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, 2023
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 8, 2023, there were 3,780,179 shares of the registrant’s common stock outstanding.
AYTU BIOPHARMA, INC. FOR THE QUARTER ENDED MARCH 31, 2023
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 plans 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 BioPharma, Cotempla, FlutiCare, Innovus Pharma, Neos Therapeutics, Poly-Vi-Flor, Tri-Vi-Flor, 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 amounts)
(Unaudited)
March 31, | June 30, | |||||
| 2023 |
| 2022 | |||
Assets | ||||||
Current assets |
|
|
| |||
Cash and cash equivalents | $ | 19,179 | $ | 19,360 | ||
Accounts receivable, net |
| 34,043 |
| 21,712 | ||
Inventories |
| 13,637 |
| 10,849 | ||
Prepaid expenses |
| 10,429 |
| 7,375 | ||
Other current assets |
| 1,177 |
| 633 | ||
Total current assets |
| 78,465 |
| 59,929 | ||
Property and equipment, net |
| 2,028 |
| 3,025 | ||
Operating lease right-of-use asset |
| 2,367 |
| 3,271 | ||
Intangible assets, net | 63,464 | 70,632 | ||||
Other non-current assets | 892 | 766 | ||||
Total non-current assets |
| 68,751 |
| 77,694 | ||
Total assets | $ | 147,216 | $ | 137,623 | ||
Liabilities | ||||||
Current liabilities |
|
|
| |||
Accounts payable and other | $ | 14,673 | $ | 10,987 | ||
Accrued liabilities |
| 49,585 |
| 44,187 | ||
Short-term line of credit | 10,403 | 3,813 | ||||
Current portion of debt |
| 3,305 |
| 96 | ||
Other current liabilities | 7,450 |
| 5,359 | |||
Total current liabilities |
| 85,416 |
| 64,442 | ||
Debt, net of current portion | 11,386 | 14,279 | ||||
Derivative warrant liabilities | 1,582 | 1,796 | ||||
Other non-current liabilities | 7,920 | 12,798 | ||||
Total liabilities |
| 106,304 |
| 93,315 | ||
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, 2023 and June 30, 2022 |
|
| ||||
Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 3,779,513 and 1,928,941, respectively, as of March 31, 2023 and June 30, 2022 |
| — |
| — | ||
Additional paid-in capital |
| 342,584 |
| 331,386 | ||
Accumulated deficit |
| (301,672) |
| (287,078) | ||
Total stockholders’ equity |
| 40,912 |
| 44,308 | ||
Total liabilities and stockholders’ equity | $ | 147,216 | $ | 137,623 | ||
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 amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
| 2023 |
| 2022 |
| 2023 | 2022 | ||||||
$ | 22,733 | $ | 24,199 | $ | 76,667 | $ | 69,221 | |||||
Cost of sales |
| 9,990 | 11,513 |
| 28,599 | 31,780 | ||||||
Gross profit | 12,743 | 12,686 | 48,068 | 37,441 | ||||||||
Operating expenses | ||||||||||||
Research and development |
| 856 | 3,282 |
| 3,630 | 9,409 | ||||||
Selling and marketing | 12,804 | 9,743 | 33,466 | 28,700 | ||||||||
General and administrative | 7,177 | 7,616 | 22,517 | 23,785 | ||||||||
Impairment expense |
| — | 45,196 |
| 2,600 | 64,649 | ||||||
Gain from contingent consideration | (734) | (1,234) |
| (504) | (682) | |||||||
Amortization of intangible assets |
| 1,198 | 1,504 |
| 3,593 | 4,546 | ||||||
Total operating expenses |
| 21,301 |
| 66,107 |
| 65,302 |
| 130,407 | ||||
Loss from operations |
| (8,558) |
| (53,421) |
| (17,234) |
| (92,966) | ||||
Other income (expense) |
|
|
|
|
|
|
| |||||
Other (expense) income, net |
| (1,215) | (32) |
| (3,527) | 4 | ||||||
Gain on extinguishment of debt | — | 169 | — | 169 | ||||||||
Gain (loss) on derivative warrant liabilities |
| 2,573 | (7) |
| 6,167 | (7) | ||||||
Total other income (expense) |
| 1,358 |
| 130 |
| 2,640 |
| 166 | ||||
Loss before income tax |
| (7,200) |
| (53,291) |
| (14,594) |
| (92,800) | ||||
Income tax benefit |
| — | — |
| — | (110) | ||||||
Net loss | $ | (7,200) | $ | (53,291) | $ | (14,594) | $ | (92,690) | ||||
Weighted average number of common shares outstanding | 3,726,779 | 1,484,492 |
| 3,099,130 |
| 1,360,585 | ||||||
Basic and diluted net loss per common share | $ | (1.93) | $ | (35.90) | $ | (4.71) | $ | (68.13) | ||||
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)
Additional | Total | ||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit | Equity (Deficit) | |||||||
Balance, July 1, 2022 | — |
| $ | — |
| 1,928,941 |
| $ | — |
| $ | 331,386 | $ | (287,078) | $ | 44,308 | |||
Stock-based compensation | — | — | (1,666) | — | 1,177 | — | 1,177 | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | 1,194,196 | — | 3,564 | — | 3,564 | ||||||||||||
Net loss | — | — | — | — | — | (701) | (701) | ||||||||||||
Balance, September 30, 2022 | — | $ | — | 3,121,471 | $ | — | $ | 336,127 | $ | (287,779) | $ | 48,348 | |||||||
Stock-based compensation | — | — | (19,228) | — | 3,067 | — | 3,067 | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | 280,902 | — | 1,095 | — | 1,095 | ||||||||||||
Net loss | — | — | — | — | — | (6,693) | (6,693) | ||||||||||||
Balance, December 31, 2022 | — | $ | — | 3,383,145 | $ | — | $ | 340,289 | $ | (294,472) | $ | 45,817 | |||||||
Stock-based compensation | — | — | 8,747 | — | 902 | — | 902 | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | 387,621 | — | 1,393 | — | 1,393 | ||||||||||||
Net loss | — | — | — | — | — | (7,200) | (7,200) | ||||||||||||
Balance, March 31, 2023 | — | $ | — | 3,779,513 | $ | — | $ | 342,584 | $ | (301,672) | $ | 40,912 | |||||||
Additional | Total | ||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit | Equity (Deficit) | |||||||
Balance, July 1, 2021 | — |
| $ | — |
| 1,374,520 |
| $ | — |
| $ | 315,867 |
| $ | (178,299) | $ | 137,568 | ||
Stock-based compensation | — |
| — | 11,000 |
| — |
| 1,519 |
| — | 1,519 | ||||||||
Issuance of common stock, net of issuance cost | — | — | 3,075 | — | 270 | — | 270 | ||||||||||||
Tax withholding for stock-based compensation | — | — | — | — | (6) | — | (6) | ||||||||||||
Net loss | — |
| — | — |
| — |
| — |
| (27,851) | (27,851) | ||||||||
Balance, September 30, 2021 | — | $ | — | 1,388,595 | $ | — | $ | 317,650 | $ | (206,150) | $ | 111,500 | |||||||
Stock-based compensation | — |
| — | 3,848 | — | 1,229 | — | 1,229 | |||||||||||
Issuance of common stock, net of issuance cost | — |
| — | 108,079 | — | 4,355 | — | 4,355 | |||||||||||
Net loss | — |
| — | — | — | — | (11,548) | (11,548) | |||||||||||
Balance, December 31, 2021 | — | $ | — | 1,500,522 | $ | — | $ | 323,234 | $ | (217,698) | $ | 105,536 | |||||||
Stock-based compensation | — |
| — | 5,388 | — | 1,270 | — | 1,270 | |||||||||||
Issuance of common stock, net of issuance cost | — |
| — | 161,885 | — | 3,856 | — | 3,856 | |||||||||||
Tax withholding for stock-based compensation | — | — | — | — | (2) | — | (2) | ||||||||||||
Warrants issued with debt refinance | — | — | — | — | 379 | — | 379 | ||||||||||||
Net loss | — |
| — | — | — | — | (53,291) | (53,291) | |||||||||||
Balance, March 31, 2022 | — | $ | — | 1,667,795 | $ | — | $ | 328,737 | $ | (270,989) | $ | 57,748 | |||||||
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, | ||||||
| 2023 |
| 2022 | |||
Operating Activities |
|
|
| |||
Net loss | $ | (14,594) | $ | (92,690) | ||
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
| ||
Depreciation, amortization and accretion |
| 6,699 |
| 7,926 | ||
Impairment expense | 2,600 |
| 64,649 | |||
Stock-based compensation expense |
| 5,146 |
| 4,018 | ||
(Gain) loss on derivative warrant liabilities | (6,167) | 7 | ||||
Gain from contingent consideration |
| (504) |
| (682) | ||
Amortization of senior debt (premium) discount | 413 | (268) | ||||
Gain on sale of equipment | (42) | (44) | ||||
Gain on debt extinguishment | — | (193) | ||||
Inventory write-down | 199 | 352 | ||||
Other noncash adjustments |
| 13 |
| (152) | ||
Changes in operating assets and liabilities: | ||||||
Accounts receivable |
| (12,335) |
| 647 | ||
Inventories |
| (2,987) |
| 91 | ||
Prepaid expenses and other current assets |
| (3,603) |
| 1,406 | ||
Accounts payable and other |
| 3,720 |
| (8,099) | ||
Accrued liabilities |
| 7,031 |
| 1,252 | ||
Other operating assets and liabilities, net | (83) | 52 | ||||
Net cash used in operating activities |
| (14,494) |
| (21,728) | ||
Investing Activities |
|
|
|
| ||
Contingent consideration payment |
| — |
| (3,138) | ||
Other investing activities |
| 38 |
| (69) | ||
Net cash provided by (used in) investing activities |
| 38 |
| (3,207) | ||
Financing Activities |
|
|
|
| ||
Proceeds from issuance of stock and warrants |
| 13,012 |
| 12,700 | ||
Payment of stock issuance costs |
| (1,045) |
| (782) | ||
Payment made to fixed payment arrangement | (4,117) | (3,277) | ||||
Net proceeds received (payments made on) short-term line of credit | 6,590 | (4,549) | ||||
Payments made to borrowings |
| (73) |
| (16,075) | ||
Proceeds from borrowings | — | 15,000 | ||||
Payment for debt issuance costs | (92) | (363) | ||||
Other financing activities | — | (7) | ||||
Net cash provided by financing activities |
| 14,275 |
| 2,647 | ||
Net change in cash, cash equivalents and restricted cash | (181) | (22,288) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 19,360 | 49,901 | ||||
Cash and cash equivalents at end of period | $ | 19,179 | $ | 27,613 | ||
8
See the accompanying Notes to the Condensed Consolidated Financial Statements.
9
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. The Company operates through two business segments (i) the Rx segment, consisting of prescription pharmaceutical products and (ii) the Consumer Health segment, which consists of various consumer healthcare products (the “Consumer Health Portfolio”). The Company was originally 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 “Neos Acquisition”) the Company changed its name to Aytu BioPharma, Inc.
On January 6, 2023, the Company effected a reverse stock split in which each common stockholder received one share of common stock for every shares held (“Reverse Stock Split”). All share and per share amounts in this quarterly report have been adjusted to reflect the effect of the Reverse Stock Split.
The Rx segment primarily consists of two product portfolios: 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”) together the “ADHD Portfolio”, and the “Pediatric Portfolio” consisting of 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 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 allergy, hair regrowth, diabetes support, digestive health, sexual and urological health and general wellness, commercialized through direct mail 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 and consumer health markets. As a result of focusing on building the portfolio of revenue-generating products, the Company has indefinitely suspended active development of its clinical development programs including AR101 (enzastaurin), Healight, and NT0502 (N-desethyloxybutynin).
As of March 31, 2023, the Company had approximately $19.2 million of cash and cash equivalents and approximately $34.0 million in accounts receivable. The Company’s operations have historically consumed cash and are expected to continue to consume cash. The Company incurred a net loss of $7.2 million and $14.6 million during the three and nine months ended March 31, 2023, respectively. The Company had an accumulated deficit of $301.7 million as of March 31, 2023. Cash used in operations was $14.5 million during the nine months ended March 31, 2023.
During the nine months ended March 31, 2023, the Company issued 699,929 shares of common stock under the “At-The-Market” (“ATM”) (see Note — 14 Capital Structure) for total gross proceeds of approximately $3.0 million before deducting commissions of 3% and other offering expenses including legal and audit fees. The Company intends to use the net proceeds from the Offering and from the ATM for growth of the Company’s commercial business, and for working capital and general corporate purposes.
As of March 31, 2023, the Company did not have sufficient working capital to cover its cash needs to fund planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q, which raises substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include adjustments that might be necessary if the Company is unable to continue as a going concern.
10
Management plans to continue to mitigate the conditions that raise substantial doubt about its ability to continue as a going concern, primarily by focusing on increasing revenue, reducing expenses associated with research and development, and raising additional capital through public or private equity, 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 continue the suspension of its developmental programs or otherwise operate its business. As a result, there can be no assurance 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 condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2022, 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 periods ended March 31, 2023 are not necessarily indicative of expected operating results for the full year or any future year.
Also see Note 2 – Previously Reported Financial Statements relating to the immaterial correction of an error in the condensed consolidated financial statements for as of June 30, 2022, and for the three and nine months ended March 31, 2022.
Prior Period Reclassification. Certain prior year amounts in the condensed consolidated statements of operations and statements of cash flows have been reclassified to conform to the current year presentation, including a reclassification made in the presentation of amortization of intellectual property, and a reclassification of fair value adjustment from contingent consideration. Amortization of intellectual property was previously included in research and development expenses and is currently recorded in amortization of intangible assets expenses on the condensed consolidated statements of operations. Gain or loss from the fair value of contingent consideration was previously included in Other expense, net, and is currently recorded in operating expenses on the condensed consolidated statements of operations. These reclassifications did not impact operating results or cash flows for the nine months ended March 31, 2023 and 2022 or its financial position as of March 31, 2023 or June 30, 2022.
11
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, write-downs 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, the depreciable lives of long-lived assets, classification of warrants equity versus liability, and the valuation of derivative warrant liability. 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.
Previously Reported Financial Statements
The classification of certain of the Company’s warrants was previously recorded as equity. These warrants according to Generally Accepted Accounting Principles in the United States (“GAAP”) should have been classified as derivative warrant liabilities at fair value and marked to market at each reporting period, with changes in fair value recorded in earnings. The affected filing periods include the quarterly unaudited financial statements as of March 31, 2022 and the audited financial statements as of June 30, 2022.
SEC Staff Accounting Bulletin No. 99, “Materiality,” and the Financial Accounting Standards Board (“FASB”), Statement of Financial Accounting Concepts No. 2 “Qualitative Characteristics of Accounting Information” indicate that quantifying and aggregating adjustments is only the beginning of an analysis of materiality and that both quantitative and qualitative factors must be considered in determining whether individual adjustments are material. The Company evaluated the adjustments and determined that the impact was not material to the condensed consolidated financial statements for the quarter ended March 31, 2022 and to the condensed consolidated balance sheet as of June 30, 2022. As a result, adjustments for the immaterial adjustments were applied to these periods for comparative purposes. The adjustments did not change the Company’s reported total assets, cash and cash equivalents, operating expenses, operating losses or cash flows from operations.
The condensed consolidated financial statements as of and for the three and nine months ended March 31, 2022 have been adjusted as shown in the following tables.
12
(1) Includes reclassification of gain or loss from fair value of contingent consideration. See Prior Period Reclassification in Note 1 – Nature of Business, Financial Condition, Basis of Presentation.
(1) Includes reclassification of gain or loss from fair value of contingent consideration. See Prior Period Reclassification in Note 1 – Nature of Business, Financial Condition, Basis of Presentation.
13
The consolidated balance sheet and the consolidated statement of stockholders’ equity as of June 30, 2022 have been adjusted as shown in the table below.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in FASB Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. Liability and equity classified warrants are valued using a Black-Scholes option model or Monte Carlo simulation model at issuance and for each reporting period when applicable.
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 three and nine months ended March 31, 2023.
An ownership change (generally a 50% change in equity ownership over a three-year period) could limit the Company’s ability to offset, post-change, U.S. federal taxable income. Section 382 of the Internal Revenue Code imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change net operating loss carryforwards and certain recognized built-in losses. The Company believes that previous acquisitions, financing transactions, and equity ownership changes in the past five years may have caused a limitation on its ability to use the pre-acquisition net operating loss carryovers. The ownership change scenario could result in increased future tax liability. The Company is in the process of analyzing the impact of any possible ownership change result of which may be a change to the Company’s net deferred tax asset or liability position.
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Impairment of Other Intangibles Assets
Acquired in-process research and development (“IPR&D) is an intangible asset classified as an indefinite-lived asset until the completion or abandonment of the associated research and development (“R&D”) effort. In periods after the acquisition of IPR&D, the Company may (1) continue internal R&D efforts associated with the acquired assets or collaborate with another party in R&D efforts; (2) dispose of the assets through a sale; (3) out-license the assets; (4) temporarily postpone further development; or (5) abandon R&D efforts. IPR&D may be subject to different subsequent accounting treatment depending on the course of action chosen by the Company with respect to the asset. If the Company changes strategies related to the IPR&D the asset could potentially be impaired (see Note —7 Goodwill and Other Intangible Assets).
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 discontinued if contract modifications are made on or before December 31, 2022. The Company adopted the guidance effective July 1, 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 adoption of this standard did not have a material impact on the Company’s condensed consolidated financial position and results of operations.
Earnings Per Share. In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”. The amendments in ASU 2021-04 provide guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2021-04 and related updates did not have a material impact on its condensed consolidated financial statements.
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, 2024 and does not expect the adoption of the standard to have a material impact on the Company’s condensed consolidated financial position or 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
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anticipate the application of ASU 2016-13 will have a material impact on the Company’s condensed consolidated financial position or 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, 2022. There have been no significant changes to the Company’s significant accounting policies during the nine months ended March 31, 2023.
3. Revenues from Contracts with Customers
Net product sales in the BioPharma Rx Segment (which includes the ADHD Portfolio and the Pediatric Portfolio) consist of sales of prescription pharmaceutical products, principally to a limited number of wholesale distributors and pharmacies in the United States. Rx product revenue is recognized at the point in time that control of the product transfers to the customer which typically aligns with shipping terms (i.e., upon delivery), which is generally “free-on-board” destination when shipped domestically within the United States and “free-on-board” shipping point when shipped internationally consistent with the contractual terms.
The Company generates Consumer Health Segment revenue (consisting of the Consumer Health Portfolio) from sales of various consumer health products through e-commerce platforms and direct-to-consumer marketing channels. Revenue is generally recognized “free-on-board” shipping point, as those are the agreed-upon contractual terms and align with the transfer of control. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from customers are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
Savings offers, rebates and wholesaler chargebacks. Reflect the terms of underlying agreements, which may vary. Accordingly, actual amounts will depend on the mix of sales by product and contracting entity. Future returns may not follow historical trends. The Company’s periodic adjustments of its estimates are subject to timed delays between the initial product sale and ultimate reporting and settlement of deductions. The Company continually monitors these provisions and does not believe variances between actual and estimated amounts have or will be material.
Revenues by Segment. Net revenue disaggregated by segment for the three and nine months ended March 31, 2023 and 2022 were as follows:
Revenues by Geographic location. The Company’s revenues are predominately within the United States, with minimal sales in Canada.
4. 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 first recognized. The Company incurred $0.1 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively; and $0.2 million and $2.4 million for the nine months ended March 31, 2023 and 2022, respectively.
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Inventory balances consist of the following:
March 31, | June 30, | |||||
2023 | 2022 | |||||
(In thousands) | ||||||
Raw materials |
| $ | 2,223 |
| $ | 1,814 |
Work in process | 2,817 | 1,838 | ||||
Finished goods |
| 8,597 |
| 7,197 | ||
Inventory | $ | 13,637 | $ | 10,849 | ||
5. 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.
Property and equipment consist of the following:
Depreciation and amortization expense was $0.3 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively; and $1.0 million and $1.3 million for the nine months ended March 31, 2023 and 2022, respectively.
6. 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 fiscal years 2023 and 2027. 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. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expenses are as follows:
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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:
As of March 31, 2023, the maturities of the Company’s future minimum lease payments were as follows:
| Operating |
| Finance | |||
(In thousands) | ||||||
2023 (remaining 3 months) | $ | 360 | $ | 23 | ||
2024 | 1,379 | 87 | ||||
2025 | 749 | — | ||||
2026 | 90 | — | ||||
2027 | 46 | — | ||||
Total lease payments | 2,624 | 110 | ||||
Less: Imputed interest | (218) | (4) | ||||
Lease liabilities | $ | 2,406 | $ | 106 | ||
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7. Goodwill and Other Intangible Assets
The Company’s strategy is to continue building its portfolio of revenue-generating products by leveraging its commercial team’s expertise to build leading brands within large therapeutic and consumer health markets. As a result of focusing on building the portfolio of revenue-generating products, the Company has decided to abandon active development of its NT0502 (N-desethyloxybutynin), a new chemical entity that is for the treatment of sialorrhea, which is excessive salivation or drooling. During the nine months ended March 31, 2023, the Company incurred an impairment charge of $2.6 million related to NT0502. The Company has terminated the licensing agreement. The Company has also terminated the license agreement with Cedars-Sinai Medical Center surrounding the Healight technology platform as an additional result of terminating the development of the Healight program.
The following table provides the summary of the Company’s intangible assets as of March 31, 2023 and June 30, 2022, respectively.
June 30, 2022 | ||||||||||||||
Weighted- | ||||||||||||||
Gross | Net | Average | ||||||||||||
Carrying | Accumulated | Carrying | Remaining | |||||||||||
| Amount |
| Amortization |
| Impairment |
| Amount |
| Life (in years) | |||||
(In thousands) | ||||||||||||||
Definite-lived intangibles: | ||||||||||||||
Acquired product technology rights | $ | 45,400 | $ | (7,667) | $ | (3,224) | $ | 34,509 |
| 12.33 | ||||
Acquired technology right | 30,200 | (2,278) | — | 27,922 | 15.75 | |||||||||
Acquired product distribution rights |
| 11,354 |
| (3,581) |
| (2,172) |
| 5,601 |
| 7.60 | ||||
Other intangible assets | 4,666 | (3,004) | (1,662) | — | — | |||||||||
91,620 | (16,530) | (7,058) | 68,032 | 13.35 | ||||||||||
Indefinite-lived intangibles: | ||||||||||||||
Acquired in-process R&D | 2,600 | — | — | 2,600 | Indefinite-lived | |||||||||
2,600 | — | — | 2,600 | |||||||||||
Total | $ | 94,220 | $ | (16,530) | $ | (7,058) | $ | 70,632 |
| 13.35 | ||||
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The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
| |||
(In thousands) | |||
2023 (remaining 3 months) | $ | 1,518 | |
2024 | 6,074 | ||
2025 | 5,934 | ||
2026 | 5,683 | ||
2027 | 5,653 | ||
2028 | 5,553 | ||
Thereafter | 33,049 | ||
Total future amortization expense | $ | 63,464 | |
Acquired Product Technology Rights
The acquired product technology rights are related to the rights to production, supply and distribution agreements of various products pursuant to the acquisitions of the Pediatric Portfolio in November 2019 and the Neos Acquisition in March 2021.
Karbinal ER. The Company acquired and assumed all rights and obligations pursuant to the Supply and Distribution Agreement, as Amended, with Tris for the exclusive rights to commercialize Karbinal ER in the United States (the “Tris Karbinal Agreement”). The Tris Karbinal Agreement’s initial term terminates in August of 2033, with an optional initial 20-year extension.
Poly-Vi-Flor and Tri-Vi-Flor. The Company acquired and assumed all rights and obligations pursuant to a Supply and License Agreement and various assignment and release agreements, including a previously agreed to Settlement and License Agreements (the “Poly-Tri Agreements”) for the exclusive rights to commercialize Poly-Vi-Flor and Tri-Vi-Flor in the United States.
ADHD Portfolio. As part of the Neos Acquisition, the Company acquired product technology for the production and sale of Adzenys XR-ODT and Cotempla XR-ODT. The formulations for the ADHD products are protected by patented technology. The estimated economic life of these proprietary technologies is 17 years.
Acquired Technology Right
TRRP Technology. As part of the Neos Acquisition, the Company acquired Time Release Resin Particle (“TRRP”) proprietary technology, which is a proprietary drug delivery technology protected by the Company as a trade secret that allows the Company to modify the drug release characteristics of each of its respective products. The TRRP technology underlines the ADHD portfolio and can potentially be used in future product development initiatives as well.
Acquired Product Distribution Rights (and Customer List)
In connection with the Innovus Acquisition, the Company obtained 35 products with a combination of over 300 registered trademarks and/or patent rights and customer lists. As of June 30, 2022, the customer list intangible asset was fully amortized.
Acquired In-Process R&D
IPR&D – NT0502. As part of the Neos Acquisition, the Company acquired in-process research and development associated with NT0502, a new chemical entity that is for the treatment of sialorrhea, which is excessive salivation or drooling. As this is an indefinite-lived intangible asset, this acquired asset remains an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. If a product using this technology is eventually approved for commercial sale, at that time, the in-process research and development will begin amortizing on a straight-line over the life of the product.
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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 $1.5 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively; and $4.6 million and $6.1 million during the nine months ended March 31, 2023 and 2022, respectively.
8. Accrued liabilities
Accrued liabilities consist of the following:
Savings offers represent programs for the Company’s patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted.
Program liabilities include government rebates.
Customer and product related fees include accrued expenses and deductions for rebates, wholesaler chargebacks and fees, and other product-related fees and deductions such as royalties for Pediatric Portfolio products, accrued distributor fees, and Medicaid liabilities.
Accrued employee compensation includes sales commissions, vacation earned, and accrued payroll.
Other accrued liabilities consist of accrued license fees, legal settlements, professional fees, credit card liabilities, taxes payable, and samples expense.
9. Other Liabilities
March 31, | June 30, | |||||
2023 | 2022 | |||||
(In thousands) | ||||||
Fixed payment arrangements | $ | 10,678 | $ | 13,051 | ||
Operating lease liabilities |
| 2,406 |
| 3,317 | ||
Contingent value rights | 465 | 578 | ||||
Contingent consideration | — | 396 | ||||
Other | 1,821 | 815 | ||||
Total other liabilities | 15,370 | 18,157 | ||||
Less: current portion | (7,450) | (5,359) | ||||
Total other liabilities, noncurrent | $ | 7,920 | $ | 12,798 | ||
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Fixed Payment Arrangements.
Fixed payment arrangements represent obligations to an investor assumed as part of the acquisition of products from Cerecor, Inc. in 2019, including fixed and variable payments. These obligations included fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15.0 million due in January 2021, of which $15.0 million was paid down in May 2020. Monthly variable payments due to the same investor are equal to 15.0% of net revenue generated from a subset of the Pediatric Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2021, when a one-time payment of $0.2 million was due and paid. The variable payment obligation was to continue until the earlier of (i) aggregate variable payments of approximately $9.3 million have been made or (ii) February 12, 2026.
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 partial satisfaction of the fixed obligation. The Company agreed to pay the remaining fixed obligation of $3.0 million in six equal quarterly payments of $0.5 million each over six quarters beginning September 30, 2021. The Company accounted for the Waiver, Release and Consent as a debt and remeasured the related liabilities using a discounted cash flow model. This fixed payment arrangement was paid in full by January 2023.
The Tris Karbinal Agreement grants the Company exclusive right to distribute and sell the product in the United States. The initial term of the agreement was 20 years. The Company will pay Tris a royalty equal to 23.5% of net sales. The Tris 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 Tris Karbinal Agreement make-whole payment is capped at $2.1 million each year. The annual payment is due in August of each year. The Tris 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. As of March 31, 2023, the fixed payment arrangement balance was $1.7 million in other current liabilities and $2.6 million in other non-current liabilities on the condensed consolidated balance sheet.
On May 12, 2022, the Company entered into an agreement with Tris to terminate the Tuzistra XR 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 $9.0 million, which reduced our total liability for minimum payments by approximately $8.0 million from the original License Agreement. As of March 31, 2023, the balance was $4.0 million in other current liabilities and $2.4 million in other non-current liabilities on the condensed consolidated balance sheet. Pursuant to the settlement agreement, if the Company does not make timely payments, it is required to pay interest on any outstanding balances at the greater of 2.5% per month and the maximum interest rate permitted by law.
Contingent Value Rights.
Contingent value rights (“CVRs”) represent contingent consideration related to the Company’s 2020 acquisition of Innovus of up to $16.0 million payable upon attainment of future performance milestones. 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. As of March 31, 2023, up to $5.0 million of future milestone payments potentially remain. As of March 31, 2023 and June 30, 2022, the CVRs were valued at $0.5 million and $0.6 million, respectively.
Contingent Consideration.
Contingent consideration represents the fair value of potential future payments in connection with acquisitions that are contingent upon the occurrence of a particular event or events. The Company records an obligation for such contingent payments at fair value on the acquisition date. Subsequent changes in the fair value of contingent consideration obligations are recognized in the condensed consolidated statements of income.
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In connection with the Company’s 2020 acquisition of Innovus, the Company recognized approximately $0.2 million in product related contingent consideration. 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, 2023 and June 30, 2022, the contingent consideration balance was zero and $0.4 million, respectively.
Through March 31, 2022, the Company’s contingent consideration liabilities included obligations under licensing arrangements for Tuzistra XR. The royalty and make-whole milestone payments related to licensing agreements with Tris for Tuzistra XR were being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing Tuzistra XR and the settlement agreement with Tris, the Company concluded that the product milestone payments underlying the contingent consideration liability ceased to exist. The Company reversed the remaining contingent consideration liabilities of $8.5 million and recorded a liability of $7.6 million related to the settlement payments payable to Tris for termination of the Tuzistra XR licensing agreement. The settlement payments are included in fixed payment arrangements at their present value using the Company’s estimated borrowing rate.
Through March 31, 2022, the royalty payments related to 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 concluded that the royalty-based product milestone payments underlying the contingent consideration liability ceased to exist. During the three months ended March 31, 2022, the Company reversed the remaining contingent consideration liabilities of $0.6 million and recorded the $50,000 payment due for termination of the Magna licensing agreements in other current liabilities.
Other.
Other consist of taxes payable and deferred cost related to our technology transfer.
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 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 Secure Overnight Financing Rate (“SOFR”), 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— Long-term debt 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.
On March 24, 2023, the Company and certain of its subsidiaries entered into an Amendment No. 4 (the Eclipse Amendment”) to the Loan and Security Agreement dated October 2, 2019 (as amended by Amendment No. 1, dated
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March 19, 2021, Amendment No. 2, dated January 26, 2022, Amendment No. 3, dated June 1, 2022, and the Eclipse Amendment (the “Eclipse Agreement”). The Eclipse Amendment, among other things, provided for an aggregate increase of $2.0 million to the Eclipse Lender’s commitment to make revolving loans from time to time under the Eclipse Agreement and increased the maximum amount available under the revolving credit facility provided under the Eclipse Agreement to $14.5 million. The Company paid $10,000 in fees associated to the Eclipse Amendment. The ability to make borrowings and obtain advances of revolving loans under the Eclipse Agreement remains subject to a borrowing base and reserve, and availability blockage requirements.
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 at any time with at least five 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, 2023, the Company was in compliance with the covenants under the Eclipse Loan Agreement.
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.
Total interest expense on the Revolving Loans, including amortization of deferred financing costs, was $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. For the nine months ended March 31, 2023 and 2022, interest expense was $0.5 million and $0.4 million, respectively.
11. Long-term Debt
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, L.P.(“Avenue”) and Avenue Venture Opportunities Fund II, L.P. (Avenue 2”) 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 to repay 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 twelve months provided, the Company has achieved, prior to December 31, 2023,
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(i) Interest-only Milestone 1 and (ii) a specified amount of trailing 12 months revenue (“Interest-only Milestone 2”) as of the date of determination.
In connection with the Eclipse Amendment, on March 24, 2023, Avenue amended certain Loan and Security Agreement dated January 26, 2022 (as amended by the First Amendment, dated October 25, 2022). The Avenue amendment, among other things, permitted the increase in revolving loan commitment provided by the Eclipse Lender under the Eclipse Facility.
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’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.
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, 2023, 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 $24.20 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 $24.20 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 are immediately exercisable and expire on January 31, 2027. The Company accounted for the Avenue Capital Warrants as a liability as the number of warrants was not fixed at the Issuance Date.
On March 7, 2022, the Company closed on an equity offering of shares of common stock and warrants at an offering price of $25.00 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 shares of common stock issuable upon exercise of the Avenue Capital Warrants were set to 43,388 at an exercise price of $24.20.
On October 25, 2022, the Company entered into an agreement with Avenue Venture Opportunities Fund, L.P (“Avenue”) to extend the interest-only period of its existing senior secure loan facility held with Avenue. The amendment to the original loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension of the interest-only period, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $8.60, corresponding to the warrant exercise price associated with the Company’s August 2022 equity financing.
In addition to the debt discounts discussed above, the Company also incurred $0.4 million in 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, including debt discount
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amortization, was $0.7 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively; and $2.0 million and $0.4 million for the nine months ended March 31, 2023 and 2022, respectively.
Long-term debt consists of the following:
Future principal payments of long-term debt, including financing leases, are as follows:
12. Fair Value Considerations
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to determine fair value 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 financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative warrant liabilities, contingent consideration liabilities, and short-term and long-term debt. The carrying amounts of certain short-term 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. Short-term and long-term debt are reported at their amortized costs on our condensed consolidated balance sheets. The remaining financial instruments and derivative warrant liabilities are reported on our consolidated balance sheets at amounts that approximate current fair values. 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. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
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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, 2023 and June 30, 2022, by level within the fair value hierarchy.
| Fair Value Measurements at June 30, 2022 | |||||||||||
| Fair Value at June 30, |
|
|
| ||||||||
2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
| (In thousands) | |||||||||||
Liabilities: | ||||||||||||
Contingent consideration | $ | 396 |
| $ | — |
| $ | — |
| $ | 396 | |
CVR liability | 578 |
| — |
| — |
| 578 | |||||
1,796 | — | — | 1,796 | |||||||||
Total | $ | 2,770 |
| $ | — |
| $ | — | $ | 2,770 | ||
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 nine months ended March 31, 2023:
| CVR |
| Contingent | Derivative |
| Fixed Payment | ||||||
Liability | Consideration | Warrant Liabilities |
| Arrangement | ||||||||
(In thousands) | ||||||||||||
Balance as of June 30, 2022 |
| $ | 578 | $ | 396 | $ | 1,796 | $ | 13,051 | |||
Included in earnings |
| (113) | (391) | (6,167) | 1,202 | |||||||
Purchases, issues, sales and settlements: |
|
|
| |||||||||
Issues |
|
| — |
| — |
| 5,953 |
| — | |||
Settlements |
|
| — |
| (5) |
| — |
| (3,575) | |||
Balance as of March 31, 2023 |
| $ | 465 | $ | — | $ | 1,582 | $ | 10,678 | |||
Significant Assumptions
Significant assumptions used in valuing CVRs were as follows:
March 31, | |||
| 2023 | ||
Leveraged Beta |
| 0.82 | |
Market risk premium | 6.35 | % | |
Risk-free interest rate | 4.79 | % | |
Discount | 21.25 | % | |
Company specific discount |
| 10.00 | % |
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Significant assumptions used in derivative warrant liabilities at issuance date were as follows:
August 9, | |||
| 2022 | ||
Expected volatility |
| 89.89 | % |
Equivalent term (years) | 4.11 | ||
Risk-free rate | 3.09 | % | |
Dividend yield | 0.00 | % | |
Significant assumptions used in derivative warrant liabilities were as follows:
March 31, | |||
| 2023 | ||
Expected volatility |
| 75.51 | % |
Equivalent term (years) | 3.84 - 4.44 | ||
Risk-free rate | 3.65 - 3.73 | % | |
Dividend yield | 0.00 | % | |
The fixed payment arrangements are recognized at their amortized cost basis using market appropriate discount rates and are accreted up to their ultimate face value over time.
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 make monthly payments of $0.1 million beginning November 1, 2019 through January 2021, with a balloon payment of $15.0 million that was originally due in January 2021 (“Balloon Payment Obligation”). A second fixed obligation required the Company to pay a minimum of $0.1 million monthly through February 2026, except for $0.2 million 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 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. The outstanding balance for the Waiver, Release and Consent obligation as of December 31, 2022 was paid in January 2023.
The Tris Karbinal Agreement grants the Company exclusive right to distribute and sell the product in the United States. The initial term of the agreement was 20 years. The Company will pay Tris a royalty equal to 23.5% of net sales.
The Tris 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 Tris Karbinal Agreement make-whole payment is capped at $2.1 million each year. The
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annual payment is due in August of each year. The Tris 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.
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, we made a payment of $0.6 million for a license fee in April 2022. In addition, upon the achievement of regulatory and commercial milestones we may be required to pay 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 Johns Hopkins, the Company assumed the responsibility for royalties of 3.0% of net product sales, with a minimum of $20,000 per year, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million.
Legal Proceeding
Aponowicz and Paguia Class-Action Securities Litigations. A putative class action was filed on February 9, 2022 in the Delaware Chancery Court by Rafal Aponowicz derivatively and on behalf of all Aytu stockholders, challenging the grant in 2021 of certain stock option awards to directors and officers. The stockholder contends those awards were in amounts exceeding the shares available under the Company’s 2015 equity incentive plan and that the directors therefore breached their fiduciary duties and breached a purported contract between them and stockholders. The Complaint seeks rescission of the awards, unspecified damages to stockholders as a result of the awards, and attorneys’ fees. A second such action was filed by Paul John M. Paguia on March 7, 2022; Mr. Paguia asserts the same claims and seeks the same relief. The parties have agreed to settle these matters for various corporate governance modifications and the payment of plaintiffs’ attorneys’ fees. The settlement was approved by the Court of Chancery of the State of Delaware in March 2023. As of March 31, 2023, the Company had $0.4 million accrued for finalized settled plaintiff attorney fees.
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.
Included in the common stock outstanding are 48,818 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, 2023, approximately $40.4 million remains available under the 2020 Shelf. This availability is subject to SEC 1.B.6 limitation to the Form S-3.
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, 2023, the Company issued 699,929 shares of common stock under the ATM Sales Agreement, with total net proceeds of approximately $2.9 million. As of March 31, 2023, the Company had approximately $2.0 million of capacity under the ATM Sales Agreement due to baby self-limitations. As our market capitalization increases, these limitations will be adjusted and the Company will be able to issue additional ATM sales.
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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, 2023, approximately $82.4 million remained available under the 2021 Shelf. This availability is subject to SEC 1.B.6 limitation to the Form S-3.
On August 11, 2022, the Company closed on an underwritten public offering (the “August 2022 Offering”), pursuant to which we sold an aggregate of (i) 1,075,290 shares of its common stock, (ii) and, in lieu of common stock to certain investors that so chose, pre-funded warrants (the “Pre-Funded Warrants”) to purchase 87,500 shares of its common stock, and (iii) accompanying warrants (the "Common Warrants") to purchase 1,265,547 shares of its 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 one share of common stock for each share of common stock or each Pre-Funded Warrant sold. The combined public offering price for each share of common stock and accompanying Common Warrant was $8.60, and the combined offering price for each Pre-Funded Warrant and accompanying Common Warrant was $8.58, which equated to the public offering price per share of the common stock and accompanying Common Warrant, less the $0.001 per share exercise price of each Pre-Funded Warrant. The Pre-Funded Warrants were exercised in full in August 2022. The Common Warrants have an exercise price of $8.60 per share of common stock and are exercisable for a period of five years from issuance. The Company raised $10.0 million in gross proceeds through the August 2022 Offering before underwriting fees and other expenses of $0.9 million. The Pre-Funded and Common Warrants have a combined fair value of approximately $6.0 million at issuance and are classified as derivative warrant liabilities in the Company’s financial statements. (See Note 16 – Warrants).
15. Equity Incentive Plans
Aytu 2015 Plan. On June 1, 2015, the Company’s stockholders approved the 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 150,000 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 250,000 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, 2023, the Company had 84,554 shares that are available for grant under the Aytu 2015 Plan.
Neos 2015 Plan. Pursuant to the Neos Merger, the Company assumed 3,486 stock options and 1,786 restricted stock units (RSUs) previously granted under Neos plan. Accordingly, on April 19, 2021, the Company registered 5,272 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, 2023, the Company had 2,579 shares that are available for grant under the Neos 2015 Plan.
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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, 2022 |
| 3,899 | $ | 209.70 |
| 7.77 | |
Granted |
| 49,212 | 4.00 |
|
| ||
Forfeited/Cancelled |
| (152) | 126.84 |
|
| ||
Expired |
| (175) | 131.45 |
|
| ||
Outstanding at March 31, 2023 |
| 52,784 | $ | 18.42 |
| 9.31 | |
Exercisable at March 31, 2023 |
| 2,920 | $ | 227.28 |
| 6.44 | |
As of March 31, 2023, there was $0.2 million total unrecognized compensation costs 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 1.7 years.
Restricted Stock
During the nine months ended March 31, 2023, as a result of the change in members of the Company’s board, the Company accelerated unvested shares for two former members and recorded $1.5 million of non-cash equity compensation expense.
On December 19, 2022, the Company entered into a Stipulation of Compromise and Settlement (the “Stipulation”). As a part of the terms of the Stipulation, the Company agreed to rescind 25% of the aggregate 2021 grants to board members. As a result of the recission of the shares, the Company recorded $0.6 million in non-cash compensation during the three months ended December 31, 2022.
Restricted stock activity under the Aytu 2015 Plan is as follows:
As of March 31, 2023, there was $4.9 million total unrecognized compensation costs 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 2.4 years.
The Company previously issued 4 shares of restricted stock outside the Aytu 2015 Plan, which vest in July 2026. On January 17, 2022, the Company granted 5,000 shares of restricted stock to a member of its management team outside of the Aytu 2015 Plan. As of March 31, 2023, there was $0.1 million total unrecognized costs 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 1.8 years.
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Restricted Stock Units
RSUs activity is as follows:
|
|
| |||
Weighted | |||||
Average Grant | |||||
Number of | Date Fair | ||||
Shares | Value | ||||
Unvested at June 30, 2022 |
| 8,500 | $ | 25.88 | |
Vested |
| (2,580) | 26.85 | ||
Unvested at March 31, 2023 |
| 5,920 | $ | 25.42 | |
As of March 31, 2023, there was $0.1 million total unrecognized compensation costs 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 1.9 years.
Stock-based compensation expense related to the fair value of stock options and restricted stock and RSUs was included in the condensed consolidated statements of operations as set forth in the below table:
16. Warrants
Liability Classified Warrants
On August 11, 2022, the Company closed on the August 2022 Offering, pursuant to which, the Company issued Pre-Funded Warrants to purchase 87,500 shares of its common stock and Common Warrants to purchase 1,265,547 shares of its common stock. The shares of common stock and the Pre-Funded Warrants were each sold in combination with corresponding Common Warrants, which one Common Warrant to purchase one share of common stock for each share of common stock or each Pre-Funded Warrant sold. The Pre-Funded Warrants had an exercise price of $0.02 per share of common stock and were exercised in full in August 2022. The Common Warrants have an exercise price of $8.60 per share of common stock and are exercisable for a period of five years from issuance. The Common Warrants provide that if there occurs any a stock split, stock dividend stock recapitalization, or similar event (a “Stock Combination Event”), then the warrant exercise price will be adjusted to the greater of the quotient determined by dividing (x) the sum of the VWAP of the Common Stock for each of the five lowest trading days during the 20 consecutive trading day period ending immediately preceding the 16th trading day after such Stock Combination Event, divided by (y) five; or $2.32 and the number of shares of common stock to be issued would be adjusted proportionately as set forth in the agreement limited to a maximum of 2,325,581 shares. The Common Warrants also provide that in the event the Company were to engage in an equity offering at a common stock price lower than the warrant exercise price prior to the second anniversary of a Stock Combination Event, the exercise price would be adjusted to the greater of the effective price of such equity offering or $2.32 (see Note 14 – Capital Structure).
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In November and throughout the quarter end the Company sold shares through its ATM Sales Agreement. Per the warrant agreement, these sales qualified as an equity offering and the sales price was less than the current the exercise price of $8.60. As a result, the common warrants exercise price was adjusted to $3.30.
On January 6, 2023, the Company consummated a to 1 reverse stock split. Pursuant to the warrant agreement described above, the Company triggered a Stock Combination Event and the warrant exercise price and number to be issued was adjusted based on the average of each of the lowest five trading days during the twenty-day consecutive trading day period beginning on December 30, 2022.
On October 25, 2022, the Company entered into an agreement with Avenue to extend the interest-only period of the Company’s existing senior secured loan facility. The amendment to the original secured loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $8.60, corresponding to the warrant exercise price associated with the Company’s latest equity financing.
Outstanding warrants are classified as derivative warrant liabilities in the condensed consolidated balance sheets and are marked to market at each reporting period (see Note 12 – Fair Value Considerations).
A summary of warrants is as follows:
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 following table sets forth securities that are considered anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
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18. License Agreements
Healight
In April 2020, we entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight. The agreement with Cedars-Sinai grants us 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. As a result of the focus on revenue growth of our commercial business we have terminated the licensing agreement with Cedars-Sinai Medical Center, effective May 9, 2023.
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.
In April 2023, the Company returned the NT0502 rights to NeuRx in exchange for and receive a royalty and potential milestone payments on amounts received for future revenue generated by NeuRx (or a future licensee) on NT0502.
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 (now Teva, following Teva’s acquisition of Actavis’ generic products) 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. The settlement agreement expires May of 2023.
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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 was 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 sales 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 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: Rx and Consumer Health. The Rx 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, | |||||
2023 | 2022 | |||||
(In thousands) | ||||||
Total assets: | ||||||
Rx Segment | $ | 131,982 | $ | 121,377 | ||
Consumer Health Segment |
| 15,234 |
| 16,246 | ||
Consolidated assets | $ | 147,216 | $ | 137,623 | ||
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20. Subsequent Events
Sublease a portion of Grand Prairie Facility
On April 27, 2023, the Company entered into an agreement with AMT Manufacturing Solutions, LLC (“AMTMS”) to sublease 22,909 square feet of its manufacturing facility in Grand Prairie, Texas (“Sublease Agreement”). The Sublease Agreement is subject and subordinate to that certain Commercial Lease Agreement by and between the Company, as successor-in-interest to PharmaFab, Inc., as tenant, and Riverside Business Green, LP, as Landlord, as successor-in-interest to Walstib, L.P., as landlord, dated June 29, 1999, as amended, and expiring on December 31, 2024.
The sublease will commence on May 15, 2023. The expansion date (“Expansion Date”) will commence as early as April 1, 2024 but no later than December 31, 2024, which date shall be designated by the Company by written notice to AMTMS not less than thirty (30) days prior to the Expansion Date. The subleased property shall be expanded to include the remaining 54,203 square feet of the Company’s manufacturing facility. The Sublease Agreement will terminate on December 31, 2024.
Under the terms of the Sublease Agreement, AMTMS will pay the Company base rent of $20,045 per month through December 31, 2023 and $21,000 per month from January 1, 2024 through the Expansion Date. Beginning on the Expansion Date, base rent will be $70,686 per month through the expiration of the Sublease Agreement. In addition to the base rent, AMTMS will pay the Company certain operating expenses incurred by the Company. AMTMS will pay a security deposit of $90,731 to the Company which will be applied to rent payments if certain conditions are met.
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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, 2022, filed on September 27, 2022. 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 United Sates Securities and Exchange Commission (“SEC”) on September 27, 2022 and November 14, 2022, 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, 2023, and our financial condition as of March 31, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and notes.
Overview
We are a commercial-stage pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. We operate through two business segments (i) the Rx segment, consisting of prescription pharmaceutical products sold primarily through third party wholesalers and (ii) the Consumer Health segment, which consists of various consumer health products sold directly to consumers. We currently manufacture our products for the treatment of attention deficit hyperactivity disorder (“ADHD”) at our manufacturing facility and use third party manufacturers for our other prescription and consumer health products.
We have incurred significant losses in each year since inception. Our net losses were $7.2 million for the three months ended March 31, 2023, and $14.6 million for the nine months ended March 31, 2023. As of March 31, 2023, and June 30, 2022, we had accumulated deficits of $301.7 million and $287.1 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the integration of our acquisitions. As of March 31, 2023, we did not have sufficient working capital to cover our cash needs to fund planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q, which raises substantial doubt about our ability to continue as a going concern.
Company Strategy
In the first quarter of fiscal 2023, we announced that we will focus our efforts on accelerating the growth of our commercial business and achieving operating cash flows. To achieve these goals, we have indefinitely suspended active development of our clinical development programs. The suspension of these programs is expected to save over $20 million in projected future study costs over the next three fiscal years.
In April 2020 we entered into a licensing agreement with Cedars-Sinai Medical Center (“Cedars-Sinai”) to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight. The agreement with Cedars-Sinai grants us 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. In April 2023, we ceased all development of Healight and are in the process of returning materials and intellectual property to Cedars-Sinai. We terminated the Healight license, effective May 9, 2023.
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 was being developed for the treatment of sialorrhea, which is excessive salivation or drooling. In April 2023, we returned the NT0502 rights to NeuRx in exchange for and receive a royalty and potential milestone payments on amounts received for future revenue generated by NeuRx (or a future licensee) on NT0502.
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Our commercial business includes the Rx segment and the Consumer Health segment.
Business Environment
COVID-19 Pandemic
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 and disrupted the reliability of the supply chain. 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 the Biden administration has announced that the COVID-19 emergency declaration will end May 11, 2023 and states and jurisdictions have rolled back stay-at-home and quarantine orders, 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.
Inflationary pressure and supply chain disruptions
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 and 2023. 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 our fiscal 2023 year.
Debt and Equity financing
On March 24, 2023, the Company and certain of its subsidiaries entered into an Amendment No. 4 (the “Eclipse Amendment”) to the Loan and Security Agreement dated October 2, 2019 (as amended by Amendment No. 1, dated March 19, 2021, Amendment No. 2, dated January 26, 2022, Amendment No. 3, dated June 1, 2022, and the Eclipse Amendment, (the “Eclipse Agreement”). The Eclipse Amendment, among other things, provided for an aggregate increase of $2.0 million to the Eclipse Lender’s commitment to make revolving loans from time to time under the Eclipse Agreement and increased the maximum amount available under the revolving credit facility provided under the Eclipse Agreement to $14.5 million. The ability to make borrowings and obtain advances of revolving loans under the Eclipse Agreement remains subject to a borrowing base and reserve, and availability blockage requirements.
On October 25, 2022, we entered into an agreement with Avenue Venture Opportunities Fund, L.P (“Avenue”) to extend the interest-only period of our existing senior secure loan facility held with Avenue. The amendment to the original loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension of the interest-only period, we and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $8.60, corresponding to the warrant exercise price associated with the Company’s latest equity financing. We expect to conserve cash of approximately $3.0 million related to principal payment in calendar year 2023. (See Note —11 Long-Term Debt and Note 16— Warrants).
On August 11, 2022, we closed on an underwritten public offering (“August 2022 Offering”), of (i) 1,075,290 shares of our common stock and, in lieu of common stock to certain investors, pre-funded warrants (“Pre-Funded Warrants”) to purchase 87,500 shares of our common stock, and (ii) accompanying warrants (the “Common Warrants”)
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to purchase 1,265,547 shares of our common stock. We received gross proceeds of $10.0 million and net proceeds of approximately $9.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.
During the nine months ended March 31, 2023, we issued 699,929 shares of common stock under the ATM Sales Agreement (as defined below) with total gross proceeds of approximately $3.0 million before deducting commissions of 3% and other offering expenses including legal and audit fees.
On January 6, 2023, we effected a 1-for-20 reverse stock split of our common stock. All share and per share amounts in this quarterly report have been adjusted to reflect the effect of the Reverse Stock Split. Aytu’s Board of Directors implemented the reverse stock split with the objective of regaining compliance with the $1.00 minimum bid price requirement of the Nasdaq Capital Market. On January 23, 2023, Nasdaq confirmed we regained compliance with this listing rule.
Aytu’s shares of common stock will continue to trade on the Nasdaq Capital Market under the symbol "AYTU." The new CUSIP number for the Company's common stock post-reverse stock split is 054754858.
A cash payment will be made to each stockholder in lieu of any fractional interest in a share to which each stockholder would otherwise be entitled as a result of the reverse stock split. The reverse stock split reduced the number of shares of outstanding common stock from approximately 68.8 million shares to approximately 3.4 million shares. As a result of the reverse stock split, proportional adjustments were also made to outstanding warrants and options, and to our 2015 equity incentive plan.
RESULTS OF OPERATIONS
Three and nine months ended March 31, 2023 compared to the three and nine months ended March 31, 2022.
| Three Months Ended |
| Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||||
| 2023 |
| 2022 |
| Change |
| 2023 |
| 2022 |
| Change | |||||||
(In thousands) | ||||||||||||||||||
Product revenue, net | $ | 22,733 | $ | 24,199 | $ | (1,466) | $ | 76,667 | $ | 69,221 | $ | 7,446 | ||||||
Cost of sales | 9,990 | 11,513 | (1,523) | 28,599 | 31,780 | (3,181) | ||||||||||||
Gross profit | 12,743 | 12,686 | 57 | 48,068 | 37,441 | 10,627 | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Research and development |
| 856 |
| 3,282 |
| (2,426) |
| 3,630 |
| 9,409 |
| (5,779) | ||||||
Advertising and direct marketing | 5,025 | 5,116 | (91) | 14,072 | 14,646 | (574) | ||||||||||||
Other selling and marketing | 7,779 | 4,627 | 3,152 | 19,394 | 14,054 | 5,340 | ||||||||||||
General and administrative | 7,177 | 7,616 | (439) | 22,517 | 23,785 | (1,268) | ||||||||||||
Impairment expense |
| — |
| 45,196 |
| (45,196) |
| 2,600 |
| 64,649 |
| (62,049) | ||||||
Gain from contingent consideration | (734) |
| (1,234) |
| 500 |
| (504) |
| (682) |
| 178 | |||||||
Amortization of intangible assets |
| 1,198 |
| 1,504 |
| (306) |
| 3,593 |
| 4,546 |
| (953) | ||||||
Total operating expenses |
| 21,301 |
| 66,107 |
| (44,806) |
| 65,302 |
| 130,407 |
| (65,105) | ||||||
Loss from operations |
| (8,558) |
| (53,421) |
| 44,863 |
| (17,234) |
| (92,966) |
| 75,732 | ||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other (expense) income, net | (1,215) | (32) | (1,183) | (3,527) | 4 | (3,531) | ||||||||||||
Gain on extinguishment of debt | — | 169 | (169) | — | 169 | (169) | ||||||||||||
Gain (loss) on derivative warrant liabilities |
| 2,573 | (7) | 2,580 |
| 6,167 | (7) | 6,174 | ||||||||||
Total other income (expense) |
| 1,358 |
| 130 |
| 1,228 |
| 2,640 |
| 166 |
| 2,474 | ||||||
Loss before income tax |
| (7,200) |
| (53,291) |
| 46,091 |
| (14,594) |
| (92,800) |
| 78,206 | ||||||
Income tax benefit |
| — | — |
| — |
| — | (110) |
| 110 | ||||||||
Net loss | $ | (7,200) | $ | (53,291) | $ | 46,091 | $ | (14,594) | $ | (92,690) | $ | 78,096 | ||||||
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Product revenue, net
In the three and nine months ended March 31, 2023, net product revenue decreased by $1.5 million, or 6%, and increased by $7.4 million, or 11%, compared to the three and nine months ended March 31, 2022, respectively. The decrease during the three months ended March 31, 2023 was primarily due to the resetting of patient deductibles at the beginning of calendar year 2023, changes in Rx Segment payer mix, and the Consumer Health Segment transitioning from direct mail to e-commerce, reducing operating losses. The increase during the nine months ended March 31, 2023 was primarily driven by product growth of our Pediatric Portfolio and ADHD Portfolio. These increases were partially offset by a modest decrease in Consumer Health products due to a change of focus on e-commerce, and supply chain issues.
Gross margins
In the three and nine months ended March 31, 2023, gross profit increased by 0%, and 28%, compared to the three and nine months ended March 31, 2022, respectively. The increase during the nine months ended March 31, 2023 was primarily driven by net revenue increases as described above. Gross margin percentage was 56% and 63% for the three and nine months ended March 31, 2023, compared to 52% and 54% for the same periods ended March 31, 2022. The improvements were primarily due to higher net revenues and cost saving efficiencies in the Pediatric Portfolio. Gross margin improvements in the ADHD Portfolio were due to efficiencies in production related to higher demand for products.
Research and development
In the three and nine months ended March 31, 2023, research and development expense decreased by $2.4 million, or 74%, and $5.8 million, or 61%, compared to the same periods ended March 31, 2022. Our research and development costs were primarily associated with AR101 and to a lesser extent, the development of Healight and support for our commercialized products. In October 2022, we announced the suspension of the development of AR101 and Healight to focus on our commercial operations. As a result, research and development spending significantly declined. We expect our research and development expenses to decrease from current levels as a result of our focus on commercial operations.
Advertising and direct marketing
In the three and nine months ended March 31, 2023, advertising and direct marketing expense was consistent with the three and nine months ended March 31, 2022. Advertising and direct marketing expense 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, 2023, other selling and marketing expense increased by $3.2 million, or 68%, and $5.3 million, or 38%, compared to the same periods ended March 31, 2022. The increases were primarily driven by commission expense based on subscriptions generated by our sale force and commercial marketing program fees.
General and administrative
In the nine months ended March 31, 2023, general and administrative expense decreased by $1.3 million, or 5% compared to the same period ended March 31, 2022. The decrease is primarily a result of ongoing cost-cutting initiatives associated with our acquisition of Neos.
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Gain or loss from contingent consideration
We fair value our acquisition-related contingent consideration based on our projected results, any changes are reflected through income or expense.
Impairment expense
Due to increased focus on our commercial efforts, we ceased active development of our NT0502 product candidate. As a result, we are returning the intellectual property and terminating the Exclusive License Agreement with NeuRx entered into in October 2018. In the nine months ended March 31, 2023, we incurred an impairment charge of $2.6 million related to these decisions.
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 of $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 7 – Goodwill and Other Intangible Assets in the accompanying unaudited consolidated financial statements for further information.
Amortization of intangible assets
In the three and nine months ended March 31, 2023, amortization expense of intangible assets, excluding amounts included in cost of sales, decreased by $0.3 million, or 20%, and $1.0 million, or 21%, compared to the same periods ended March 31, 2022. The decreases were primarily related to the smaller intangible asset base due to the impairments of certain intangible assets during the fiscal 2022 year.
Unrealized gain or loss from derivative warrant liabilities
We calculate the fair value of derivative warrant liabilities using either the Black-Scholes option model or the Monte Carlo simulation model and are revalued at each reporting period, changes are reflected through income or expense.
Other (expense) income, net
In the three and nine months ended March 31, 2023, other (expense) income, net, increased by $1.2 million and $3.5 million, compared to the same periods ended March 31, 2022. Other (expense) income, net, includes interest expense, accretion from fixed payment arrangements, and other income. In the three months ended March 31, 2022, we received payments related to the divestiture of Natesto, which was recorded as other income. In the three months ended March 31, 2023, we did not receive such payments.
Liquidity and Capital Resources
Sources of Liquidity
We have obligations related to our loan agreements, contingent consideration related to our acquisitions, milestone payments for licensed products and manufacturing purchase commitments.
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
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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, 2023, approximately $82.4 million remains available under the 2021 Shelf. This availability is subject to SEC 1.B.6 1limitations of Form S-3.
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, 2023, approximately $40.4 million remains available under the 2020 Shelf. This availability is subject to SEC 1.B.6 1limitations of Form S-3.
On June 4, 2021, we entered into a sales agreement with a sales agent, to provide for the offering, issuance and sale by us of up to $30.0 million of our 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, 2023, we issued 699,929 shares of common stock under the ATM Sales Agreement, with total net proceeds of approximately $2.9 million. As of March 31, 2023, we had approximately $2.0 million of capacity under the ATM Sales Agreement due to baby self-limitations. As our market capitalization increases, these limitations will be adjusted and we will be able to issue additional ATM sales.
Underwriting Agreements
On August 11, 2022, we closed on an underwritten public offering (“August 2022 Offering”), of (i) 1,075,290 shares of our common stock and, in lieu of common stock to certain investors, pre-funded warrants (“Pre-Funded Warrants”) to purchase 87,500 shares of our common stock, and (ii) accompanying warrants (the “Common Warrants”) to purchase 1,265,547 shares of our common stock. We received gross proceeds of $10.0 million and net proceeds of approximately $9.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.
Eclipse Loan Agreement
The Eclipse Loan Agreement, as amended, provides us with up to $14.5 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 bore interest at LIBOR, plus 4.50% through April 2022. Beginning in May 2022 through maturity, the Revolving Loans bear interest at the Secured Overnight Financing Rate (“SOFR”) 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.
Cash Flows
The following table shows cash flows for the nine months ended March 31, 2023, and 2022:
Nine Months Ended March 31, | Increase | ||||||||
| 2023 |
| 2022 |
| (Decrease) | ||||
(In thousands) | |||||||||
Net cash used in operating activities | $ | (14,494) | $ | (21,728) | $ | (7,234) | |||
Net cash provided by (used in) investing activities | $ | 38 | $ | (3,207) | $ | (3,245) | |||
Net cash provided by financing activities | $ | 14,275 | $ | 2,647 | $ | 11,628 | |||
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 impairment, stock-based compensation expense, gain or loss on derivative warrant liabilities, depreciation, amortization and accretion, and other charges.
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During the nine months ended March 31, 2023, net cash used in operating activities totaled $14.6 million. The use of cash was primarily the result of the increase in accounts receivable, inventory, and prepaid expenses, offsetting these increases was an increase in accounts payable and accrued expenses.
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, primarily due to non-cash charges of goodwill and 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.
Net Cash Provided by (Used in) Investing Activities
Net cash flows provided by investing activities were nominal in the nine months ended March 31, 2023.
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 Provided by Financing Activities
Net cash provided by financing activities of $14.4 million during the nine months ended March 31, 2023, was primarily from $9.1 million of proceeds from our August 2022 equity raise, $6.6 million of additional net borrowing made under our short-term line of credit, and $2.9 million net proceeds from our sales under the ATM Sales Agreement; partially offset by fixed payment arrangements totaling $4.1 million and stock issuance costs of $1.0 million.
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.
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 condensed consolidated financial statements for further information.
On May 12, 2022, we entered into an agreement with Tris Pharma Inc. (“Tris”) to terminate the License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “License Agreement”). Pursuant to such termination, we agreed to pay Tris a total of $6 million to $9 million, which reduced our total liability for minimum payments by approximately $8 million from the original License Agreement. As of March 31, 2023, the balance was $6.4 million on the condensed consolidated balance sheet. Pursuant to the settlement agreement, if the Company does not make timely payments, it is required to pay interest on any outstanding balances at a rate equal to the greater of (i) 2.5% per month and (ii) the maximum interest rate permitted by applicable law.
Upon closing of the acquisition of a line of prescription pediatric products from Cerecor, Inc. in October 2019, we assumed payment obligations that require us to make fixed and product milestone payments based driven on sales. As of March 31, 2023, up to $4.2 million of fixed and product milestone payments based on net sales remain.
In connection with the February 2020 acquisition of Innovus Pharmaceuticals, Inc. (“Innovus”), all of Innovus’ 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, 2023, up to $5.0 million of potential CVR milestone payments remain.
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In connection with our acquisition of the assets from Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (collectively, “Rumpus”), upon satisfaction of 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 made a payment of $0.6 million for a license fee in April 2022. In addition, upon the achievement of regulatory and commercial milestones, we may be required to pay up to $101.7 million. Under the licensing agreement with Johns Hopkins University (“JHU”), upon achievement of regulatory and commercial milestone, we may be required to pay up to $1.6 million to JHU. In fiscal 2022, two milestones payable to Rumpus were achieved totaling $4.0 million, which were paid in 109,447 shares of common stock and $2.6 million in cash. The Company also assumed the responsibility for royalties of 3.0% of net product sales, with a minimum of $20,000 per year, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. There have been no material changes to our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended June 30, 2022.
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 required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, due to the material weakness in our internal control over financial reporting related to the Company’s accounting for complex financial instruments, specifically, with regards to warrants. As a result, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Amendment present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Changes in Internal Control over Financial Reporting
Previous Disclosure of Material Weakness in Internal Controls Over Financial Reporting
As disclosed in our September 30, 2022 Form 10Q/A, we identified a material weakness in controls over the accounting for complex warrant issuances and the classification of these issued warrants. This material weakness resulted in the failure to prevent material adjustments in accounting for the warrants as equity classification when the warrants should have been classified as liabilities and marked to market each reporting period. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements, other literature, and consultation with third-party experts, we did not classify the warrants correctly.
Remediation Plan
Our Audit Committee is conducting an internal investigation to identify and determine a plan to remediate the material weakness described above and to enhance our overall control environment. We will not consider the material weakness remediated until our enhanced control is operational for a sufficient period of time and tested, enabling management to conclude that the enhanced controls are operating effectively. Our remediation plan includes the implementation of controls over the process of reviewing significant and complex contracts and agreements.
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Changes in Internal Control Over Financial Reporting
Except for the material weakness noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2023 that have material effect, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Aponowicz and Paguia Class-Action Securities Litigations. A putative class action was filed on February 9, 2022 in the Delaware Chancery Court by Rafal Aponowicz derivatively and on behalf of all Aytu stockholders, challenging the grant in 2021 of certain stock option awards to directors and officers. The stockholder contends those awards were in amounts exceeding the shares available under the Company’s 2015 equity incentive plan and that the directors therefore breached their fiduciary duties and breached a purported contract between them and stockholders. The Complaint seeks rescission of the awards, unspecified damages to stockholders as a result of the awards, and attorneys’ fees. A second such action was filed by Paul John M. Paguia on March 7, 2022; Mr. Paguia asserts the same claims and seeks the same relief. The parties have agreed to settle these matters for various corporate governance modifications and the payment of plaintiffs’ attorneys’ fees. The settlement was approved by the Court of Chancery of the State of Delaware in March 2023. As of March 31, 2023, the Company had $0.4 million accrued for finalized settled plaintiff attorney fees.
Witmer Class-Action Securities Litigation. A shareholder derivative suit was filed on September 12, 2022 in the Delaware Chancery Court by Paul Witmer, derivatively and on behalf of all Aytu stockholders, against Armistice Capital, LLC, Armistice Capital Master Fund, Ltd., Steve Boyd (Armistice’s Chief Investment Officer and Managing Partner, and a former director of Aytu), and certain other current and former directors of Aytu, Joshua Disbrow, Gary Cantrell, John Donofrio, Jr., Michael Macaluso, Carl Dockery and Ketan B. Mehta. Plaintiff amended the complaint on April 5, 2023. The Amended Complaint drops Mr. Macaluso as a defendant and alleges that (i) Armistice facilitated the sale of assets of Cerecor in 2019 and Innovus in 2020 to Aytu in exchange for convertible securities which it subsequently converted and sold at a profit on the open market; (ii) the Armistice defendants breached their fiduciary duties, were unjustly enrichment and wasted corporate assets in connection with these acquisitions; (iii) the Armistice defendants breached their fiduciary duties by engaging in as insider trading; and (iv) the other directors breached their fiduciary duties, and aided and abetted the Armistice defendants breaches of fiduciary duties, in connection with these acquisitions. The Amended Complaint seeks unspecified damages, equitable relief, restitution, disgorgement of profits, enhanced governance and internal procedures, and attorneys’ fees. While we believe that this lawsuit is without merit and we intend to vigorously defend against it, we are not able to predict at this time whether this proceeding will have a material impact on our financial condition or results of operations.
Sabby Litigation. A complaint was filed on February 22, 2023 in the Supreme Court of the State of New York by Sabby Volatility Warrant Master Fund LTD (“Sabby”) and Walleye Opportunities Master Fund Ltd (“Walleye”), holders of certain warrants to purchase common stock, against the Company. The complaint alleges that the Company improperly adjusted the exercise price of the warrants and miscalculated the number of shares the warrantholders may receive, and that the Company failed to provide prompt notice to the warrantholders of such adjustment. The complaint seeks a declaratory judgment of the warrant share calculation, that 575,000 warrant shares be due to Sabby on exercise of its warrants rather than 312,908 shares, and that 100,000 warrant shares be due to Walleye on exercise of its warrants rather than 54,146 shares. While we believe that this lawsuit is without merit and we intend to vigorously defend against it, we are not able to predict at this time whether this proceeding will have a material impact on our financial condition or results of operations.
Stein Litigation. Cielo Stein (“Stein”), a former territory manager, filed a complaint on February 1, 2023 in Jefferson County Circuit Court in Kentucky against the Company and its wholly-owned subsidiary Neos Therapeutics. The complaint alleges that Aytu retaliated against Stein in violation of the Kentucky Civil Rights Act after she opposed what she contends was unwelcome behavior by her supervisor. The complaint also alleges that the Company’s response to Stein’s subsequent complaint to human resources was inadequate. The complaint seeks an award of unspecified compensatory damages, emotional-distress damages, and attorneys’ fees and costs. The Company removed the lawsuit to the United States District Court for the Western District of Kentucky and filed a motion to dismiss the complaint, which is pending. Due to the early stage of litigation, we are not able to predict at this time whether this proceeding will have a material impact on our financial condition or results of operations, and intend to vigorously defend this case in the event it is not dismissed.
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Item 1A. Risk Factors.
Our business faces significant risks and uncertainties. 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 2022 Annual Report on Form 10-K filed on September 27, 2022.
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.
None
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Item 6. Exhibits.
Exhibit No. |
| Description |
| Registrant’s |
| Date |
| Exhibit |
| Filed |
3.1 | Certificate of Amendment to the Certificate of Incorporation of Aytu BioPharma, Inc. | 8-K | 01/05/2023 | 3.1 | ||||||
10.1 | X | |||||||||
10.2 | X | |||||||||
10.3#& | 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, 2023 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 11, 2023 | By: | /s/ Joshua R. Disbrow | |
| Joshua R. Disbrow | ||
| Chief Executive Officer | ||
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