AYTU BIOPHARMA, INC. This discussion should be read in conjunction withAytu BioPharma, Inc.'s Annual Report on Form 10-K for the year endedJune 30, 2022 , filed onSeptember 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 theUnited Sates Securities and Exchange Commission ("SEC") onSeptember 27, 2022 andNovember 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 six months endedDecember 31, 2022 , and our financial condition as ofDecember 31, 2022 . 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 through third party wholesalers and (ii) theConsumer Health segment, which consists of various consumer health products sold directly to consumers. We generate revenue by selling our products through third party intermediaries in our marketing channels as well as directly to our customers. We currently manufacture our products for the treatment of attention deficit hyperactivity disorder ("ADHD") at our manufacturing facilities and use third party manufacturers for our other prescription and consumer health products. We also have product candidates in development, including, AR101 (enzastaurin) for the treatment of vascular Ehlers-Danlos Syndrome ("VEDS") and Healight (endotracheal light catheter) for the treatment the treatment of severe, difficult-to-treat respiratory infections. We have incurred significant losses in each year since inception. Our net losses was$6.7 million for the three months endedDecember 31, 2022 , and was$7.4 million for the six months endedDecember 31, 2022 . As ofDecember 31, 2022 , andJune 30, 2022 , we had accumulated deficits of$294.5 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.
Significant Developments
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, including AR101(enzastaurin) and Healight. The suspension of these programs is expected to save over$20 million in projected future study costs over the next three fiscal years. InApril 2020 . we entered into a licensing agreement withCedars-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, and upon receiving the VAP pre-clinical study results on Healight, we intend to evaluate strategic options for Healight, including partnering the asset, modifying the licensing agreement withCedar-Sinai Medical Center , and terminating the licensing agreement. 34
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Our commercial business includes the Rx segment and the
Business Environment
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainties. We believe COVID-19 has negatively impacted the market for prescription products, disrupted the reliability of the supply chain, and impacted the ability and efficiency of conducting clinical trials. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the new variants of coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets inthe United States and abroad. While the Biden administration has announced that the COVID-19 emergency declaration will endMay 11, 2023 and states and jurisdictions have rolled back stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and if we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition. In addition, a recurrence or impact from new strains of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We will continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic. We have continued to experience significant inflationary pressure and supply chain disruptions related to the sourcing of raw materials, energy, logistics and labor during fiscal 2022 and 2023. While we do not have sales or operations inRussia orUkraine , 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
OnOctober 25, 2022 , we entered into an agreement withAvenue 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 inJanuary 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). OnAugust 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. During the six months endedDecember 31, 2022 , we issued 312,308 shares of common stock under the ATM Sales Agreement (as defined below) with total gross proceeds of approximately$1.5 million before deducting commissions of 3% and other offering expenses including legal and audit fees. OnJanuary 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 theNasdaq Capital Market. OnJanuary 23, 2023 , Nasdaq confirmed we regained compliance with this listing rule. 35 Table of Contents
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 six months ended
Three Months Ended Six Months Ended
December 31, December 31,
2022 2021 Change 2022 2021 Change
(In thousands)
Product revenue, net $ 26,279 $ 23,125 $ 3,154 $ 53,934 $ 45,022 $ 8,912
Cost of sales 8,986 10,826 (1,840) 18,609 20,267 (1,658)
Gross profit 17,293 12,299 4,994 35,325 24,755 10,570
Operating expenses
Research and development 1,710 4,475 (2,765) 2,774 6,127 (3,353)
Advertising and direct marketing 4,595 4,985 (390) 9,047 9,530 (483)
Other selling and marketing 5,965 4,675 1,290 11,615 9,427 2,188
General and administrative 8,018 7,953 65 15,340 16,169 (829)
Impairment expense 2,600 - 2,600 2,600 19,453 (16,853)
Amortization of intangible assets 1,198 1,505 (307) 2,395 3,042 (647)
Total operating expenses 24,086 23,593 493 43,771 63,748 (19,977)
Loss from operations (6,793) (11,294) 4,501 (8,446) (38,993) 30,547
Other income (expense)
Other expense, net (1,303) (257) (1,046) (2,542) (516) (2,026)
Gain on derivative warrant liability 1,403 - 1,403 3,594 - 3,594
Total other income (expense) 100 (257) 357 1,052 (516) 1,568
Loss before income tax (6,693) (11,551) 4,858 (7,394) (39,509) 32,115
Income tax benefit - (3) 3 - (110) 110
Net loss $ (6,693) $ (11,548) $
4,855
Product revenue, net
In the three and six months endedDecember 31, 2022 , net product revenue increased by$3.2 million , or 14%, and$8.9 million , or 20%, compared to the three and six months endedDecember 31, 2021 , respectively. The increases were primarily driven by product growth of our Pediatric Portfolio and ADHD Portfolio. These increases were partially offset by a modest decrease inConsumer Health products due to a change of focus on e-commerce, and supply chain issues.
Gross margins
In the three and six months endedDecember 31, 2022 , gross margins increased by$5.0 million , or 41%, and$10.6 million , or 43%, compared to the three and six months endedDecember 31, 2021 , respectively. The increases were primarily driven by net revenue increases as described above. Gross margin percentage
increased to 66% and 65%
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for the three and six months ended December 31, 2022 , compared to 53% and 55%
for the same periods ended December 31, 2021 . 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 six months endedDecember 31, 2022 , research and development expense decreased by$2.8 million , or 62%, and$3.4 million , or 55%, compared to the same periods endedDecember 31, 2021 . 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. InOctober 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 six months endedDecember 31, 2022 , advertising and direct marketing expense was consistent with the three and six months endedDecember 31, 2021 . Advertising and direct marketing expense includes direct-to-consumer marketing, advertising, sales, and customer support and processing fees related to ourConsumer 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 six months endedDecember 31, 2022 , other selling and marketing expense increased by$1.3 million , or 28%, and$2.2 million , or 23%, compared to the same periods endedDecember 31, 2021 . The increases were primarily driven by commission expense based on subscriptions prescribed and commercial marketing program fees. General and administrative
In the three months ended
In the six months endedDecember 31, 2022 , general and administrative expense decreased by$0.8 million , or 5% compared to the same period endedDecember 31, 2021 . The decrease is primarily a result of ongoing cost cutting initiatives associated with our acquisition of Neos.
Impairment expense
Due to increased focus on our commercial efforts, we ceased active development of our NT0502 product candidate. As a result, we intend to return the intellectual property and terminate the Exclusive License Agreement withNeuRX Pharmaceuticals entered into inOctober 2018 . In the three and six months endedDecember 31, 2022 , we incurred an impairment charge of$2.6 million related to these decisions. In the six months endedDecember 31, 2021 , as a result of the decline in our market capitalization, a qualitative and quantitative analysis was performed on the goodwill and other intangible assets associated with our Rx Segment. This analysis resulted in an impairment loss of$19.5 million .
Amortization of intangible assets
In the three and six months endedDecember 31, 2022 , amortization expense of intangible assets, excluding amounts included in cost of sales, decreased by$0.3 million , or 20%, and$0.6 million , or 21%, compared to the same 37
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periods ended
Unrealized gain or loss from derivative warrant liabilities
The fair value of derivative warrant liabilities was calculated using either the Black-Scholes option model or the Monte Carlo simulation model and are revalued at each reporting period. In the three and six months endedDecember 31, 2022 , we recognized unrealized gain of$1.4 million and$3.6 million , respectively, from the fair value adjustments.
Other (expense), net
In the three and six months endedDecember 31, 2022 , other expense, net, increased by$1.0 million and$2.0 million , compared to the same periods endedDecember 31, 2021 . The increases were primarily due to licensing agreements and an increase in the interest rate on our debt including amortization of our fixed term payment arrangements.
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
OnSeptember 28, 2021 , we filed a shelf registration statement on Form S-3, which was declared effective by theSEC onOctober 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 ofDecember 31, 2022 , approximately$82.4 million remains available under the 2021 Shelf. OnJune 8, 2020 , we filed a shelf registration statement on Form S-3, which was declared effective by theSEC onJune 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 ofDecember 31, 2022 , approximately$42.0 million remains available under the 2020 Shelf. OnJune 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 six months endedDecember 31, 2022 , we issued 312,308 shares of common stock under the ATM Sales Agreement, with total net proceeds of approximately$1.5 million . As ofDecember 31, 2022 , we had approximately$3.3 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
OnAugust 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 1,162,790 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. 38 Table of Contents Eclipse Loan Agreement The Eclipse Loan Agreement, as amended, provides us with up to$12.5 million in Revolving Loans, of which up to$2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bore interest at LIBOR, plus 4.50% throughApril 2022 . Beginning inMay 2022 through maturity, the Revolving Loans bear interest at the Secured Overnight Financing Rate ("SOFR") plus 4.50%. In addition, we are required to pay an unused line fee of 0.50% of the average unused portion of the maximum Revolving Loans amount during the immediately preceding month. Interest is payable monthly in arrears. The maturity date under the Eclipse Loan Agreement, as amended, isJanuary 26, 2025 .
Cash Flows
The following table shows cash flows for the six months endedDecember 31, 2022 , and 2021: Six Months Ended December 31, Increase 2022 2021 (Decrease) (In thousands)
Net cash used in operating activities$ (11,588) $ (12,613) $ (1,025) Net cash provided by (used in) investing activities $ 37$ (3,137) $ (3,174) Net cash provided by financing activities$ 11,692
$ 1,126
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. During the six months endedDecember 31, 2022 , net cash used in operating activities totaled$11.6 million . The use of cash was primarily the result of the decrease in inventory, prepaid expenses, and accrued liabilities. These were partially offset by positive cash earnings (net loss offset by non-cash depreciation, amortization and accretion, in addition to stock compensation expense and impairment charges). During the six months endedDecember 31, 2021 , net cash used in operating activities totaled$12.6 million . The use of cash was approximately$26.7 million less than the net loss due primarily to non-cash charges of goodwill 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 amortization of debt premium and non-cash 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 six months
ended
Net cash used in investing activities of
Net Cash Provided by Financing Activities
Net cash provided by financing activities of$11.7 million during the six months endedDecember 31, 2022 , was primarily from$9.1 million of proceeds from ourAugust 2022 equity raise,$3.6 million of additional net borrowing made under our short-term line of credit, and$1.5 million from our sales under our ATM Sales Agreement. 39 Table of Contents Net cash provided by financing activities of$1.1 million during the six months endedDecember 31, 2021 was primarily from$4.6 million of net proceeds from issuance of our common stock under the ATM, partially offset by$2.7 million in payments of fixed payment arrangements and$0.8 million net reduction in our revolving loan.
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.
OnMay 12, 2022 , we entered into an agreement withTRIS Pharma Inc. ("Trish") to terminate the License, Development, Manufacturing and Supply Agreement datedNovember 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 ofDecember 31, 2022 , the balance was$7.2 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 fromCerecor, Inc. inOctober 2019 , we assumed payment obligations that require us to make fixed and product milestone payments driven off sale. As ofDecember 31, 2022 , up to$4.6 million of fixed and product milestone payments based on net sales remain. In connection with theFebruary 2020 acquisition ofInnovus Pharmaceuticals, Inc. ("Innovus"), all of Innovus's shares were converted to our common stock and CVRs, which represents contingent additional consideration of up to$16.0 million payable to satisfy future performance milestones. As ofDecember 31, 2022 , up to$5.0 million of potential CVR milestone payments remain. In connection with our acquisition of the assets fromRumpus 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 withDenovo Biopharma LLC ("Denovo"), we made a payment of$0.6 million for a license fee inApril 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 withJohns 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
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