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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 September 30, 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

Graphic

AYTU BIOPHARMA, INC.

(www.aytubio.com)

Delaware

   

47-0883144

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

7900 East Union Avenue, Suite 920

Denver, Colorado 80237

(Address of principal executive offices, including zip code)

(720) 437-6580

(Registrants 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 November 1, 2023, there were 5,567,490 shares of the registrant’s common stock outstanding.

AYTU BIOPHARMA, INC. FOR THE QUARTER ENDED SEPTEMBER 30, 2023

INDEX

PART I—FINANCIAL INFORMATION

Page

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023

4

Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022

5

Consolidated Statement of Stockholders’ Equity for the three months ended September 30, 2023 and 2022

6

Consolidated Statements of Cash Flows for the three months ended September 30, 2023 and 2022

7

Notes to Consolidated Financial Statements

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

38

 

Item 4. Controls and Procedures

38

 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

39

 

Item 1A. Risk Factors

39

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

39

 

Item 3. Defaults Upon Senior Securities

39

 

Item 4. Mine Safety Disclosures

39

 

Item 5. Other Information

40

 

Item 6. Exhibits

40

 

SIGNATURES

41

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 Aytu, Aytu BioPharma, Adzenys XR-ODT, Cotempla XR-ODT, Innovus Pharma, Neos, Neos Therapeutics, Poly-Vi-Flor, and Tri-Vi-Flor, 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.

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per-share amounts)

(Unaudited)

September 30, 

June 30

2023

2023

Assets

Current assets

  

    

  

Cash and cash equivalents

$

19,964

$

22,985

Accounts receivable, net

 

29,882

 

28,937

Inventories

 

12,966

 

11,995

Prepaid expenses

 

7,038

 

8,047

Other current assets

 

749

 

868

Total current assets

 

70,599

 

72,832

Property and equipment, net

 

1,722

 

1,815

Operating lease right-of-use asset

 

2,454

 

2,054

Intangible assets, net

57,341

58,970

Other non-current assets

772

792

Total non-current assets

 

62,289

 

63,631

Total assets

$

132,888

$

136,463

Liabilities

Current liabilities

  

    

  

Accounts payable and other

$

14,466

$

13,478

Accrued liabilities

 

40,730

 

46,799

Short-term line of credit

1,215

1,563

Current portion of debt

 

62

 

85

Other current liabilities

8,990

 

7,090

Total current liabilities

 

65,463

 

69,015

Debt, net of current portion

14,842

14,713

Derivative warrant liabilities

12,310

6,403

Other non-current liabilities

8,106

6,975

Total liabilities

 

100,721

 

97,106

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred Stock, par value $.0001; 50,000,000 shares authorized; no shares issued or outstanding as of September 30, 2023 and June 30, 2023

 

 

Common Stock, par value $.0001; 200,000,000 shares authorized; 5,530,235 and 5,517,174 shares issued or outstanding, respectively, as of September 30, 2023 and June 30, 2023

 

1

 

1

Additional paid-in capital

 

344,415

 

343,485

Accumulated deficit

 

(312,249)

 

(304,129)

Total stockholders’ equity

 

32,167

 

39,357

Total liabilities and stockholders’ equity

$

132,888

$

136,463

See the accompanying Notes to the Consolidated Financial Statements

4

AYTU BIOPHARMA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per-share amounts)

(Unaudited)

Three Months Ended

September 30, 

    

2023

2022

Product revenue, net

$

22,099

$

27,655

Cost of sales

 

7,315

9,623

Gross profit

14,784

18,032

Operating expenses

Selling and marketing

7,422

10,102

General and administrative

6,956

7,322

Research and development

 

604

1,064

Amortization of intangible assets

 

1,306

1,197

Loss from contingent consideration

155

Total operating expenses

 

16,288

 

 

19,840

Loss from operations

 

(1,504)

 

 

(1,808)

Other income (expense)

 

  

 

 

  

Other expense, net

 

(709)

(1,084)

(Loss) gain on derivative warrant liabilities

 

(5,907)

2,191

Total other (expense) income

 

(6,616)

 

 

1,107

Loss before income tax

 

(8,120)

 

 

(701)

Income tax benefit

 

Net loss

$

(8,120)

$

(701)

Weighted average number of common shares outstanding

 

5,482,037

 

 

2,517,906

Basic and diluted net loss per common share

$

(1.48)

$

(0.28)

See the accompanying Notes to the Consolidated Financial Statements.

5

AYTU BIOPHARMA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

(Unaudited)

Three Months Ended September 30,

Additional

Total

Preferred Stock

Common Stock

Paid-in

Accumulated

    

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

Deficit

Equity

Balance, July 1, 2023

    

$

    

5,517,174

    

$

1

    

$

343,485

    

$

(304,129)

$

39,357

Stock-based compensation

13,061

930

930

Net loss

(8,120)

(8,120)

Balance, September 30, 2023

$

5,530,235

$

1

$

344,415

$

(312,249)

$

32,167

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

See the accompanying Notes to the Consolidated Financial Statements

6

AYTU BIOPHARMA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

    

Three Months Ended

September 30, 

2023

2022

Operating Activities

  

 

  

Net loss

$

(8,120)

$

(701)

Adjustments to reconcile net loss to cash used in operating activities:

 

  

 

  

Depreciation, amortization and accretion

 

2,230

 

2,301

Stock-based compensation expense

 

930

 

1,177

Loss (gain) on derivative warrant liabilities

5,907

(2,191)

Amortization of senior debt discount

148

145

Loss from contingent consideration

 

 

155

Inventory write-down

51

82

Other noncash adjustments

 

(6)

 

(33)

Changes in operating assets and liabilities:

Accounts receivable

 

(945)

 

(6,212)

Inventories

 

(1,023)

 

(2,104)

Prepaid expenses and other current assets

 

1,125

 

(1,801)

Accounts payable and other

 

914

 

3,587

Accrued liabilities

 

(5,166)

 

(3,481)

Other operating assets and liabilities, net

3,744

(72)

Net cash used in operating activities

 

(211)

 

(9,148)

Investing Activities

 

  

 

  

Other investing activities

 

(76)

 

42

Net cash (used in) provided by investing activities

 

(76)

 

42

Financing Activities

 

  

 

  

Proceeds from issuance of stock and warrants

 

 

10,416

Net (payments made on) proceeds received from, short-term line of credit

(348)

4,274

Payment made to fixed payment arrangement

(2,204)

(301)

Payment of stock issuance costs

 

(160)

 

(793)

Payments made to borrowings

 

(22)

 

(26)

Other financing activities

(13)

Net cash (used in) provided by financing activities

 

(2,734)

 

13,557

Net change in cash and cash equivalents

(3,021)

4,451

Cash and cash equivalents at beginning of period

22,985

19,360

Cash and cash equivalents at end of period

$

19,964

$

23,811

7

    

Three Months Ended

September 30, 

    

2023

    

2022

Supplemental cash flow data

Cash paid for interest

$

1,359

$

565

Non-cash investing and financing activities:

Fair value of warrants at issuance, net

$

$

5,953

Other noncash investing and financing activities

$

$

146

See the accompanying Notes to the Consolidated Financial Statements.

8

AYTU BIOPHARMA, INC.

NOTES TO 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 twenty 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 multiple 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. To date, the Consumer Health Segment has generated negative cash flows. In the fiscal 2023 year, the Company announced it would wind down or monetize the Consumer Health Segment in the fiscal 2024 year.

The Company’s strategy is to continue building its portfolio of revenue-generating prescription pharmaceutical products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets. As a result of focusing on building the portfolio of revenue-generating products and generating profitability, in the fiscal 2023 year, the Company indefinitely suspended active development of its clinical development programs including AR101 (enzastaurin), and terminated the license agreements relating to Healight and NT0502 (N-desethyloxybutynin).

As of September 30, 2023, the Company had $20.0 million of cash and cash equivalents and $29.9 million in accounts receivable. The Company’s operations have historically consumed cash and may continue to consume cash in the future. The Company incurred a net loss of $8.1 million and $0.7 million during the three months ended September 30, 2023 and 2022, respectively. The Company had an accumulated deficit of $312.2 million and $304.1 million as of September 30, 2023 and June 30, 2023, respectively. Cash used in operations was $0.2 million and $9.1 million during the three months ended September 30, 2023 and 2022, respectively.

In addition, the Company has non-operating liabilities that are scheduled to, or may become, current in the fifteen months following the filing of this Quarterly Report on Form 10-Q, most notably the maturity of the $15 million Avenue Capital term note (the “Avenue Note”, see Note 11 – Long-term Debt). The Company expects to refinance the Avenue Note in the event it does not have sufficient cash on hand to retire it at maturity. As a result of this, there exists substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include adjustments that might be necessary if the Company is unable to continue as a going concern.

Management plans to mitigate the conditions that raise substantial doubt about its ability to continue as a going concern are primarily focused on (i) improving cash flows from operations, (ii) winding down or monetizing the

9

Consumer Health Segment, (iii) refinancing its $15 million Avenue Note to extend its maturity date, and, (iv) , if necessary, raising additional capital through public or private equity, debt offerings, or monetizing additional 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 support its operations and obligations, 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 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 consolidated financial statements contained in this Quarterly Report on Form 10-Q represent the financial statements of the Company and its wholly owned subsidiaries. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2023, which included all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended September 30, 2023 are not necessarily indicative of expected operating results for the full year or any future period.

Prior Period Reclassification. Certain prior year amounts in the consolidated statements of operations have been reclassified to conform to the current year presentation, including a reclassification of the fair value adjustment from contingent considerations. Net gain or loss from the fair value of contingent considerations was previously included in Other Expense, net, and is currently recorded in operating expenses on the consolidated statements of operations. This reclassification did not impact net loss or cash flows for the three months ended September 30, 2023 and 2022 or the Company’s financial position as of September 30, 2023 or June 30, 2023.

 

 

 

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 consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, revenue recognition, allowance for credit losses, 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, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities, the depreciable lives of long-lived assets, classification of warrants equity versus liability, and the valuation of warrants and 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.

 

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.

10

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 months ended September 30, 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 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.

Employee Retention Credit

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”), which allows for employers to claim a refundable payroll tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees after December 31, 2020 through September 30, 2021. The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic.

As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company will account for the ERC by analogy to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, when management determines reasonable assurance that the Company had substantially met all eligibility requirements of the ERC, the ERC benefit shall either be recorded as an offset against payroll costs or recognized as other income in the consolidated statement of operations (see Note – 9 Other Liabilities).

Recent Adopted Accounting Pronouncements

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 effective dates for the amendments in ASU 2022-02 align with those of ASU 2016-13. The Company had adopted ASU 2016-13 and ASU 2019-05 for the fiscal year ended June 30, 2024. The Company had evaluated the impact of adoption of ASUs 2016-13, 2019-05, and 2022-02 and concluded that the application of the new standards did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Debt—Debt with Conversion and Other Options. In August 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

11

does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.

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, 2023. Other than the application of IAS 20 for the Employee Retention Credit, there have been no significant changes to the Company’s significant accounting policies during the three months ended September 30, 2023.

 

 

 

3. Revenues from Contracts with Customers

Net product sales in the Rx Segment 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), generally “free-on-board” destination when shipped domestically within the United States, and “free-on-board” shipping point when shipped internationally, consistent with contractual terms.

The Company generates Consumer Health Segment revenue 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, consistent with contractual terms and aligning with the transfer of control of the products. 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 time delays between the initial product sale, and the 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 months ended September 30, 2023 and 2022 were as follows:

Three Months Ended

September 30, 

    

2023

    

2022

(In thousands)

Consolidated revenue:

  

 

  

Rx Segment

$

17,817

$

18,652

Consumer Health Segment

 

4,282

 

9,003

Total consolidated revenue

$

22,099

$

27,655

 

12

Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio in the Rx Segment for the three months ended September 30, 2023 and 2022 were as follows:

Three Months Ended

September 30, 

2023

    

2022

(In thousands)

Rx Segment:

ADHD Portfolio

$

15,128

$

11,585

Pediatric Portfolio

2,565

6,558

Other

124

509

Total Rx Segment revenue

$

17,817

$

18,652

 

Other includes discontinued and deprioritized products in the Rx Segment. The Consumer Health Segment is comprised of one product portfolio, the Consumer Health Portfolio.

Revenues by Geographic location. The Company’s revenues are predominately within the United States, with insignificant 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 in inventory write-downs for each of the three months ended September 30, 2023 and 2022.

Inventory balances consist of the following:

September 30, 

June 30, 

2023

2023

(In thousands)

Raw materials

 

$

1,968

    

$

1,301

Work in process

3,288

2,956

Finished goods

 

7,710

 

7,738

Inventories

$

12,966

$

11,995

 

 

 

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.

13

Property and equipment consist of the following:

    

September 30, 

June 30, 

2023

2023

(In thousands)

Manufacturing equipment

$

2,433

    

$

2,433

Leasehold improvements

 

 

999

 

999

Office equipment, furniture and other

 

 

1,125

 

1,125

Lab equipment

 

 

832

 

832

Assets under construction

323

107

Property and equipment, gross

5,712

5,496

Less accumulated depreciation and amortization

(3,990)

(3,681)

Property and equipment, net

 

$

1,722

$

1,815

 

Depreciation and amortization expense from property and equipment was $0.3 million for each of the three months ended September 30, 2023 and 2022.

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 2024 and 2029. 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.

In May 2023, the Company entered into a lease agreement to relocate its principal office. The space was made available to the Company in September 2023 (lease commencement) with an initial term of five and a half years. The Company recorded an operating lease right-of-use (“ROU”) asset of $0.7 million and a lease liability of $0.7 million at lease commencement. The ROU asset and lease liability were recorded at present value using an incremental borrowing rate of 10.3%. The Company had elected the practical expedient to not separate lease and non-lease components.

The components of lease expenses are as follows:

Three Months Ended

September 30, 

    

2023

    

2022

    

Statement of Operations Classification

(In thousands)

Lease cost:

Operating lease cost

$

360

$

222

 

Operating expenses

Short-term lease cost

 

 

23

 

160

 

Operating expenses

Finance lease cost:

 

 

Amortization of leased assets

 

 

14

 

18

 

Cost of sales

Interest on lease liabilities

1

3

Other expense, net

Total net lease cost

 

$

398

$

403

 

  

 

14

Supplemental balance sheet information related to leases is as follows:

    

September 30, 

June 30, 

    

Balance Sheet Classification

2023

2023

(In thousands)

Assets:

Operating lease assets *

$

2,454

$

2,054

 

Operating lease right-of-use asset

Finance lease assets

 

159

 

Property and equipment, net

Total leased assets

$

2,454

$

2,213

 

Liabilities:

 

Current:

Operating leases

$

1,265

$

1,258

Other current liabilities

Finance leases

62

85

Current portion of debt

Non-current

Operating leases

1,208

832

Other non-current liabilities

Total lease liabilities

$

2,535

$

2,175

* Includes $0.2 million from the Consumer Health Segment as of September 30, 2023 and June 30, 2023.

 

Remaining lease term and discount rate used are as follows:

    

September 30, 

June 30, 

 

2023

2023

Weighted-Average Remaining Lease Term (years)

Operating lease assets

 

2.65

1.72

Finance lease assets

 

0.62

0.87

Weighted-Average Discount Rate

 

Operating lease assets

 

8.60

%

7.78

%

Finance lease assets

6.54

%

6.54

%

 

Supplemental cash flow information related to lease is as follows:

Three Months Ended

September 30, 

    

2023

    

2022

(In thousands)

Cash flow classification of lease payments:

Operating cash flows from operating leases

$

360

$

357

Operating cash flows from finance leases

$

1

$

3

Financing cash flows from finance leases

$

23

$

27

 

As of September 30, 2023, the maturities of the Company’s future minimum lease payments were as follows:

    

Operating

    

Finance

(In thousands)

2024 (remaining 9 months)

$

1,035

$

64

2025

937

2026

282

2027

241

2028

199

Thereafter

168

Total lease payments

2,862

64

Less: Imputed interest

(389)

(2)

Lease liabilities

$

2,473

$

62

 

 

 

 

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7. 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 markets.

The following table provides the summary of the Company’s intangible assets as of September 30, 2023 and June 30, 2023, respectively. Carrying amounts are net of any impairment charges from prior periods. An intangible asset with zero net carrying amount at the end of a reporting period is not presented in the table of a future reporting period.

September 30, 2023

Weighted-

Net

Average

Carrying

Accumulated

Carrying

Remaining

    

Amount

    

Amortization

    

Impairment

    

Amount

    

Life (in years)

(In thousands)

Definite-lived intangibles:

Acquired product technology rights

$

42,176

$

(11,683)

$

$

30,493

 

11.29

Acquired technology right

30,200

(4,498)

25,702

14.50

Acquired product distribution rights

 

6,207

 

(5,061)

 

 

1,146

 

0.75

Total

$

78,583

$

(21,242)

$

$

57,341

 

12.52

June 30, 2023

Weighted-

Net

Average

Carrying

Accumulated

Carrying

Remaining

    

Amount

    

Amortization

    

Impairment

    

Amount

    

Life (in years)

(In thousands)

Definite-lived intangibles:

Acquired product technology rights

$

42,176

$

(10,881)

$

$

31,295

 

11.49

Acquired technology right

30,200

(4,054)

26,146

14.75

Acquired product distribution rights

 

9,182

 

(4,678)

 

(2,975)

 

1,529

 

1.00

81,558

(19,613)

(2,975)

58,970

12.67

Indefinite-lived intangibles:

Acquired in-process R&D

2,600

(2,600)

Indefinite-lived

2,600

(2,600)

Total

$

84,158

$

(19,613)

$

(5,575)

$

58,970

 

12.67

The following table summarizes the estimated future amortization expense to be recognized over the next five fiscal years and periods thereafter:

     

September 30, 

(In thousands)

2024 (remaining 9 months)

$

4,889

2025

4,989

2026

4,989

2027

4,989

2028

4,988

Thereafter

32,497

Total future amortization expense

$

57,341

 

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.

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Karbinal ER. The Company acquired and assumed all rights and obligations pursuant to the Supply and Distribution Agreement, as Amended, with Tris Pharma, Inc. (“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 additional 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. The customer lists are fully amortized. As of June 30, 2023, the acquired product distribution rights included an impairment charge of $3.0 million due to the discontinuance of products in the Consumer Health Segment.

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 IPR&D will begin amortizing on a straight-line over the life of the product. During the fiscal year ended June 30, 2023, the Company fully impaired the IPR&D of NT0502 due to the termination of its development program.

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 $1.6 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively.

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8. Accrued liabilities

Accrued liabilities consist of the following:

September 30, 

June 30, 

2023

2023

(In thousands)

Accrued savings offers

$

13,023

$

15,739

Accrued program liabilities

9,994

11,012

Accrued employee compensation

5,374

5,675

Accrued customer and product related fees

4,691

6,579

Return reserve

 

5,137

 

5,777

Other accrued liabilities

2,511

2,017

Total accrued liabilities

$

40,730

$

46,799

 

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 and commercial rebates.

Accrued employee compensation includes sales commissions, vacation earned, and accrued payroll.

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. 

Other accrued liabilities consist of accrued license fees, legal settlements, professional fees, credit card liabilities, taxes payable, and samples expense; none of which individually represent greater than five percent of total liabilities.

9. Other Liabilities

September 30, 

June 30, 

2023

2023

(In thousands)

Fixed payment arrangements

$

9,380

$

10,420

Operating lease liabilities

 

2,473

 

2,090

Employee retention credit

3,759

Other

1,484

1,555

Total other liabilities

17,096

14,065

Less: current portion

(8,990)

(7,090)

Total other liabilities, non-current

$

8,106

$

6,975

 

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 early 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.

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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 September 30, 2023, the fixed payment arrangement balance was $1.8 million in other current liabilities, and $1.7 million in other non-current liabilities on the 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 its total liability for minimum payments by approximately $8.0 million from the original License Agreement. As of September 30, 2023, the balance was $6.0 million in other current liabilities on the consolidated balance sheet.

Employee Retention Credit. 

The Employee Retention Credit (“ERC”) in other non-current liabilities was a result of $3.8 million in proceeds the Company received from the ERC program during the quarter ended September 30, 2023. The ERC is a refundable payroll tax credit from the Coronavirus Aid, Relief, and Economic Security Act enacted by the U.S. government to provide certain relief from the COVID-19 pandemic. The refundable payroll tax credit shall be recognized in the consolidated statement of operations following any adjustments from its regulatory audit or upon further clarifications from the Internal Revenue Service (see Note 2 – Significant Accounting Policies). The associated vendor fee of $0.4 million was expensed as incurred in the quarter ended September 30, 2023.

Other. 

Other consists of taxes payable and deferred cost related to the Company’s 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 into with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLC) (“Eclipse”) as agent for the lenders (the “Eclipse Loan Agreement”). Under the Eclipse Loan Agreement, Eclipse extended up to $25.0 million in secured revolving loans to Neos (the “Revolving Loans”), of which up to $2.5 million was available for short-term swingline loans against 85% of eligible accounts receivable. The Revolving Loans thereunder, accrued at variable interest through maturity at the one-month 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, 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

19

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 Fourth Amendment”) to the Eclipse Loan Agreement. The Eclipse Fourth Amendment, among other things, provided for an aggregate increase of $2.0 million to Eclipse commitment to make revolving loans from time to time under the Eclipse Loan Agreement, and increased the maximum amount available under the revolving credit facility provided under the Eclipse Loan Agreement to $14.5 million. The ability to make borrowings and obtain advances of revolving loans under the Eclipse Loan 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 September 30, 2023, the Company was in compliance with the covenants under the Eclipse Loan Agreement, as amended.

The Company’s obligations under the Eclipse Loan Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of Eclipse on the ABL Priority Collateral, and a second priority lien in favor of Eclipse on the Term Loan Priority Collateral, as each is defined in the Replacement Term Loan Intercreditor Agreement, as defined in the Eclipse Loan Agreement, as amended by the Eclipse Second Amendment.

Total interest expense on the Revolving Loans, including amortization of deferred financing costs, was $27,000 and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and June 30, 2023, the outstanding Revolving Loans under the Eclipse Loan Agreement, as amended, were $1.2 million and $1.6 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”, and collectively with the Avenue Capital Lenders, “Avenue

20

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, (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 Fourth Amendment, on March 24, 2023, Avenue and the Company entered into a First Amendment (the “Avenue Amendment”) to the Avenue Capital Agreement. 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)