Aytu Biopharma, Inc: Form 10-Q for the period ended Sep 30, 2024

This discussion should be read in conjunction with the Company’s 2024 Form 10-K. 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 the Company’s 2024 Form 10-K, and in Part II, Item 1A of this Form 10-Q.

Objective

The purpose of the Management’s 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 months ended September 30, 2024, and our financial condition as of September 30, 2024. The MD&A is provided as a supplement to, and should be read in conjunction with, our Unaudited Consolidated Financial Statements and Notes to the Unaudited Consolidated Financial Statements.

Overview

We are a pharmaceutical company focused on commercializing novel therapeutics. Our strategy is to become a leading pharmaceutical company that improves the lives of patients. We use a focused approach of in-licensing, acquiring, developing, and commercializing novel prescription therapeutics in order to continue building our portfolio of revenue-generating products and leveraging our commercial team’s expertise to build leading brands within large therapeutic markets. Our primary focus is on commercializing innovative prescription products that address conditions frequently developed or diagnosed in childhood, including ADHD. We are focusing our efforts on accelerating the growth of our commercial business and achieving operating cash flows. To achieve these goals, we indefinitely suspended active development of our clinical development programs and have wound down and divested unprofitable operations.

In July 2024 we completed the wind down and divestiture of our Consumer Health business (see Part I, Item 1, Note 20 – Discontinued Operations in this Form 10-Q for further detail) and now operate our business as a single operating and reporting segment, which is focused on our prescription pharmaceutical products sold primarily through third party wholesalers and pharmacies and which primarily consists of two product portfolios, the ADHD Portfolio and the Pediatric Portfolio. The ADHD Portfolio consists of products for the treatment of ADHD, primarily Adzenys (amphetamine), an extended-release orally disintegrating tablet and Cotempla (methylphenidate), an extended-release orally disintegrating tablet. The Pediatric Portfolio consists primarily of Karbinal (carbinoxamine maleate extended-release oral suspension), an extended-release first-generation antihistamine suspension containing carbinoxamine indicated to treat numerous allergic conditions, and 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. During the fourth quarter of fiscal 2024, we successfully completed the transition of all manufacturing of our ADHD products to a United States-based third-party contract manufacturer to improve the profitability of these products.

In July 2023, we entered into an exclusive collaboration, distribution and supply agreement with Medomie, a privately owned pharmaceutical company, for Medomie to sell Adzenys and Cotempla in Israel and the Palestinian Authority. In September 2024, we entered into an exclusive collaboration, distribution and supply agreement with Lupin, a subsidiary of global pharmaceutical company Lupin Limited, for Lupin to sell Adzenys and Cotempla in Canada. We will supply Adzenys and Cotempla to Medomie and Lupin based on forecasts and provide product training. Medomie and Lupin are responsible for seeking local regulatory approvals and marketing authorizations for both Adzenys and Cotempla, which is expected to occur over the next 18 to 24 months. The agreement with Medomie and the agreement with Lupin represent our first and second international commercial agreements for Adzenys and Cotempla, respectively.

In light of our own business activities and external developments in the biopharmaceutical industry, we regularly review our performance, prospects and risks such as the potential impact to our business resulting from our competitive landscape (i.e., entry of generic competitors, payer pressures, new branded entrants, etc.). These reviews have included consideration of potential partnerships, collaborations, and other strategic transactions such as acquisitions or divestitures of programs or technology to enhance stockholder value. We continue to evaluate potential strategic transactions and business combinations, but there can be no guarantee that we will be able to enter into such transactions and there can be no guarantee that such transactions will achieve our desired goals.

Business Environment

We continue to experience inflationary pressure and have experienced supply chain disruptions related to the sourcing of raw materials, energy, logistics and labor. While we do not have sales or operations in Russia or Ukraine and we do not expect to have material sales or operations in the Middle East, 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 expect that inflationary pressures and supply chain disruptions could continue to be significant across the business throughout fiscal 2025. We have not experienced stock outages for our ADHD products since the launch of those products, and the pediatric product supply has remained adequate to satisfy demand for the preceding four years.

In October 2024, we received a Paragraph IV Certification Notice Letter (“Notice Letter”) from Granules Pharmaceuticals, Inc. (“Granules”), stating that it intends to market a generic version of Adzenys before the expiration of all patents currently listed in the Orange Book. The Notice Letter states that Granules’ NDA for the generic version of Adzenys contains a Paragraph IV certification alleging that these patents are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic version of Adzenys. We are currently reviewing the Notice Letter. We have 45 days from receipt of the Notice Letter to commence a patent infringement lawsuit against Granules to trigger a stay precluding the FDA from approving Granules’ NDA for a generic version of Adzenys for up to 30 months or entry of judgment holding the patents invalid, unenforceable, or not infringed, whichever occurs first. We plan to vigorously enforce our intellectual property rights related to Adzenys.

Results of Operations

The results of operations for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, is as follows:

(in thousands)

34

Net Revenue

Net revenue by portfolio for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, is as follows:

(in thousands)

During the three months ended September 30, 2024, net revenue decreased by $1.2 million, or 7%, compared to the same period ended September 30, 2023. The decrease was primarily due to a decrease in net revenue from the Pediatric Portfolio driven by payer changes last year that negatively affected prescription coverage. We entered into negotiations with a vendor that resulted in a reduction to the liability purportedly owed the vendor by $3.3 million, which resulted in a decrease in the estimated variable consideration accrual as of September 30, 2024, and a related increase in net revenue for our ADHD Portfolio of $3.3 million for the three months ended September 30, 2024.

Gross Profit

During the three months ended September 30, 2024, gross profit decreased by 8%, compared to the same period ended September 30, 2023. Gross profit percentage was 72% for the three months ended September 30, 2024, compared to 73% for the same period ended September 30, 2023.

Selling and Marketing

During the three months ended September 30, 2024, selling and marketing expense decreased by $0.4 million, or 7%, compared to the same periods ended September 30, 2023. The decrease was primarily driven by reduced commission expense and variable commercial marketing program fees in response to the lower revenue.

General and Administrative

During the three months ended September 30, 2024, general and administrative expense decreased by $1.2 million, or 19%, compared to the same period ended September 30, 2023. The decrease is primarily a result of continued cost reduction efforts and improved operational efficiencies.

Research and Development

During the three months ended September 30, 2024, research and development expense was relatively flat compared to the same period ended September 30, 2023. Our research and development costs are primarily associated with support for our commercialized products and costs associated with maintaining our intellectual property on our AR-101 asset.

Amortization of Intangible Assets

During the three months ended September 30, 2024, amortization expense of intangible assets, excluding amounts included in cost of sales, were relatively consistent compared to the same period ended September 30, 2023.

Restructuring Costs

During the three months ended September 30, 2024, we incurred $0.8 million of restructuring costs related to our previously announced operational realignment and related costs. During the three months ended September 30, 2023, no restructuring costs were incurred.

Other Income, Net

During the three months ended September 30, 2024, other income, net was relatively consistent compared to the same period ended September 30, 2023.

Interest Expense

During the three months ended September 30, 2024, interest expense decreased by $0.3 million, or 23%, compared to the same period ended September 30, 2023, primarily due to the extinguishment of our $15.0 million term loan while entering into the $13.0 million Eclipse Term Loan on more favorable terms during the fourth quarter of fiscal 2024.

Derivative Warrant Liabilities Gain (Loss)

The fair value of derivative warrant liabilities is calculated using either the Black-Scholes option pricing model or the Monte Carlo simulation model and is revalued at each reporting period, and changes are reflected through income or expense. For the three months ended September 30, 2024, we recognized an unrealized gain of $2.9 million from the fair value adjustment primarily driven by a decrease in our stock price during the three months ended September 30, 2024. For the three months ended September 30, 2023, we recognized an unrealized loss of $5.9 million from the fair value adjustment primarily driven by an increase in our stock price during the three months ended September 30, 2023.

Income Tax Expense

Income tax expense for continuing operations was $0.4 million for the three months ended September 30, 2024, which was an effective tax rate of 27.0%. This income tax expense was primarily driven by the limitations on losses as a result of Section 382 of the Internal Revenue Code changes in ownership coupled with existing valuation allowances.

For the three months ended September 30, 2023, income tax expense for continuing operations was zero with an effective tax rate of zero percent for those same periods, reflecting the full valuation allowance and no impact of Section 382 of the Internal Revenue Code.

Net Income (Loss) from Discontinued Operations, Net of Tax

Net income (loss) from discontinued operations, net of tax is related to the wind down and divestiture of our Consumer Health business that was completed in the first quarter of fiscal 2025. See Part I, Item 1, Note 20 – Discontinued Operations in this Form 10-Q for further detail.

Liquidity and Capital Resources

Sources of Liquidity

We have obligations related to our loan agreements, 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 from cash generated from operations.

Shelf Registrations

On September 26, 2024, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 15, 2024. This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate of $100.0 million of our common stock, preferred stock, debt securities, warrants, rights and units (the “2024 Shelf”). Through the filing date of this Form 10-Q, $100.0 million remains available under the 2024 Shelf. This availability is subject to the SEC’s “baby shelf” limitation as set forth in SEC Instruction I.B.6 limitation to the Form S-3.

Eclipse Agreement

In June 2024, we and certain of our subsidiaries entered into the Eclipse Amendment No. 5, with the Eclipse Lender. Under the Eclipse Agreement No. 5, we have two loan agreements, the Eclipse Term Loan and the Eclipse Revolving Loan.

The Eclipse Term Loan consists of a principal amount of $13.0 million, at an interest rate of SOFR plus 7.0%, with a four-year term and a straight-line loan amortization period of seven years, which would provide for a loan balance at the end of the four-year term of $5.6 million to be repaid on June 12, 2028, the maturity date. We used the proceeds of the Eclipse Term Loan and a portion of the proceeds from warrant exercises described below to repay in full a $15.0 million term note.

The Eclipse Revolving Loan allows us to borrow up to $14.5 million at an interest rate of SOFR plus 4.5%. In addition, we are required to pay an unused line fee of 0.5% of the average unused portion of the maximum Eclipse Revolving Loan amount during the immediately preceding month. The ability to make borrowings and obtain advances of the Eclipse Revolving Loan remains subject to a borrowing base and reserve, and availability blockage requirements and the maturity date, as amended, is June 12, 2028.

Cash Flows

The following table shows cash flows for the three months ended September 30, 2024, and 2023:

(in thousands)

Net Cash Used in Operating Activities

Net cash used in operating activities during these periods primarily reflects our net income (loss) from continuing operations, partially offset by cash provided by discontinued operations and changes in working capital and non-cash charges including stock-based compensation expense, derivative warrant liabilities gain or loss, depreciation, amortization and accretion, and other charges.

During the three months ended September 30, 2024, net cash used in operating activities totaled $1.2 million. The use of cash was primarily the result of the decrease in accounts receivable, net; inventories; prepaid expenses and other assets; other accrued liabilities; and accrued liabilities, partially offset by positive cash earnings (net income (loss) offset by non-cash depreciation, amortization and accretion, derivative warrant liabilities adjustment, and stock compensation expense). Additionally, these were partially offset by an increase in accounts payable.

During the three months ended September 30, 2023, net cash used in operating activities totaled $0.2 million. The use of cash was primarily the result of the decrease in accrued liabilities, partially offset by funds from the ERC program recorded in other operating liabilities (see Note 2 – Summary of Significant Accounting Policies and Note 9 – Other Liabilities). Additionally, these were partially offset by positive cash earnings (net loss offset by non-cash depreciation, amortization and accretion, derivative warrant liabilities adjustment, and stock compensation expense).

Net Cash Provided by (Used In) Investing Activities

Net cash provided by investing activities for the three months ended September 30, 2024, were driven by cash received from the sale of fixed assets, partially offset by cash payments for fixed asset purchases.

Net cash used in investing activities were nominal during the three months ended September 30, 2023.

Net Cash Provided by (Used In) Financing Activities

Net cash provided by financing activities of $0.9 million during the three months ended September 30, 2024, was primarily from net proceeds received from the revolving credit facility, partially offset by payments made to fixed payment arrangements and payments made on borrowings.

Net cash used in financing activities of $2.7 million during the three months ended September 30, 2023, was primarily from payments made to fixed payment arrangements.

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 notes to the unaudited consolidated financial statements for further information.

In May 2022, we entered into an the Tuzistra License Agreement. Pursuant to such termination, as of September 30, 2024, we have accrued a settlement liability of $5.8 million payable to Tris in other current liabilities on the consolidated balance sheet payable to Tris, with a provision that allows the Company to pay interest on any principal amounts due but remaining unpaid past July 2024.

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. As of September 30, 2024, the Tris Karbinal Agreement accrued fixed payment arrangement balance was $1.7 million recorded in other current liabilities on the consolidated balance sheet.

In connection with our acquisition of the assets from Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (collectively, “Rumpus”), and only if we resume and ultimately complete clinical development of AR101 and gain regulatory clearances to commercialize the product in multiple markets around the world, we may be required to pay up to $67.5 million in regulatory and commercial-based earn-out payments to Rumpus, which are primarily paid against commercial milestone achievements. 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 revenue from the product, with a minimum of $20,000 per year, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million. With clinical development currently suspended, only if and when we resume and ultimately complete clinical development of AR101, are substantially all milestones payable to these parties.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion about our significant accounting policies, refer to our 2024 Form 10-K.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

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.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, our management, with the participation of 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 the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2024, at reasonable assurance levels, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Accordingly, we believe that the financial statements presented in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented herein.

Inherent Limitations on Effectiveness of Internal Controls over Financial Reporting

Our management team, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple errors or mistakes. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Form 10-Q, that have a material effect, or are reasonably likely to have a material effect, on our internal control over financial reporting.

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 2024 Form 10-K.