available for issuance under the Aytu 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the Aytu 2015 Plan. Stock options granted under this plan have contractual terms of 10 years from the grant date and a vesting period ranging from 3 to 4 years. The restricted stock awards have a vesting period ranging from 4 to 10 years, whereas the restricted stock units have a vesting period of 4 years. As of March 31, 2022, the Company had 2,401,186 shares available for grant under the Aytu 2015 Plan.
Neos 2015 Plan. Pursuant to the Neos Acquisition, the Company assumed 69,721 stock options and 35,728 restricted stock units (RSUs) previously granted under Neos plan. Accordingly, on April 19, 2021, the Company registered 105,449 shares of its common stock under the Neos Therapeutics, Inc. 2015 Stock Options and Incentive Plan (the "Neos 2015 Plan") with the SEC. The terms and conditions of the assumed equity securities will stay the same as they were under the previous Neos plan. The Company allocated costs of the replacement awards attributable to pre- and post-combination service periods. The pre-combination service costs were included in the considerations transferred. The remaining costs attributable to the post-combination service period are being recognized as stock-based compensation expense over the remaining terms of the replacement awards. Stock options granted under this plan have contractual terms of 10 years from the grant date and a vesting period ranging from 1 to 4 years. As of March 31, 2022, the Company had 43,151 shares available for grant under the Neos 2015 Plan.
Stock Options
Stock option activity is as follows:
|
|
|
| Weighted | |||
Average | |||||||
Weighted | Remaining | ||||||
Number of | Average | Contractual | |||||
Options | Exercise Price | Life in Years | |||||
Outstanding June 30, 2021 |
| 109,588 | $ | 14.52 |
| 8.07 | |
Forfeited/Cancelled |
| (15,132) | 8.03 |
|
| ||
Expired |
| (10,599) | 9.16 |
|
| ||
Outstanding at March 31, 2022 |
| 83,857 | $ | 16.37 |
| 7.79 | |
Exercisable at March 31, 2022 |
| 55,611 | $ | 20.51 |
| 7.68 | |
As of March 31, 2022, there was $0.2 million total unrecognized compensation costs adjusted for estimated forfeitures, related to non-vested stock options granted under the Company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years.
Restricted Stock
During the nine months ended March 31, 2022, the Company granted a total of 295,000 shares of restricted stock, with certain accelerated vesting conditions, to members of its management team pursuant to the Aytu 2015 Plan, of which vest on the grant date and on of , to continuing employment with the Company through each vesting date. These restricted stock grants have a grant date fair value ranging from $2.65 per-share to $4.02 per-share.
29
Restricted stock activity under the Aytu 2015 Plan is as follows:
Weighted | |||||
Average Grant | |||||
Number of | Date Fair | ||||
Shares | Value | ||||
Unvested at June 30, 2021 |
| 1,955,268 | $ | 7.83 | |
Granted |
| 295,000 | 3.67 | ||
Vested |
| (112,787) | 8.03 | ||
Unvested at March 31, 2022 |
| 2,137,481 | $ | 7.25 | |
As of March 31, 2022, there was $10.8 million total unrecognized compensation costs adjusted for estimated forfeitures, related to non-vested restricted stock granted under the Company’s equity incentive plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.9 years.
The Company previously issued 158 shares of restricted stock outside the Aytu 2015 Plan, which vest in July 2026. On January 17, 2022, the Company granted 100,000 shares of restricted stock to a member of its management team outside of the Aytu 2015 Plan, of which vest on January 17, 2023 and , employment with the Company through each vesting date until January 17, 2025. This restricted stock grant has a grant date fair value of $1.35 per-share. As of March 31, 2022, there was $1.0 million total unrecognized costs adjusted for estimated forfeitures, related to non-vested restricted stock outside of the Company’s equity incentive plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 4.1 years.
Restricted Stock Units
During the nine months ended March 31, 2022, the Company granted a total of 150,000 shares of restricted stock units (“RSUs”), to members of its management pursuant team to the Aytu 2015 Plan, of which vest on the grant date and thereafter, subject to continuing employment with the Company through each vesting date. These RSUs have a grant date fair value ranging from $1.08 per-share to $1.86 per-share.
RSUs activity is as follows:
|
|
| |||
Weighted | |||||
Average Grant | |||||
Number of | Date Fair | ||||
Shares | Value | ||||
Unvested at June 30, 2021 |
| 78,318 | $ | 7.20 | |
Granted | 150,000 | 1.33 | |||
Vested |
| (10,908) | 6.50 | ||
Forfeited | (62,922) | 7.44 | |||
Unvested at March 31, 2022 |
| 154,488 | $ | 1.45 | |
As of March 31, 2022, there was $0.2 million total unrecognized compensation costs adjusted for any estimated forfeitures, related to non-vested RSUs granted under the Company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.8 years.
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Stock-based compensation expense related to the fair value of stock options and restricted stock and RSUs was included in the statements of operations as set forth in the below table:
16. Warrants
Equity Classified Warrants
On March 7, 2022, the Company closed on an underwriting agreement, pursuant to which, the Company sold, (i) 3,030,000 shares of the Company’s common stock, (ii) Pre-Funded Warrants to purchase up to 3,030,000 shares of common stock, and (iii) Common Warrants to purchase up to 6,666,000 shares of common stock. The shares of common stock and the Pre-Funded Warrants were each sold in combination with corresponding Common Warrants, with one Common Warrant to purchase 1.1 shares of common stock for each share of common stock or each Pre-Funded Warrant sold. The Pre-Funded Warrants have an exercise price of $0.0001 per share of common stock and were exercised in full in April 2022. The Common Warrants have an exercise price of $1.30 per share of common stock and are exercisable six months after the date of issuance and have a term of five years from the date of exercisability (see Note 14 – Capital Structure).
On January 26, 2022, as consideration for entering into the Avenue Capital Agreement, the Company issued Avenue Capital Warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price of $1.21 per share, subject to adjustment. The Avenue Capital Warrants were immediately exercisable and expire on January 31, 2027. On March 7, 2022, the Company closed on an equity offering of shares of common stock and warrants at an offering price of $1.25 per share. As this offering precluded the Company from pursuing any equity financing prior to July 7, 2022 and the effective price of the March 7, 2022 offering was more than the exercise price of the Avenue Capital Warrants, the number of common stock issuable upon exercise of the Avenue Capital Warrants were set to 867,769 shares at an exercise price of $1.21. As a result, on March 7, 2022, the Company reclassified the Avenue Capital Warrants from a liability to equity (see Note 11 – Long-term Debt, Note 12 – Fair Value Considerations and Note 14 – Capital Structure).
Significant assumptions used in valuing these warrants were as follows:
March 7, | |||
2022 | |||
Valuation method | Black-Scholes | ||
Expected volatility |
| 54.45 | % |
Equivalent term (years) | 4.89 - 5.00 | ||
Risk-free rate | 1.71 | % | |
Dividend yield | 0.00 | % | |
On July 1, 2020, 92,302 warrants previously issued to a placement agent with a weighted average exercise price of $15.99 per warrant expired. In addition, during the nine months ended March 31, 2022, 31,925 various other warrants with a weighted average exercise price of $483.75 per warrant to purchase the Company’s shares of common stock expired.
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A summary of equity-based warrants is as follows:
Liability Classified Warrants
As of March 31, 2022, the Company had 24,105 liability warrants outstanding with a weighted-average exercise price of $720.0 per share. These warrants expire on August 25, 2022.
17. Net Loss per Common Share
Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that period. Diluted net loss per share reflects the potential of securities that could share in the net loss of the Company. The 3,030,000 Pre-Funded Warrants with an exercise price of $0.0001 per share of common stock were considered economically equivalent to common stock and were included in the weighted average number of common stock outstanding for calculation of basic income (loss) per share.
The following table sets-forth securities that are considered anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
18. License Agreements
Healight
In April 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight, an investigational medical device platform technology.
The agreement with Cedars-Sinai grants the Company a license to all patent and development related technology rights for the intra-corporeal therapeutic use of ultraviolet light in the field of endotracheal and nasopharyngeal applications. The term of the agreement is on a country-by-country basis and will expire on the latest of the date upon which the last to expire valid claim shall expire, ten years after the first bona fide commercial sale of such licensed product in a country, or the expiration of any market exclusivity period granted by a regulatory agency. Pursuant to the terms of the agreement, the Company paid an initial $0.3 million license fee and approximately $0.1 million in earlier patent prosecution fees.
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NeuRx
In October 2018, Neos entered into an Exclusive License Agreement (“NeuRx License”) with NeuRx Pharmaceuticals LLC (“NeuRx”), pursuant to which NeuRx granted Neos an exclusive, worldwide, royalty-bearing license to research, develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx’s proprietary compound designated as NRX-101, referred to as NT0502. NT0502 is a new chemical entity that is being developed for the treatment of sialorrhea, which is excessive salivation or drooling. The Company may be required to make certain development and milestone payments and royalties based on annual net sales, as defined in the NeuRx License. Royalties are to be paid on a country-by-country and licensed product-by-licensed product basis, during the period of time beginning on the first commercial sale of such licensed product in such country and continuing until the later of: (i) the expiration of the last-to-expire valid claim in any licensed patent in such country that covers such licensed product in such country; and/or (ii) expiration of regulatory exclusivity of such licensed product in such country.
Teva
On December 21, 2018, Neos and Teva Pharmaceuticals USA, Inc. (“Teva”) entered into an agreement granting Teva a non-exclusive license to certain patents owned by Neos by which Teva has the right to manufacture and market its generic version of Cotempla XR-ODT under an Abbreviated New Drug Application (“ANDA”) filed by Teva beginning on July 1, 2026, or earlier under certain circumstances.
Actavis
On October 17, 2017, Neos entered into an agreement granting Actavis a non-exclusive license to certain patents owned by Neos by which Actavis has the right to manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on September 1, 2025, or earlier under certain circumstances.
Shire
In July 2014, Neos entered into a Settlement Agreement and an associated License Agreement (the “2014 License Agreement”) with Shire LLC (“Shire”) for a non-exclusive license to certain patents for certain activities with respect to Neos’ New Drug Application (the “NDA”) No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet. In accordance with the terms of the 2014 License Agreement, following the receipt of the approval from the FDA for Adzenys XR-ODT, Neos paid an up-front, non-refundable license fee of an amount less than $1.0 million in February 2016. Neos is paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents.
In March 2017, Neos entered into a License Agreement (the “2017 License Agreement”) with Shire, pursuant to which Shire granted Neos a non-exclusive license to certain patents owned by Shire for certain activities with respect to Neos’ NDA No. 204325 for an extended-release amphetamine oral suspension. In accordance with the terms of the 2017 License Agreement, following the receipt of the approval from the FDA for Adzenys ER, Neos paid an up-front, non-refundable license fee of an amount less than $1.0 million in October 2017. Neos is paying a single digit royalty on net sales of Adzenys ER during the life of the patents. Adzenys ER was discontinued as of September 30, 2021.
The royalties are recorded as cost of goods sold in the same period as the net sales upon which they are calculated.
Additionally, each of the 2014 and 2017 License Agreements contains a covenant from Shire not to file a patent infringement suit against Neos alleging that Adzenys XR-ODT or Adzenys ER, respectively, infringes the Shire patents.
19. Segment Reporting
The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews
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financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.
The Company manages and aggregates its operational and financial information in accordance with two reportable segments: BioPharma and Consumer Health. The BioPharma segment consists of the Company’s prescription products. The Consumer Health segment contains the Company’s consumer healthcare products.
Select financial information for these segments is as follows:
March 31, | June 30, | |||||
2022 | 2021 | |||||
(In thousands) | ||||||
Total assets: | ||||||
BioPharma | $ | 139,127 | $ | 236,449 | ||
Consumer Health |
| 29,699 |
| 29,219 | ||
Consolidated assets | $ | 168,826 | $ | 265,668 | ||
20. Subsequent Events
On April 14, 2022, upon receiving Fast Track designation from the FDA for AR101, a milestone payment of $1.5 million is due and payable to Rumpus in cash or in shares of the Company’s common stock. In May 2022, the Company issued 2,188,940 shares of common stock and $75,000 in cash for the full repayment of the amount due under the Fast Track designation milestone.
On April 19, 2022, the Company issued 3,030,000 shares of common stock to holders of the March 7, 2022 Pre-Funded Warrants upon exercise of these warrants at an exercise price of $0.0001.
On May 12, 2022, the Company entered into an agreement with Tris to terminate the License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “License Agreement”). Pursuant to such termination, the Company agreed to pay Tris a total of approximately $6 million to $9 million, which reduced our total liability for minimum payments by approximately $8 million from the original License Agreement. The settlement payment will be paid in three installments from December 2022 through July 2024.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu BioPharma, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2021, filed on September 28, 2021. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the risk factors included in Aytu’s Form 10-K and Form 10-Q filed with the Securities and Exchange Commission on September 28, 2021 and November 15, 2021 respectively.
Objective
The purpose of the Management Discussion and Analysis (the “MD&A”) is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the three and nine months ended March 31, 2022 and our financial condition as of March 31, 2022. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and notes. The MD&A is organized in the following sections:
| ● | Overview |
| ● | Significant Developments. We discuss (i) the business environment, (ii) debt and equity financings, (iii) regulatory developments and (iv) discontinuation of certain non-core products. |
| ● | Results of Operations. We discuss changes in our statements of operations line items, including the major drivers of these changes for three and nine months ended March 31, 2022, as compared with the three and nine months ended March 31, 2021. |
| ● | Liquidity and Capital Resources. We discuss (i) sources of our liquidity, (ii) cash flows, (iii) obligations due on our debt obligations and (iv) expected payments under contractual obligations, commitments and contingencies. |
| ● | Critical Accounting Estimates. We discuss the critical accounting policies and estimates that require significant management judgment. |
Overview
We are a commercial-stage pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products and developing therapeutics for rare pediatric-onset or difficult-to-treat diseases. We operate through two business segments (i) the BioPharma segment, consisting of various prescription pharmaceutical products sold through third party wholesalers (the Rx Portfolio”), and (ii) the Consumer Health segment, which consists of various consumer health products sold directly to consumers. We generate revenue by selling our products through third party intermediaries in our marketing channels as well as directly to our customers. We currently manufacture our products for the treatment of attention deficit hyperactivity disorder (“ADHD”) at our manufacturing facilities and use third party manufacturers for our other prescription and consumer health products. We also have two product candidates in development, AR101 (enzastaurin) for the treatment of vascular Ehlers-Danlos Syndrome (“VEDS”) and Healight (endotracheal light catheter) for the treatment the treatment of severe, difficult-to-treat respiratory infections.
We have incurred significant losses in each year since inception. Our net losses were $53.1 million and $25.5 million for the three months ended March 31, 2022 and 2021, respectively, and $92.5 million and $39.3 million for the nine months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and June 30, 2021, we had an accumulated deficit of approximately $270.8 million and $178.3 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the integration of our acquisitions and development of our product pipeline.
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Significant Developments
Business Environment
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainties. We believe COVID-19 has negatively impacted the market for prescription products, disrupted the reliability of the supply chain, and impacted the ability and efficiency of conducting clinical trials. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the new variants of coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets in the United States and abroad. While states and jurisdictions have rolled back stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and if we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition. In addition, a recurrence or impact from new strains of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We will continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.
We have continued to experience significant inflationary pressure and supply chain disruptions related to the sourcing of raw materials, energy, logistics and labor during fiscal 2022. While we do not have sales or operations in Russia or Ukraine, it is possible that the conflict or actions taken in response, could adversely affect some of our markets and suppliers, economic and financial markets, costs and availability of energy and materials, or cause further supply chain disruptions. We continue to closely monitor the impact of, and responses to, COVID-19 variants, including government-imposed lockdowns, on demand conditions and our supply chain. We expect that inflationary pressures and supply chain disruptions could continue to be significant across the business throughout the year.
Debt and Equity financing
On January 26, 2022, we entered into Loan and Security Agreement (the “Avenue Capital Agreement”) with Avenue Venture Opportunities Fund II, L.P. and Avenue Venture Opportunities Fund II, L.P. as lenders (the “Avenue Capital Lenders”), and Avenue Capital Management II, L.P. as administrative agent (the “Avenue Capital Agent”), collectively (“Avenue Capital”), pursuant to which the Avenue Capital Lenders provided the Company and certain of its subsidiaries with a secured $15.0 million loan. The interest rate on the loan is the greater of the prime rate and 3.25%, plus 7.4%, payable monthly in arrears. The maturity date of the loan is January 26, 2025. The proceeds from the Avenue Capital Agreement were used towards the repayment of outstanding obligations pursuant to a senior secured term credit facility (the “Deerfield Facility”) with Deerfield Private Design Fund III, L.P. and Deerfield Partners, L.P., which was otherwise due and payable on May 11, 2022. Concurrent with the Avenue Capital Agreement, we entered into a Consent, Waiver and Second Amendment to Eclipse Loan Agreement, dated as of January 26, 2022 (together, the “Eclipse Second Amendment”), in which Eclipse (as defined below) extended the maturity date from the May 11, 2022 to January 26, 2025 and reduced the availability under the Revolving Loans from $25.0 million to $12.5 million minus a $3.5 million availability block. See Note 10 – Line of Credit and Note 11 – Long-term Debt in the accompanying unaudited consolidated financial statements for further information.
On March 7, 2022, upon closing of an underwritten public offering, we raised gross proceeds of $7.5 million from the issuance of (i) 3,030,000 shares of our common stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 3,030,000 shares of common stock, and (iii) common stock purchase warrants (the “Common Warrants”) to purchase up to 6,666,000 shares of common stock (the “March 2022 Offering”). We received $6.8 million in proceeds net of underwriting fees and other expenses. See Note 14 – Capital Structure in the accompanying unaudited consolidated financial statements for further information.
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Orange Book Listing of newly issued Cotempla XR-ODT patent
On March 23, 2022, our newly issued US patent No. 11,166,947 for Cotempla XR-ODT was listed in the U.S. Food and Drug Administration (the “FDA”) publication "Approved Drug Products with Therapeutic Equivalence Evaluations", commonly known as the "Orange Book." The Cotempla XR-ODT patent covers methods of use for the effective pediatric dosing of methylphenidate for the treatment of attention deficit hyperactivity disorder. The Orange Book listing extends the exclusivity period for Cotempla XR-ODT to 2038. Pursuant to the non-exclusive license agreement between Neos Therapeutics, Inc. (“Neos”) and Teva Pharmaceuticals USA, Inc. (“Teva”) entered into on December 21, 2018, Teva has the right to manufacture and market its generic version of Cotempla XR-ODT under its Abbreviated New Drug Application (“ANDA”) beginning on July 1, 2026, or earlier under certain circumstances. See Note 18 – License Agreements in the accompanying unaudited consolidated financial statements for further information.
Orphan Drug Designation in Europe and Fast Track Designation granted to AR101
On March 2, 2022, the European Commission granted orphan designation to AR101 (enzastaurin), a PKC beta inhibitor, for the treatment of Ehlers-Danlos Syndrome, a group of rare inherited connective tissue disorders that includes the severe subtype VEDS. This designation is based on a positive opinion from the Committee for Orphan Medicinal Products of the European Medicines Agency (“EMA COMP”). Orphan designation in the European Union is granted by the European Commission (“EU”) based on a positive opinion issued by the EMA COMP. To qualify, an investigational medicine must be intended to treat a seriously debilitating or life-threatening condition that affects fewer than five in 10,000 people in the EU, and there must be sufficient non-clinical or clinical data to suggest the investigational medicine may produce clinically relevant outcomes. The European Medicines Agency orphan designation affords us with certain benefits and incentives, including clinical protocol assistance, differentiated evaluation procedures for Health Technology Assessments in certain countries, access to a centralized marketing authorization procedure valid in all EU member states, reduced regulatory fees and 10 years of market exclusivity.
On April 19, 2022, we were notified by the FDA that AR101 received Fast Track designation. Fast Track is a process designed to facilitate the development, and expedite the review, of drugs to treat serious conditions and fill an unmet medical need. Fast Track addresses a broad range of serious conditions, and the request can be initiated by a pharmaceutical company at any time during the development process. FDA reviews the request and decides based on whether or not the drug fills an unmet medical need in a serious condition. Once a drug receives Fast Track designation, early and frequent communication between the FDA and the sponsor is encouraged throughout the entire drug development and review process. Pursuant to the Asset Purchase Agreement among Aytu BioPharma and Rumpus VEDS LLC, Rumpus Therapeutics LLC and Rumpus Vascular LLC (together, “Rumpus”) entered into on April 12, 2021, the achievement of this Fast Track designation was an earn-out milestone, which resulted in our obligation to pay $1.5 million to Rumpus in cash or in shares of our common stock.
AR101 is an orally available investigational first-in-class small molecule, serine/threonine kinase inhibitor of the PKC beta, PI3K and AKT pathways. AR101 has been studied in more than 3,300 patients across a range of solid and hematological tumor types in trials previously conducted by Eli Lilly & Company. Dr. Hal Dietz developed the first preclinical model that mimics the human condition and recapitulates VEDS, and this model serves as the basis for the plausible clinical benefit and rationale for conducting a clinical trial with AR101 in VEDS.
Positive results from a preclinical pilot study for Healight™
In April 2022, our preclinical pilot study showed a positive results that administration of our Healight ultraviolet light A (“UV-A”) endotracheal catheter delayed the time to development of ventilator-associated pneumonia (“VAP”) in a novel porcine model. VAP has a reported mortality rate approaching 50% in some patient populations, making it one of the most difficult-to-treat and deadly infections affecting hospitalized patients. Approximately 86% of nosocomial pneumonias are associated with mechanical ventilation and result in VAP. Between 250,000 and 300,000 VAP cases per year occur in the United States alone, which is an incidence rate of 5 to 10 cases per 1,000 hospital admissions. VAP afflicts up to 15% of mechanically ventilated patients in intensive care units.
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Healight is an investigational medical device technology employing proprietary methods of administering intermittent UV-A light via a novel respiratory medical device. This patent was issued to Cedars-Sinai Medical Center, from which we have an exclusive worldwide license for all respiratory applications of the UV-A light-based technology. Proof of concept clinical findings demonstrated significant reductions in SARS-CoV-2 viral load and improvement in clinical outcomes in a small number of mechanically ventilated COVID-19 patients.
Discontinued products
As part of our realization of post-acquisition synergies and product prioritization, we have implemented a portfolio rationalization plan whereby we will discontinue or divest five non-core products: Cefaclor Oral Suspension, Flexichamber, Tussionex, Tuzistra XR, and Zolpimist. These products, collectively, contributed $1.7 million in net revenue and $0.6 million in gross loss during the nine months ended March 31, 2022.
RESULTS OF OPERATIONS
Three and nine months ended March 31, 2022 compared to the three and nine months ended March 31, 2021
| Three Months Ended |
| Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||||
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | |||||||
(In thousands) | (In thousands) | |||||||||||||||||
Product revenue, net | $ | 24,199 | $ | 13,483 | $ | 10,716 | $ | 69,221 | $ | 42,150 | $ | 27,071 | ||||||
Cost of sales | 11,513 | 13,935 | (2,422) | 31,780 | 24,249 | 7,531 | ||||||||||||
Gross profit | 12,686 | (452) | 13,138 | 37,441 | 17,901 | 19,540 | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Research and development |
| 3,726 |
| 390 |
| 3,336 |
| 10,742 |
| 859 |
| 9,883 | ||||||
Advertising and direct marketing | 5,116 | 4,754 | 362 | 14,646 | 14,137 | 509 | ||||||||||||
Other selling and marketing | 4,627 | 1,843 | 2,784 | 14,054 | 3,991 | 10,063 | ||||||||||||
General and administrative | 7,615 | 6,001 | 1,614 | 23,784 | 16,948 | 6,836 | ||||||||||||
Acquisition related costs | — |
| 1,537 | (1,537) | — |
| 2,849 | (2,849) | ||||||||||
Restructuring costs | — |
| 4,818 | (4,818) | — |
| 4,875 | (4,875) | ||||||||||
Impairment expense |
| 45,196 |
| 4,286 |
| 40,910 |
| 64,649 |
| 4,286 |
| 60,363 | ||||||
Amortization of intangible assets |
| 1,061 |
| 1,585 |
| (524) |
| 3,214 |
| 4,754 |
| (1,540) | ||||||
Total operating expenses |
| 67,341 |
| 25,214 |
| 42,127 |
| 131,089 |
| 52,699 |
| 78,390 | ||||||
Loss from operations |
| (54,655) |
| (25,666) |
| (28,989) |
| (93,648) |
| (34,798) |
| (58,850) | ||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other income/(expense), net | (55) | (425) | 370 | (75) | (1,555) | 1,480 | ||||||||||||
Gain (loss) from contingent consideration |
| 1,257 | 631 | 626 |
| 761 | (2,680) | 3,441 | ||||||||||
Gain (loss) on extinguishment of debt | 169 | — | 169 | 169 | (258) | 427 | ||||||||||||
Gain on derivative warrant liability |
| 211 | — | 211 |
| 211 | — | 211 | ||||||||||
Total other expense |
| 1,582 |
| 206 |
| 1,376 |
| 1,066 |
| (4,493) |
| 5,559 | ||||||
Loss before income tax |
| (53,073) |
| (25,460) |
| (27,613) |
| (92,582) |
| (39,291) |
| (53,291) | ||||||
Income tax benefit |
| — | — |
| — |
| (110) | — |
| (110) | ||||||||
Net loss | $ | (53,073) | $ | (25,460) | $ | (27,613) | $ | (92,472) | $ | (39,291) | $ | (53,181) | ||||||
Product revenue, net
In the three and nine months ended March 31, 2022, net product revenue increased by $10.7 million, or 79%, and $27.1 million, or 64%, compared to the three and nine months ended March 31, 2021, respectively. The increases were primarily driven by the $9.7 million and $30.5 million net revenue generated from the ADHD product portfolio during the three and nine months ended March 31, 2022, respectively, which we acquired in March 2021. Revenue from our consumer health products grew by $2.0 million and $2.8 million during the three and nine months ended March 31, 2022, respectively, attributable to the launching of three ANDA products in 2020 which has resulted in increased sales.
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These increases were partially offset by decreases of $1.2 million and $6.6 million in revenue from sale of COVID-19 test kits during the three and nine months ended March 31, 2022, respectively, and reductions in revenue of $0.4 million and $1.2 million during the three and nine months ended March 31, 2022, respectively, from the divesture of our Natesto prescription product.
Cost of sales
In the three months ended March 31, 2022, cost of sales decreased by $2.4 million, or 17%, compared to three months ended March 31, 2021 and in the nine months ended March 31, 2022 cost of sales increased by $7.5 million, or 31%, compared to the nine months ended March 31, 2021. Cost of sales in the three and nine months ended March 31, 2021 were affected by a $7.0 million write down of COVID-19 test kits as that product was discontinued. The remaining increases were a result of the increased revenue as described above. Currently, we manufacture our ADHD products and are in the process of moving production to a third-party contract manufacturer and expect to complete that process in mid-calendar 2023. We believe this change will improve the gross margins earned on these products.
Research and development
| Three Months Ended |
| Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||||
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | |||||||
(In thousands) | (In thousands) | |||||||||||||||||
Research and development: | ||||||||||||||||||
AR101 | $ | 2,721 | $ | — | $ | 2,721 | $ | 7,791 | $ | — | $ | 7,791 | ||||||
Healight | 222 | 201 | 21 | 791 | 494 | 297 | ||||||||||||
ADHD | 639 | 132 | 507 | 1,850 | 132 | 1,718 | ||||||||||||
Others | 144 | 57 | 87 | 310 | 233 | 77 | ||||||||||||
Total Research and development | $ | 3,726 | $ | 390 | $ | 3,336 | $ | 10,742 | $ | 859 | $ | 9,883 | ||||||
In the three the three and nine months ended March 31, 2022, research and development expense increased by $3.3 million, or 855%, and $9.9 million, or 1,151%, compared to the three and nine months ended March 31, 2021, respectively. AR101 spending primarily consists of costs associated with preparing for the PREVEnt registrational clinical trial and the $2.5 million milestone payment upon receiving Orphan Drug Designation (“ODD”) in the third quarter of 2022. Spending on the ADHD product portfolio primarily consists of medical monitoring costs and costs associated with post-marketing requirements. We expect spending will be subject to material fluctuations between periods based on the timing of activities, including clinical and pre-clinical trials, of each program.
Advertising and direct marketing
In the three and nine months ended March 31, 2022, advertising and direct marketing expenses increased by $0.4 million, or 8%, and $0.5 million, or 4%, compared to the three and nine months ended March 31, 2021, respectively. Advertising and direct marketing expenses include direct-to-consumer marketing, advertising, sales and customer support and processing fees related to our Consumer Health segment. Advertising and direct marketing can fluctuate materially between periods based on the timing of marketing campaigns.
Other selling and marketing
In the three and nine months ended March 31, 2022, other selling and marketing expense increased by $2.8 million, or 151%, and $10.1 million, or 252%, compared to the three and nine months ended March 31, 2021, respectively. The increases were primarily driven by the addition of the ADHD product portfolio in March 2021.
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General and administrative
In the three and nine months ended March 31, 2022, general and administrative expense increased by $1.6 million, or 27%, and $6.8 million or 40%, compared to the three and nine months ended March 31, 2021, respectively. The increases were primarily driven by the additional infrastructure and spending from the acquisition of Neos (“Neos Acquisition”) in March 2021, partially offset by reduced spending by our Consumer Health segment.
Acquisition related costs
In the three and nine months ended March 31, 2021, acquisition related costs were $1.5 million and $2.8 million, respectively, which were primarily related to the Neos Acquisition in March 2021. Such costs include legal fees, due diligence expenses and financial advisory fees. There was no such cost during the three and nine months ended March 31, 2022.
Restructuring costs
In the three and nine months ended March 31, 2021, restructuring costs were $4.8 million and $4.9 million, respectively, primarily related to the Neos Acquisition, which was closed on March 19, 2021. There was no such cost during the three and nine months ended March 31, 2022.
Impairment expense
In the three months ended March 31, 2022, we recognized total impairment expense of $45.2 million, consisting of (i) $37.7 million in goodwill impairment, (ii) $4.9 million intangible assets write-down, (iii) $2.0 million inventory write-down, (iv) $0.4 million other assets write-down and (v) $0.2 million property and equipment write-down. In the nine months ended March 31, 2022, we recognized total impairment expense $64.6 million, consisting of (i) $57.2 million in goodwill impairment, (ii) $4.9 million intangible assets write-down, (iii) $2.0 million inventory write-down, (iv) $0.4 million other assets write-down and (v) $0.2 million property and equipment write-down. The impairment expense related to write-down of assets was due to the discontinuation of commercializing certain products in our BioPharma Segment. See Note 8 – Goodwill and Other Intangible Assets in the accompanying unaudited consolidated financial statements for further information.
In the three and nine months ended March 31, 2021, we recognized impairment expense of $4.3 million related to impairment of the Natesto licensed intangible asset, which was divested on March 31, 2021.
Amortization of intangible assets
In the three and nine months ended March 31, 2022, amortization expense of intangible assets, excluding amounts included in cost of sales, decreased by $0.5 million, or 33%, and $1.5 million, or 32%, compared to the three and nine months ended March 31, 2021, respectively. The decrease was primarily related to licensed intangible assets that were being amortized during the three months ended March 31, 2021 but have subsequently been divested or discontinued.
Other income/(expense), net
In the three and nine months ended March 31, 2022, other expense, net decreased by $0.4 million, or 87%, and $1.5 million, or 95%, compared to the three and nine months ended March 31, 2021, respectively. The decreases were primarily due to proceeds from the Natesto divestiture, partially offset by increases in interest expense from our debt.
Gain (loss) from contingent consideration
In the three and nine months ended March 31, 2022, net gain from contingent consideration increased by $0.6 million, or 99%, and $3.4 million, or 128%, compared to the three and nine months ended March 31, 2021, respectively. In each of the three and nine months ended March 31, 2022, gain from contingent consideration included a $0.6 million
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gain from the reversal of contingent consideration liability related to ZolpiMist. See Note 12 – Fair Value Considerations in the accompanying unaudited consolidated financial statements for further information.
Gain (Loss) on debt extinguishment
In the three and nine months ended March 31, 2022, we recognized $0.2 million gain from repayment of the Deerfield Facility. In the nine months ended March 31, 2021, we recognized $0.3 million loss from conversion of outstanding debt to our shares of common stock. There was no such loss during the three months ended March 31, 2021.
Gain on derivative warrant liability
In the three and nine months ended March 31, 2022, we recognized $0.2 million gain from change in fair value of warrants upon the reclassification from a liability to equity warrant. See Note 12 – Fair Value Considerations in the accompanying unaudited consolidated financial statements for further information.
Income tax benefit
The impairment of the BioPharma segment book goodwill decreased the net deferred tax liability by $0.1 million resulting in an income tax benefit of $0.1 million during the three months ended September 30, 2021. There was no income tax expense or benefit during the three months ended March 31, 2022 and 2021.
Liquidity and Capital Resources
Sources of Liquidity
We finance our operations through a combination of sales of our common stock and warrants, borrowings under our line of credit facility and cash generated from operations.
Shelf Registrations
On September 28, 2021, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 7, 2021. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2021 Shelf”). As of March 31, 2022, approximately $92.4 million remains available under the 2021 Shelf.
On June 8, 2020, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on June 17, 2020. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2020 Shelf”). As of March 31, 2022, approximately $43.0 million remains available under the 2020 Shelf.
In June 2020, we initiated an at-the-market offering program ("ATM"), which allow us to sell and issue shares of our common stock from time-to-time. Since initiated in June 2020 through March 31, 2022, we issued a total of 5,524,326 shares of common stock for aggregate proceeds of $28.3 million before estimated offering costs of $2.8 million. On June 2, 2021, we terminated our “at-the-market” sales agreement with a sales agent, and on June 4, 2021, we entered into a Controlled Equity OfferingSM Sales Agreement (the “ATM Sales Agreement”) with a sales agent, pursuant to which we agreed to sell up to $30.0 million of our common stock from time to time in “at-the-market” offerings. As of March 31, 2022, approximately $12.2 million of our common stock remained available to be sold pursuant to the ATM Sales Agreement.
Underwriting Agreements
On March 7, 2022, we closed on the March 2022 Offering, pursuant to which, we sold (i) 3,030,000 shares of our common stock, (ii) Pre-Funded Warrants to purchase up to 3,030,000 shares of common stock, and (iii) Common Warrants to purchase up to 6,666,000 shares of common stock. The shares of common stock and the Pre-Funded
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Warrants were each sold in combination with corresponding Common Warrants, with one Common Warrant to purchase 1.1 shares of common stock for each share of common stock or each Pre-Funded Warrant sold. The Pre-Funded Warrants have an exercise price of $0.0001 per share of common stock and were exercised in full in April 2022. The Common Warrants have an exercise price of $1.30 per share of common stock and are exercisable six months after the date of issuance and have a term of five years from the date of exercisability. We raised gross proceeds of $7.6 million through the March 2022 Offering before commission and other costs of $0.8 million. The Pre-Funded Warrants and Common Warrants have a combined fair value of approximately $5.6 million and are classified as additional paid in capital in the stockholders’ equity.
On December 10, 2020, we entered into an underwriting agreement, pursuant to which, we agreed to sell, in an upsized firm commitment offering, 4,166,667 shares of our common stock, to the underwriter at an offering price to the public of $6.00 per share, less underwriting discounts and commissions. In addition, pursuant to the underwriting agreement, we granted the underwriter a 30-day option to purchase up to an additional 625,000 shares of common stock at the same offering price to the public, less underwriting discounts and commissions. The underwriter exercised their over-allotment option in full, purchasing a total of 4,791,667 shares of common stock. We raised gross proceeds of $28.8 million through this offering. Offering costs totaled $2.6 million resulting in net cash proceeds of $26.2 million. In connection with the offering, we issued 311,458 underwriter warrants to purchase up to 311,458 shares of common stock. The exercise price per share of the underwriter warrants is $7.50 (equal to 125% of the public offering price per share for the shares of common stock sold in the offering) and the underwriter warrants have a term of five years from the date of effectiveness of the offering. The underwriter warrants are exercisable immediately. These warrants have a fair value of approximately $1.3 million and are classified as additional paid in capital in the stockholders' equity. Effective June 2, 2021, we terminated the underwriting agreement; pursuant to such termination, there will be no future sales of our common stock under this underwriting agreement.
Eclipse Loan Agreement
Upon closing of the Neos Acquisition in March 2021, we assumed the senior secured credit agreement that Neos entered into with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLC) (“Eclipse”) as agent for the lenders (the “Eclipse Loan Agreement”). We entered into the Eclipse Second Amendment, dated as of January 26, 2022, in which Eclipse extended the maturity date from May 11, 2022 to January 26, 2025. Under the amended Eclipse Loan Agreement, Eclipse will from time to time extend up to $12.5 million in secured revolving loans to us (the “Revolving Loans”), of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. See Note 10 – Line of Credit in the accompanying unaudited consolidated financial statements for further information.
Cash Flows
The following table shows cash flows for the nine months ended March 31, 2022 and 2021:
Nine Months Ended March 31, | Increase | ||||||||
| 2022 |
| 2021 |
| (Decrease) | ||||
(In thousands) | |||||||||
Net cash used in operating activities | $ | (21,728) | $ | (19,687) | $ | (2,041) | |||
Net cash used in investing activities | $ | (3,207) | $ | (356) | $ | (2,851) | |||
Net cash provided by financing activities | $ | 2,647 | $ | 18,500 | $ | (15,853) | |||
Net Cash Used in Operating Activities
Net cash used in operating activities during these periods primarily reflected our net losses, partially offset by changes in working capital and non-cash charges including inventory write-down, changes in fair values of various liabilities, stock-based compensation expense, depreciation, amortization and accretion and other charges.
During the nine months ended March 31, 2022, net cash used in operating activities totaled $21.7 million. The use of cash was approximately $70.7 million less than the net loss due primarily to non-cash charges of goodwill and
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long-lived asset impairment, depreciation, amortization and accretion, stock-based compensation, inventory write-down and loss from change in fair values of contingent consideration. These non-cash charges were partially offset by non-cash credits of amortization of debt premium and gain from change in fair values of contingent value rights. In addition, our use of cash decreased due to changes in working capital including decreases in accounts receivable and prepaid expense and other current assets, increase in accrued liabilities, offset by a decrease in accounts payable.
During the nine-months ended March 31, 2021, our operating activities used $19.7 million in cash, which was less than the net loss of $34.2 million, primarily due to a $7.2 million inventory impairment, and other non-cash adjustments such as depreciation, amortization and accretion, stock-based compensation, and loss from change in fair value of contingent consideration and contingent value rights (“CVR”), decreases in accounts receivable, prepaid expenses, other current assets and an increase in accrued compensation. These charges were offset by an increase in inventory and decreases in accounts payable and accrued liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities of $3.2 million during the nine months ended March 31, 2022 was primarily due to $3.1 million payment of contingent consideration to Tris.
Net cash used in investing activities of $0.4 million during the nine months ended March 31, 2021 was primarily due to $0.7 million payment of contingent consideration, partially offset by $0.3 million net cash received from the Neos Acquisition.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $2.6 million during the nine months ended March 31, 2022 was primarily from $15.0 million proceeds from long-term debt and $11.9 million net proceeds from issuance of our common stock, partially offset by $16.1 million full repayment of long-term debt, $4.5 million net reduction in our revolving loan, $3.2 million in payments of fixed payment arrangements and $0.4 million payment of debt issuance costs.
Net provided by financing activities in the nine-months ended March 31, 2021 was $18.6 million. This was primarily related to the December 2020 offering for gross proceeds cost of $28.8 million offset by the offering cost of $2.6 million. We also issued shares of our common stock under the ATM with gross proceeds of $3.6 million, which was offset by commission and other offering cost of $1.6 million. We paid approximately $6.0 million on our short-term line of credit, $3.0 million related to fixed payment obligation and $0.3 million of debt.
Capital Resources
We have obligations related to our loan and credit facilities, contingent considerations related to our acquisitions, milestone payments and purchase commitments.
Loan and Credit
Avenue Capital Agreement
On January 26, 2022, we entered into the Avenue Capital Agreement, pursuant to which the Company received $15.0 million loan. The interest rate on the loan is the greater of the prime rate and 3.25%, plus 7.4%, payable monthly in arrears. The maturity date of the loan is January 26, 2025. The proceeds from the Avenue Capital Agreement were used towards the repayment of the Deerfield Facility.
In the event we prepay the outstanding principal prior to the maturity date, we will pay Avenue Capital a fee equal to (i) 3.0% of the loan if such event occurs on or before January 26 2023, (ii) 2.0% of the loan if such event occurs after January 26, 2023 but on or before January 26, 2024, and (iii) 1.0% of the loan if such event occurs after January 26, 2024 but before January 26, 2025. In addition, upon the payment in full of the obligations, we shall pay to Avenue
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Capital a non-refundable fee in the amount of $0.6 million (“Final Payment”). See Note 11 – Long-term Debt in the accompanying unaudited consolidated financial statements for further information.
Eclipse Loan Agreement
The Eclipse Loan Agreement, as amended, provides us with up to $12.5 million in Revolving Loans, of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bear variable interest through maturity at the one-month LIBOR, plus 4.50%. In addition, we are required to pay an unused line fee of 0.50% of the average unused portion of the maximum Revolving Loans amount during the immediately preceding month. Interest is payable monthly in arrears. The maturity date under the Eclipse Loan Agreement, as amended, is January 26, 2025.
In event that, for any reason, all or any portion of the Eclipse Loan Agreement is terminated prior to the scheduled maturity date, in addition to the payment of all outstanding principal and unpaid accrued interest, we are required to pay a fee equal to (i) 2.0% of the Revolving Loans commitment if such event occurs on or before January 26, 2023, (ii) 1.0% of the Revolving Loans commitment if such event occurs after January 26, 2023 but on or before January 26, 2024, and (iii) 0.5% of the Revolving Loans commitment if such event occurs after January 26, 2024 but on or before January 26, 2025. We may permanently terminate the Eclipse Loan Agreement with at least five business days prior notice. See Note 10 – Line of Credit in the accompanying unaudited consolidated financial statements for further information.
Contractual Obligations, Commitments and Contingencies
As a result of our acquisitions and licensing agreements, we are contractually and contingently obliged to pay, when due, various fixed and contingent milestone payments. See Note 13 – Commitments and Contingencies in the accompanying unaudited consolidated financial statements for further information.
Upon closing of the acquisition of a line of prescription pediatric products from Cerecor, Inc. in October 2019, we assumed payment obligations that required us to make fixed and product milestone payments. As of March 31, 2022, up to $8.5 million of milestone payments remain.
In connection with the February 2020 acquisition of Innovus Pharmaceuticals, Inc. (the “Innovus Acquisition”), all of Innovus’s shares were converted to our common stock and CVRs, which represents contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones. As of March 31, 2022, up to $10 million of milestone payments remain.
In connection with our Innovus Acquisition, we assumed a contingent obligation which required us to make five payments of $0.5 million, between fiscal year 2026 through fiscal year 2033 to Novalere, if and when certain levels of FlutiCare sales are achieved.
In connection with our acquisition of the Rumpus assets, upon satisfaction of the milestones, we may be required to pay up to $67.5 million in regulatory and commercial-based earn-out payments to Rumpus. Under the licensing agreement with Denovo Biopharma LLC (“Denovo”), we are required to make a payment of $0.6 for an option license fee in April 2022 and upon achievement of regulatory and commercial milestones, up to $101.7 million is payable to Denovo. Under the licensing agreement with JHU, upon achievement of regulatory and commercial milestone, we may be required to pay up to $1.6 million to Johns Hopkins University (“JHU”). In fiscal 2022, two milestones were achieved totaling $4.0 million.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the
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date of the financial statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to the notes to our audited financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
We generate revenue from product sales through our BioPharma segment and Consumer Health segment. We recognize revenue when all of the following criteria are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) as each performance obligation is individually satisfied.
Revenue from our BioPharma segment involves significant judgment and estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler (distributor) fees, wholesaler chargebacks and estimated rebates) to be incurred on the respective product sales (known as “Gross to Net” adjustments), and we recognize the estimated net amount as revenue when control of the product is transferred to our customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgment and other market data. We provide for prompt payment discounts, wholesaler fees and wholesaler chargebacks based on customer contractual stipulations. We analyze recent product return history to determine a reliable return rate. Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions and information obtained from third party providers to determine these respective variable considerations.
Savings offers
We offer savings programs for our patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The amount of redeemed savings offers is recorded based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustment at the time revenue is recognized. Historical trends of savings offers will be regularly monitored, which may result in adjustments to such estimates in the future.
Prompt payment discounts
Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized.
Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of our products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.
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Rebates
The Rx Portfolio products are subject to commercial managed care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Calculations related to rebate accruals are estimated based on information from third-party providers. Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated rebates will be regularly monitored, which may result in adjustments to such estimates in the future.
Returns
Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized. We analyzed return data available from sales since inception date to determine a reliable return rate.
Wholesaler chargebacks
The Rx Portfolio products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to us. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized based on information provided by third parties.
Inventories
Inventories consist of raw materials, work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable, pre-launch inventories are expensed into research and development. Post-FDA approval, manufacturing costs for the production of our products are being capitalized into inventory. We periodically review the composition of our inventories in order to identify obsolete, slow-moving, excess or otherwise unsaleable items. Unsaleable items will be written down to net realizable value in the period identified.
Stock-based compensation expense
Stock-based compensation awards, including stock options, restricted stock and restricted stock units are recognized in the statement of operations based on their fair values on the date of grant. Stock option grants are valued on the grant date using the Black-Scholes option pricing model and compensation costs are recognized ratably over the period of service using the graded method. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of the Company’s common stock and recognized ratably over the requisite service period. Forfeitures are adjusted for as they occur.
We calculated the fair value of options using the Black-Scholes option pricing model. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of our common stock. The Black-Scholes option pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. We have not paid and do not anticipate paying cash dividends. Therefore, the expected dividend rate is assumed to be 0%. The expected stock price volatility for stock option awards is based on our stock price volatility in the valuation model. The risk-free rate was based on the U.S. Treasury yield curve in effect commensurate with the expected life assumption. The average expected life of stock options was determined according to the “simplified method” as described in SAB Topic 110, which is the midpoint
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between the vesting date and the end of the contractual term. The risk-free interest rate was determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are adjusted for as they occur.
There is a high degree of subjectivity involved when using option pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option pricing model, such a model value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.
Impairment of Long-lived Assets
We assess impairment of long-lived assets annually and when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Long-lived assets consist of property and equipment, net and goodwill and other intangible assets, net. Circumstances which could trigger a review include but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
Pursuant to the guidance under ASC 360, as of March 31, 2022, the undiscounted future cash flow did not indicated impairment of long-lived assets. However, as part of our realization of post-acquisition synergies and product prioritization, we have implemented a portfolio rationalization plan in our BioPharma segment whereby we will discontinue or divest five non-core products: Cefaclor Oral Suspension, Flexichamber, Tussionex, Tuzistra XR, and Zolpimist. As a result of this decision, we recorded an impairment charge of $4.9 million associated with the write-down of intangible assets of these products during the three and nine months ended March 31, 2022.
Goodwill
Goodwill is recorded as the difference between the fair value of the purchase consideration and the fair value of the net identifiable tangible and intangible assets acquired. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. We typically complete our annual impairment test for goodwill using an assessment date in the fourth quarter of each fiscal year. Pursuant to the guidance under ASC 350, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of our reporting units is greater than its carrying amount. If, after assessing events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, then we perform a quantitative impairment test by comparing the fair value of the reporting unit with the carrying value. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The fair value of the reporting unit is determined using a combination of a market multiple and a discounted cash flow approach. Determining the fair value of a reporting unit requires the use of estimates, assumptions and judgment. The principal estimates and assumptions that we use include prospective financial information (revenue growth, operating margins and capital expenditures), future market conditions, weighted average costs of capital, a terminal growth rate, comparable multiples of publicly traded companies in our industry, and the earnings metrics and multiples utilized. We believe that the estimates and assumptions used in impairment assessments are reasonable. If the fair value of the reporting unit is less than the carrying amount, an impairment charge is recorded in the amount of the difference. We have determined that we have two reporting units that require periodic review for goodwill impairment, the BioPharma segment and the Consumer Health segment.
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During fiscal 2022, our market capitalization significantly declined. During the three months ended September 30, 2021, the decline was considered a qualitative factor that led management to assess whether an impairment had occurred. Management’s evaluation indicated that the goodwill related to one of our reporting units within the BioPharma segment was potentially impaired. We performed a quantitative impairment test by calculating the fair value of the reporting unit and compared that amount to its carrying value. Significant assumptions inherent in the valuation methodologies include, but were not limited to prospective financial information, growth rates, terminal value, discount rates and comparable multiples from publicly traded companies in our industry. The decline in market capitalization was an indicator of increased risk thereby increasing the discount rates in the valuation models. We determined the fair value of the reporting unit utilizing the discounted cash flow model. As of September 30, 2021, utilizing the risk adjusted weighted-average discount rate, the fair value of the reporting unit was less than its carrying value. We recognized an impairment loss of $19.5 million in the BioPharma segment related to the goodwill associated with the Cerecor Inc. acquisition.
During the three months ended March 31, 2022, the continued decline of our market capitalization was considered a qualitative factor that led management to reassess whether an impairment had occurred. Management’s evaluation indicated that the goodwill related to one of its reporting units within the BioPharma segment was potentially impaired. We performed a quantitative impairment test by calculating the fair value of the reporting unit and compared that amount to its carrying value. Significant assumptions inherent in the valuation methodologies include, but were not limited to prospective financial information, growth rates, terminal value, discount rates and comparable multiples from publicly traded companies in our industry. The decline in market capitalization was an indicator of increased risk thereby increasing the discount rates in the valuation models. we determined the fair value of the reporting unit utilizing the discounted cash flow model. As of March 31, 2022, utilizing the risk adjusted weighted-average discount rate, the fair value of the reporting unit was less than its carrying value. We recognized an impairment loss of $37.7 million in the BioPharma segment related to the goodwill associated with the Neos Acquisition.
The Consumer Health segment, which has $8.6 million goodwill from the Innovus Acquisition, reported $2.2 million negative carrying value as of March 31, 2022, and as such there was no goodwill impairment related to the Consumer Health segment during the three months ended March 31, 2022.
Contingent considerations
We classify contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of contingent consideration liabilities based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology.
The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then re-measured for future expected payout as well as the increase in fair value due to the time value of money. These gains or losses, if any, are included as a component of operating cash flows.
Fixed payment arrangements are comprised of minimum product payment obligations relating to either make whole payments or fixed minimum royalties arising from a business acquisition. The fixed payment arrangements were recognized at their amortized cost basis using a market appropriate discount rate and are accreted up to their ultimate face value over time. The liabilities related to fixed payment arrangements are not re-measured at each reporting period, unless we determine the circumstances have changed such that the fair value of these fixed payment obligations would have changed due to changes in company specific circumstances or interest rate environments.
Warrants
Equity classified warrants are valued using a Black-Scholes model. Liability classified warrants are accounted for by recording the fair value of each instrument in its entirety and recording the fair value of the warrant derivative
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liability. The fair value of liability classified derivative financial instruments were calculated using a lattice valuation model. Changes in the fair value of liability classified derivative financial instruments in subsequent periods are recorded as derivative income or expense for the warrants and reported as a component of cash flows from operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
Item 4. Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and are operating in an effective manner.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have not been any material changes to our legal proceedings from those reported in our fiscal year 2021 Annual Report on Form 10-K filed with the SEC on September 28, 2021.
Item 1A. Risk Factors.
Our business faces significant risks and uncertainties, including the impact of the COVID-19 pandemic. Certain important factors may have a material adverse effect on our business prospects, financial condition, and results of operations, and you should carefully consider them. There have not been any material changes to our risk factors from those reported in our fiscal year 2021 Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the SEC on September 28, 2021 and November 15, 2021 respectively.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
On May 12, 2022 (the “Settlement Effective Date”), we entered into the Settlement and Termination of License Agreement (the “Settlement Agreement”) with Tris, which terminated the License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “License Agreement”). Pursuant to the Settlement Agreement, we agreed to pay Tris a total of approximately $6 million to $9 million (the “Settlement Payment”), which reduced our total liability for minimum payments by approximately $8 million from the original License Agreement. The Settlement Payment will be paid in three installments from December 2022 through July 2024. Any amount of the Settlement Payment not paid when due, shall bear interest from the date due until paid at the rate equal to the greater of (i) 2.5% per month and (ii) the maximum interest rate permitted by applicable law.
Upon execution of the Settlement Agreement, we will transfer, assign and convey to Tris, free and clear of all liens, claims, encumbrances and security interests (collectively, ”Encumbrances”), at our expense, all right title and interest to and under the intellectual property, permits and product registrations and books and records as sets forth in the Settlement Agreement (collectively, the “Transferred Assets”).
We are also responsible for discharging certain liabilities with respect to (i) Tuzistra inventories in existence in our control on the Settlement Effective Date, (ii) certain obligations and commitments in respect of defects, returns and/or credits, refunds, rebates, chargebacks, patient and co-pay coupons, off-invoice discounts or price-protection commitments sets forth in the Settlement Agreement, (iii) certain transferred assets, (iv) default of or breaches of the Settlement Agreement, and (v) all FDA fees paid in respect of Tuzistra related to any period prior to the Settlement Effective Date (collectively, “Retained Liabilities”).
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Item 6. Exhibits.
Exhibit No. |
| Description |
| Registrant’s |
| Date Filed |
| Exhibit |
| Filed |
1.1 | 8-K | 3/4/2022 | 1.1 | |||||||
3.1 | 8-K | 5/9/2022 | 3.1 | |||||||
4.1 | 8-K | 3/4/2022 | 4.1 | |||||||
4.2 | 8-K | 3/4/2022 | 4.2 | |||||||
10.1#& | X | |||||||||
31.1 | X | |||||||||
31.2 | X | |||||||||
32.1 | X | |||||||||
101 | XBRL (extensible Business Reporting Language). The following materials from Aytu BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted in Inline XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statement of Cash Flows, and (v) the Consolidated Notes to the Financial Statements. | X | ||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101. | X |
# | The company has requested confidential treatment of certain portions of this agreement. These portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request. |
& | Pursuant to Item 601(b)(10) of Regulation S-K, portions of this exhibit (indicated by asterisks) have been omitted as the registrant has determined that (1) the omitted information is not material and (2) the omitted information would likely cause competitive harm to the registrant if publicly disclosed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AYTU BIOPHARMA, INC. | |||
|
| ||
Date: May 16, 2022 | By: | /s/ Joshua R. Disbrow | |
| Joshua R. Disbrow | ||
| Chief Executive Officer | ||
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