Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing strategy, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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 fiscal year ended June 30, 2021 and our financial condition as of June 30, 2021. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and notes. The MD&A is organized in the following sections:
● Overview
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Overview
We are commercial-stage specialty pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. We operate through two business segments: Aytu BioPharma segment, consisting of various prescription pharmaceutical products sold through third party wholesalers, and Aytu Consumer health segment, which consists of various consumer health products sold directly to consumers. We generate revenue by selling our products through third party intermediaries in our marketing channels as well as directly to our customers. We develop and manufacture our ADHD products at our manufacturing facilities, and use third party manufacturers for our other prescription and consumer health products.
We have incurred significant losses in each year since inception. Our net losses were $58.3 million and $13.6 million for the years ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and 2020, we had an accumulated deficit of approximately $178.3 million and $120.0 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the successful integration of our acquisitions.
Significant Developments
Below are significant developments in our business and other factors affecting our business during the fiscal year 2021.
COVID-19
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainties during fiscal years 2020 and 2021. The federal government and states imposed restrictions on travel and business operations and placed limitations on the size of public and private gatherings. However, beginning the third quarter of fiscal 2021, with the introduction of vaccines under emergency use authorizations, these restriction began to wind down and business operating environments have improved.
We believe COVID-19 has negatively impacted the overall market for prescription products. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the new variants of coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets in the United States and abroad. While states and jurisdictions have rollbacked 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.
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Acquisitions and Divestitures
On April 12, 2021, we closed on an asset purchase agreement with Rumpus Therapeutics, LLC through an asset purchase agreement with Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (together with Rumpus VEDS, LLC and Rumpus Therapeutics LLC, “Rumpus”), pursuant to which we acquired certain rights and other assets, including key commercial global licenses, relating primarily to the pediatric-onset rare disease development asset enzastaurin (now referred to as AR101), which is a pivotal study-ready therapeutic being studied for the treatment of vascular Ehlers-Danlos Syndrome or vEDS. This asset was acquired for $1.5 million in cash, payment of aggregated fees of $0.6 million and, upon the achievement of certain regulatory and commercial milestones, up to $67.5 million in earn-out payments, which are payable in cash or shares of our common stock, generally at our option.
On March 31, 2021, we terminated the Natesto license agreement previously entered into on July 1, 2016 as amended on July 29, 2019. With the acquisition of Neos Therapeutics, Inc. (“Neos”), we believe that this divestiture will not have significant impact on our financials, and will also allow us to focus on and further develop our prescription pharmaceutical products (“Rx Portfolio”).
On March 19, 2021, we acquired Neos (the “Neos Merger”), a commercial-stage pharmaceutical company developing, manufacturing and commercializing Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER in the U.S. using Neos' internal commercial organization. These commercial products are extended-release (“XR”) medications in patient-friendly, orally disintegrating tablet (“ODT”) or oral suspension dosage forms that utilize our microparticle modified-release drug delivery technology platform. Neos received approval from the U.S. Food and Drug Administration (“FDA”) for these three products. In addition, Neos manufactures and sells generic Tussionex, an extended-release oral suspension for the treatment of cough and upper respiratory symptoms of a cold.
We incurred restructuring costs as a result of our merger and acquisitions. These costs are primarily related to severance payments to employees affected by the change in business structure. During the year ended June 30, 2021, we incurred $4.9 million in severance cost, all of which was paid during the year ended June 30, 2021.
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Results of Operations
Comparison of the years ended June 30, 2021 and 2020.
Year Ended June 30,
(In thousands)
Operating expenses
Other (expense) income
Gain (Loss) on extinguishment of debt (1,569) (316) (1,253) 397 %
Gain from warrant derivative liability — 2 (2) (100) %
Income tax expense 259 — 259 —
Product revenue. Total net product revenue was $65.6 million during the year ended June 30, 2021, an increase of approximately $38.0 million, or 138%, compared to $27.6 million during the year ended June 30, 2020. The increase was primarily driven by the full year contributions from our fiscal year 2020 acquisitions and the partial year revenue generated from the ADHD product portfolio of Neos, which was acquired on March 19, 2021, as well as additional revenues from COVID-19 test kit sales. Due to our entry into a termination and transition agreement with Acerus Pharmaceuticals Corporation, on March 31, 2021, terminating the License and Supply Agreement related to Natesto, we will no longer recognize revenue related to Natesto as of April 1, 2021.
Cost of sales. Total cost of sales was $36.4 million during the year ended June 30, 2021, an increase of $28.1 million, or 340%, compared to $8.3 million during the year ended June 30, 2020. The increase was primarily driven by the full year operations of our fiscal year 2020 acquisitions and the partial year costs incurred for the production and sale of ADHD product portfolio of Neos, which was acquired on March 19, 2021. In addition, we recognized approximately $7.3 million in write-downs for slow moving inventory during the year ended June 30, 2021. Neos manufactures the ADHD products at its Grand Prairie, Texas facilities, and as such, allocates a significant portion of its intangible assets amortization and fixed assets depreciation into cost of sales.
Research and development. Total research and development expense was $5.6 million during the year ended June 30, 2021, an increase of $3.9 million, or 192%, compared to $1.7 million during the year ended June 30, 2020. The increase was due primarily to $2.9 million in costs related to the acquisition of in-process research and development that we determined to have no alternative future use at the time of purchase and was expensed as incurred, and costs associated with our Healight Platform license and initial research and development costs, as well as the acquisition of
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Neos on March 19, 2021, which incurs costs related to product development and FDA-required post-marketing clinical trials.
Advertising and direct marketing. Advertising and direct marketing expenses include direct-to-consumer marketing, advertising, sales and customer support and processing fees related to our consumer health segment. Total advertising and direct marketing expense was $20.6 million for the year ended June 30, 2021, an increase of $14.2 million, or 222%, compared to $6.4 million during the year ended June 30, 2020. The increase was primarily driven by the inclusion of full year operations of the consumer health segment, which was acquired on February 14, 2020.
Other selling and marketing. Total other selling and marketing expense was $9.7 million during the year ended June 30, 2021, an increase of $4.7 million, or 95%, compared to $5.0 million during the year ended June 30, 2020. The increase was primarily driven by the partial year commercialization of the ADHD product portfolio of Neos, which was acquired on March 19, 2021.
General and administrative. Total general and administrative expense was $25.5 million during the year ended June 30, 2021, an increase of $5.8 million, or 30%, compared to $19.7 million during the year ended June 30, 2020. The increase was primarily driven by the full year operations of our fiscal year 2020 acquisitions and the partial year expenses of Neos, which was acquired on March 19, 2021.
Acquisition related costs. Acquisition related costs was $2.9 million during the year ended June 30, 2021, an increase of $0.6 million, or 24%, compared to $2.3 million during the year ended June 30, 2020. The increase was due primarily to the Neos Merger on March 19, 2021. Such costs include legal fees, due diligence expenses and financial advisory fees.
Restructuring costs. Restructuring costs was $4.9 million during the year ended June 30, 2021, an increase of $4.2 million, compared to $0.7 million during the year ended June 30, 2020. The increase was due primarily to the Neos Merger on March 19, 2021. Such costs primarily consisted of severance payments for terminated employees.
Impairment of intangible assets. Total impairment expense of intangible assets was $12.8 million during the year ended June 30, 2021, and increase of $12.6 million, compared to $0.2 million for the year ended June 30, 2020. The increase was due primarily to the $8.5 million write-off of the licensed intangible asset related to Tuzistra as a result of the impact of COVID-19 and other factors negatively impacting product sales, and $4.3 million write-off of licensed intangible asset related to the March 30, 2021 Natesto divestiture.
Amortization of intangible assets. Total amortization expense of intangible assets was $6.0 million during the year ended June 30, 2021, an increase of $1.5 million, or 34%, compared to $4.5 million for the year ended June 30, 2020. The increase was due primarily to the full year amortization of intangible assets related to our fiscal year 2020 acquisitions and the partial year expense for Neos, which was acquired on March 19, 2021.
Other (expense) income, net. Total other (expense) income, net during the year ended June 30, 2021 was expense of approximately $2.1 million, a decrease of $0.5 million, or 21%, compared to other expense of $2.6 million during the year ended June 30, 2020. The decrease was primarily due to an increase in other income of $0.8 million from partial proceeds from the Natesto divestiture, partially offset by an increase in interest expense from the increase in debt as a result of the Neos Merger on March 19, 2021.
Gain (Loss) from contingent consideration. Gain from contingent considerations during the year ended June 30, 2021 was $4.5 million, a decrease of $5.9 million, or 57%, compared to $10.4 million during the year ended June 30, 2020. Of the $4.5 million gain during the year ended June 30, 2021, $1.3 million gain was attributable to change in change in the fair value of the ZolpiMist and Tuzistra contingent consideration liabilities and $3.2 million gain was attributable to change in fair value of the contingent value rights ("CVR's") liability related to the Innovus Merger (see Note 10 – Fair Value Considerations).
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Loss on debt extinguishment. During the year ended June 30, 2021, we recognized $1.3 million loss from modification of our obligations under Fixed Payment Arrangement and $0.3 million loss from conversion of outstanding debt to our shares of common stock.
Income tax expense. Our provision for income taxes during the year ended June 30, 2021 was $0.3 million at effective tax rate of 0.45%, primarily comprised of deferred taxes.
Liquidity and Capital Resources
Sources of Liquidity
We finance our operations through a combination of public offerings of our common stock and warrants, borrowings under our line of credit facility and cash generated from operations.
In June 2020, we initiated an at-the-market offering program ("ATM"), which allow us to sell and issue shares of our common stock from time-to-time. Since initiated in June 2020 through June 30, 2021, we issued a total of 3,093,539 shares of common stock for aggregate proceeds of $23.1 million before estimated offering costs of $2.6 million.
We entered into three separate registered direct stock offerings on March 10, 2020, March 12, 2020 and March 19, 2020 (the “March Offerings”) in which we issued a combination of common stock and warrants. In July 2020, we issued 92,302 warrants to purchase 92,302 shares of our common stock with a weighted-average exercise price of $15.99 to an investment bank. The warrants have a term of one year from the issuance date. These warrants had at issuance a fair value of approximately $0.4 million and were valued using a Black-Scholes model.
In December 2020, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”) (as amended and restated, the “Underwriting Agreement”), pursuant to which the underwriter exercised its over-allotment option in full and purchased 4,791,667 shares of our common stock for total proceeds of $28.8 million before estimated offering costs of $2.6 million. Effective June 2, 2021, we terminated the Underwriting Agreement with Wainwright, and pursuant to such termination, there will be no future sales of our common stock under the agreement.
On June 2, 2021, we terminated our “at-the-market” sales agreement with Jefferies LLC. On June 4, 2021, we entered into a Controlled Equity OfferingSM Sales Agreement (the “Cantor Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), pursuant to which we agreed to sell up to $30.0 million of our common stock from time to time in “at-the-market” offerings.
In October 2019, our Neos subsidiary entered into a senior secured credit agreement with Encina Business Credit, LLC (“Encina”) as agent for the lenders (the “Loan Agreement”). Under the Loan Agreement, Encina will extend up to $25.0 million in secured revolving loans to us (the “Revolving Loans”), of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable (see Note 18).
Cash Flows
The following table sets forth the primary sources and uses of cash for the periods indicated:
Year Ended June 30, Increase
(In thousands)
Net cash used in operating activities $ (25,964) $ (28,374) $ 2,410
Net cash used in investing activities $ (2,782) $ (5,656) $ 2,874
Net cash provided by financing activities $ 30,314 $ 71,069 $ (40,755)
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Net Cash Used in Operating Activities
Net cash used in operating activities during these periods primarily reflected our net losses, partially offset by changes in working capital and non-cash charges including inventory write-down, changes in fair values of various liabilities, stock-based compensation expense, depreciation, amortization and accretion and other charges.
During fiscal 2021, net operating cash outflows totaled $26.0 million. The use of cash was approximately $32.3 million less than the net loss due primarily to non-cash charges of depreciation, amortization and accretion, impairment of intangible assets, stock-based compensation, inventory write-down and loss on debt extinguishment. These charges were offset by gains from change in fair values of contingent consideration and contingent value rights. In addition, our use of cash decreased due to changes in working capital including decreases in accounts receivable and inventory, offset by a decrease in accounts payable.
During fiscal 2020, net operating cash outflows totaled $28.4 million. The use of cash was approximately $14.8 million greater than the net loss due primarily to non-cash gains from change in fair value of contingent consideration and derecognition of contingent consideration. In addition, our use of cash increased due to changes in working capital including increases in accounts receivable, inventory, prepaid and other assets. These charges were offset by depreciation, amortization and accretion and an increase in accrued liabilities and accrued compensation.
Net Cash Used in Investing Activities
Net cash used in investing activities is generally related to our merger and acquisitions as well as purchase of assets to support our operations.
Net cash used in investing activities of $2.8 million during the year ended June 30, 2021 was primarily due to $15.5 million principally for the paydown of debt of Neos as part of the Neos Merger, $2.3 million for the Rumpus asset acquisition and $0.7 million payment of contingent considerations, partially offset by $15.7 million cash acquired due to the Neos Merger.
Net cash used in investing activities of $5.7 million during the year ended June 30, 2020 was primarily due to $1.4 million cash paid for the Innovus merger, $4.5 million for the acquisition of the Pediatric Portfolio from Cerecor, and $0.2 million payment of contingent consideration, partially offset by $0.4 million cash acquired due to the Innovus merger.
Net Cash from Financing Activities
Net cash provided by financing activities of $30.3 million during the year ended June 30, 2021 was primarily from $28.8 million gross proceeds from public offering of our shares in December 2020, offset by $2.6 million in related offering costs and $16.3 million gross proceeds from issuance of our common stock under the ATM, offset by $2.3 million in related offering costs. These increases were partially offset by $6.1 million in payments of fixed payment arrangements, $2.7 million paydown on the revolving loan and $1.0 million repayment of term loans.
Net cash provided by financing activities of $71.1 million during the year ended June 30, 2020. This was primarily related to the (i) October 2019 Offering for gross proceeds of $10.0 million, offset by the offering cost of $0.7 million which was paid in cash; (ii) $49.0 million raised in the March 2020 Offerings, offset by offering costs of approximately $4.5 million, (iii) $27.0 million raised as the result of warrant exercises in March 2020, and (iv) gross proceeds of $6.8 million from the at-the-market offering program in June 2020, offset by offering costs of $0.2 million.
Capital Resources
We have obligations related to our loan and credit facilities, contingent considerations related to our acquisitions, milestone payments and purchase commitments.
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Loan and Credit
Upon closing of the Neos Merger, we indirectly assumed $15.6 million principal and $1.0 million in exit fee obligation under Neos’ credit facility with Deerfield. As of June 30, 2021, outstanding under the Deerfield facility, including the exit fee was $16.0 million. Interest is due quarterly at a rate of 12.95% per year. Payment on the Deerfield facility, including the exit fee and any unpaid interest, is due on May 11, 2022. If all or any of the principal is prepaid or required to be prepaid prior to December 31, 2021, then we shall pay, in addition to such prepayment and accrued interest thereon, a prepayment premium equal to 6.25% of the amount of principal prepaid.
Our Neos subsidiary’s Loan Agreement with Encina, provide us with up to $25.0 million in Revolving Loans, of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bear variable interest through maturity at the one-month London Interbank Offered Rate, plus an applicable margin of 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 facility amount during the immediately preceding month. Interest is payable monthly in arrears, upon a prepayment of a loan and on the maturity date. The maturity date under the Loan Agreement is May 11, 2022.
We may permanently terminate the Loan Agreement by prepaying all outstanding principal amounts and accrued interest at any time, subject to at least five (5) business days prior notice to the lender and the payment of a prepayment fee equal to (i) 1.0% of the aggregate principal amount prepaid if such prepayment occurs after October 2, 2020 but on or before October 2, 2021, and (ii) 0.5% of the aggregate principal amount prepaid if such prepayment occurs after October 2, 2021 but before May 11, 2022.
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 milestone payments (see Note 16 – Commitments and Contingencies for additional information).
Upon closing of the Pediatric Portfolio acquisition in October 2019, we assumed fixed payment obligations that required us to make a payment of $4.1 million in the fiscal year 2022, $3.1 million in fiscal year 2023 and annual payments of $2.1 million in each of the fiscal years 2024 and 2025. In addition, in fiscal year 2022, upon occurrence of certain events, we may be required to pay approximately $3.0 million in milestone payments.
In February 2020, upon closing of our Innovus Merger, all of Innovus shares were converted to our common stock and CVRs, which represents contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones. Depending on satisfaction of these conditions, we may be required to pay $2.0 million in fiscal year 2022 and additional $5.0 million in each of the fiscal years 2023 and 2024.
Our Innovus subsidiary is also contractually obliged for inventory purchase commitments, for which we are expected to pay approximately $0.7 million in July 2021 and $0.7 million in fiscal year 2022.
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Novalere acquisition, Innovus is obligated to make five payments of $0.5 million, between fiscal year 2026 through fiscal year 2033, when certain levels of FlutiCare sales are achieved.
In connection with our acquisition of the Rumpus assets, as discussed above under the section “Acquisitions and Divestitures”, we are required to make a payment of $0.6 for an option license fee in April 2022.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments
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that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to the notes to our audited financial statements included elsewhere in this Annual Report on Form 10 K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
We generate revenue from product sales through our Aytu BioPharma segment and Aytu Consumer Health Segment. We recognize revenue when all of the following criteria are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) as each performance obligation is individually satisfied.
Revenue from our Aytu BioPharma segment involves significant judgment and estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler (distributor) fees, wholesaler chargebacks and estimated rebates) to be incurred on the respective product sales, and we recognize the estimated amount as revenue when control of the product is transferred to our customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgment and other market data. We provide for prompt payment discounts, wholesaler fees and wholesaler chargebacks based on customer contractual stipulations. We analyze recent product return history to determine a reliable return rate. Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions and information obtained from third party providers to determine these respective variable considerations.
Savings offers
We offer savings programs for our patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The amount of redeemed savings offers is recorded based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustments at the time revenue is recognized. Historical trends of savings offers will be regularly monitored, which may result in adjustments to such estimates in the future.
Prompt payment discounts
Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustments at the time revenue is recognized.
Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of our products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.
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Rebates
The Rx Portfolio products are subject to commercial managed care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Calculations related to rebate accruals are estimated based on information from third-party providers. Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated rebates will be regularly monitored, which may result in adjustments to such estimates in the future.
Returns
Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized. We analyzed return data available from sales since inception date to determine a reliable return rate.
Wholesaler chargeback
The Rx Portfolio products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to us. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized based on information provided by third parties.
Inventories
Inventories consist of raw materials, work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable, pre-launch inventories are expensed into research and development. Post-FDA approval, manufacturing costs for the production of our products are being capitalized into inventory. We periodically review the composition of our inventories in order to identify obsolete, slow-moving, excess or otherwise unsaleable items. Unsaleable items will be written-down to net realizable value in the period identified.
Stock-based compensation expense
Stock-based compensation awards, including grants of stock options, restricted stock and restricted stock units, and modifications to existing awards, are recognized in the statement of operations based on their fair values on the date of grant. Stock option grants are valued on the grant date using the Black-Scholes option pricing model and compensation costs are recognized ratably over the period of service using the graded method. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of the Company’s common stock and recognized ratable over the requisite service period. Forfeitures are adjusted for as they occur.
We calculated the fair value of options using the Black Scholes option pricing model. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of our common stock. The Black Scholes option pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. We have not paid and do not anticipate paying cash dividends. Therefore, the expected dividend rate is assumed to be 0%. The expected stock price volatility for stock option awards is based on our stock price volatility in the valuation model. The risk-free rate was based on the U.S. Treasury yield curve in effect commensurate with the expected life assumption. The average expected life of stock options was determined according to the “simplified method” as described in SAB Topic 110, which is the midpoint
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between the vesting date and the end of the contractual term. The risk-free interest rate was determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are adjusted for as they occur.
There is a high degree of subjectivity involved when using option pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option pricing model, such a model value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.
Impairment of Long-lived Assets
We assess impairment of long-lived assets when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Long-lived assets consist of property and equipment, net and goodwill and other intangible assets, net. Circumstances which could trigger a review include, but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
Contingent considerations
We classify contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of contingent consideration liabilities based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology.
The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured for future expected payout as well as the increase in fair value due to the time value of money. These gains or losses, if any, are included as a component of operating cash flows.
Fixed payment arrangements are comprised of minimum product payment obligations relating to either make whole payments or fixed minimum royalties arising from a business acquisition. The fixed payment arrangements were recognized at their amortized cost basis using a market appropriate discount rate and are accreted up to their ultimate face value over time. The liabilities related to fixed payment arrangements are not remeasured at each reporting period, unless we determine the circumstances have changed such that the fair value of these fixed payment obligations would have changed due to changes in company specific circumstances or interest rate environments.
Warrants
We account for liability classified warrants by recording the fair value of each instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of liability classified derivative financial instruments were calculated using a lattice valuation model. Equity classified warrants are valued using a Black-Scholes model. Changes in the fair value of liability classified derivative financial instruments in subsequent periods were recorded as derivative income or expense for the warrants and reported as a component of cash flows from operations.
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Item 7A.Quantitative and Qualitative Disclosures about Market Risks
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
Item 8.Financial Statements and Supplementary Data
The financial statements required by this item are identified in Item (a)(1) of Part IV and begin at page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our principal executive officer and principal financial officer concluded that, as a result of the material weakness in our internal control over financial reporting as described below and in Part I Item 1A. of the Annual Report on Form 10-K, our disclosure controls and procedures were not effective as of the end of the period covered by this Report. Notwithstanding the material weakness, our management believes that the financial statements included elsewhere in this report present fairly, in all material respects, our financial position, results of operations, changes in stockholders’ equity (deficit) and cash flows in conformity with GAAP.
In connection with the preparation of our financial statements for the period ended June 30, 2021, we concluded that we had a material weakness in internal control over financial reporting related to our analysis for the accounting of goodwill and other intangibles and accounting for the impairment of long-lived assets. As a result, we have sought and received technical guidance from a third-party provider. This deficiency did not result in a revision of any of our previously issued financial statements. However, if not addressed, the deficiency could result in a material misstatement in the future. In response, we have taken a number of steps, including incorporating the third-party provider review and expertise in our analysis, and we believe that our controls are now designed properly and operating effectively.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Our management has concluded that, as of June 30, 2021, our internal control over financial reporting is effective based on these criteria.
Plante Moran, PLLC, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, was not required to issue an attestation report on our internal control over financial reporting.
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Changes in Internal Control over Financial Reporting
Other than the material weakness discussed above, there were no changes in our internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company’s assessment over changes in our internal controls over financial reporting excluded those processes or controls that exist at our Neos subsidiary, which we acquired from the March 19, 2021 Neos Merger. Neos’ last annual report for the year ended December 31, 2020 has been audited without any qualifications. Since the merger, there has been no significant change to its internal control over financial reporting.
Item 9B.Other Information
None.
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PART III
Item 10.Directors and Executive Officers, and Corporate Governance
The following table sets forth the names and ages of all of our directors and executive officers as of August 31, 2021. Our Board of Directors is currently comprised of five members, who are elected annually to serve for one year or until their successor is duly elected and qualified, or until their earlier resignation or removal. We have two executive officers that serve at the discretion of the Board of Directors and are appointed by the Board of Directors.
Name Age Position
Joshua R. Disbrow 46 Chairman and Chief Executive Officer
Richard Eisenstadt 62 Chief Financial Officer, Secretary, and Treasurer
Michael E. Macaluso 69 Director
Carl C. Dockery 58 Director
John A. Donofrio, Jr. 53 Director
Gary V. Cantrell 66 Director
The following is a biographical summary of the experience of our executive officers and directors during the past five years, and an indication of directorships held by the directors in other companies subject to the reporting requirements under the federal securities law.
Joshua R. Disbrow – Chairman and Chief Executive Officer
Joshua R. Disbrow has been employed by us since April 16, 2015 and a member of our Board of Directors since January 2016. Prior to the closing of the merger with Luoxis Diagnostics, Inc. and Vyrix Pharmaceuticals, Inc. that formed Aytu BioPharma, Mr. Disbrow was the Chief Executive Officer of Luoxis since January 2013. Mr. Disbrow served as the Chief Operating Officer of Ampio Pharmaceuticals, Inc. (“Ampio”) from December 2012 until April 2015. Prior to joining Ampio, he served as the Vice President of Commercial Operations at Arbor Pharmaceuticals LLC (“Arbor”), a specialty pharmaceutical company, from May 2007 through October 2012, which he joined as the company’s second employee and oversaw the launch and subsequent growth of the company’s commercial operations. Mr. Disbrow led the launch of the company’s first product, subsequently launching numerous products and scaling the commercial organization across sales, marketing, managed care, sales training and national accounts. In less than five years, Arbor grew from a company from the pre-commercialization stage to product sales of over $250 million. Prior to joining Arbor, Mr. Disbrow served as Regional Sales Manager with Cyberonics, Inc., a medical device company focused on neuromodulation therapies from June 2005 through April 2007. Prior to joining Cyberonics he was the Director of Marketing at LipoScience Inc., an in vitro diagnostics company. Mr. Disbrow holds an MBA from Wake Forest University and BS in Management from North Carolina State University. Mr. Disbrow currently serves on the Board of Zynex Medical, Inc. Mr. Disbrow’s experience in executive management and marketing within the pharmaceutical industry, monetizing company opportunities, and corporate finance led to the conclusion that he should serve as a member of our Board of Directors.
Gary V. Cantrell – Director
Gary Cantrell joined our Board of Directors in July 2016. He has 30 years of experience in the life sciences industry ranging from clinical experience as a respiratory therapist to his current executive consulting business as Principal of Averaden, LLC, where he has served since July 2015. As Principal of Averaden, LLC, Mr. Cantrell consulted exclusively with Mayne Pharma Group Limited (“Mayne”) (ASX: MYX) as Business Development Executive focused on acquiring branded prescription assets for Mayne’s U.S. Specialty Brands Division, a position he held from July 2015 to October 2017. Mr. Cantrell served as CEO of Yasoo Health Inc. (“Yasoo”), a global specialty nutritional company from 2007 through June 2015, highlighted by the sale of its majority asset AquADEKs to Actavis plc.in March 2016. Previously, he was President of The Catevo Group, a U.S.-based healthcare consulting firm. Prior to that, he was Executive Vice President, Sales and Marketing for TEAMM Pharmaceuticals Inc., an Accentia Biopharmaceuticals company, where he led all commercial activities for a public specialty pharmaceutical business. His previous 22 years were at GlaxoSmithKline plc where he held progressively senior management positions in sales, marketing and business
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development. Mr. Cantrell is a graduate of Wichita State University and serves as an advisor to several emerging life science companies. He served as a director for Yasoo Health Inc., Yasoo Health Limited and Flexible Stenting Solutions, Inc., a leading developer of next generation peripheral arterial, venous, neurovascular and biliary stents, which was sold to Cordis, while a Division of Johnson & Johnson in March 2013. Mr. Cantrell served as a director of Vyrix from February 2014 to April 2015. Mr. Cantrell’s experience in consulting and executive management within the pharmaceutical industry led to the conclusion that he should serve as a member of our Board of Directors.
Carl C. Dockery – Director
Carl Dockery joined our Board of Directors in April 2016. Mr. Dockery is a financial executive with 30 years of experience as an executive in the insurance and reinsurance industry and more recently since 2006 as the founder and president of a registered investment advisory firm, Alpha Advisors, LLC. Mr. Dockery’s career as an insurance executive began in 1988 as an officer and director of two related and closely held insurance companies, including serving as secretary of Crossroads Insurance Co. Ltd. of Bermuda and as vice president of Gulf Insurance Co. Ltd. of Grand Cayman. Familiar with the London reinsurance market, in the 1990s, Mr. Dockery worked at Lloyd’s and the London Underwriting Centre brokering various types of reinsurance placements. Mr. Dockery served as a director of CytoDyn Inc. (OTCQB: CYDY), a biotechnology company, from September 2014 until September 2019. Mr. Dockery graduated from Southeastern University with a Bachelor of Arts in Humanities. Mr. Dockery’s financial expertise and experience, as well as his experience as a director of a publicly traded biopharmaceutical company led to the conclusion that he should serve as a member of our Board of Directors.
John A. Donofrio, Jr. – Director
John Donofrio joined our Board of Directors in July 2016. He is a senior pharmaceutical executive with 28 years of experience in industry including a broad range of areas in finance, including consolidated financial reporting, international accounting and internal controls, financial systems development and implementation, cost accounting, inventory management, supply chain, transfer pricing, budget and forecast planning, integration of mergers and acquisitions and business development. Since March 2019, he has served as the President of EPI Health, a privately-held specialty pharmaceutical company commercializing products in the dermatology market. He previously served as Chief Financial Officer at TrialCard from March of 2018 to March 2019. TrialCard is a technology-driven pharmaceutical services company providing patient access and support programs to the pharmaceutical and biotechnology industries. Prior to joining TrialCard, Mr. Donofrio was the Chief Financial Officer and Head of North American Business Development for Merz North America, or Merz, from August 2013 to March 2018. Merz is a specialty healthcare company that develops and commercializes innovative treatment solutions in aesthetics, dermatology and neurosciences in the United States and Canada. At Merz, Mr. Donofrio was accountable for financial performance, cost management, internal controls, business development and strategic business planning and analysis for the finance organization in North America. Prior to joining Merz, Mr. Donofrio served as Vice President, Stiefel Global Finance, U.S. Specialty Business and Puerto Rico for Stiefel, a GlaxoSmithKline plc company from July 2009 to July 2013. In that role, Mr. Donofrio was responsible for the financial strategy, management reporting, and overall control framework for the Global Dermatology Business Unit. He was also the Senior Finance Partner accountable for the U.S. Specialty Business Units of GlaxoSmithKline plc. Mr. Donofrio served as a director of Vyrix from February 2014 to April 2015. Mr. Donofrio holds a degree in Accounting from North Carolina State University. Mr. Donofrio’s financial expertise and experience in the pharmaceutical industry led to the conclusion that he should serve as a member of our Board of Directors.
Michael E. Macaluso – Director
Michael Macaluso joined our Board of Directors in April 2015. Mr. Macaluso is also the Chairman and Chief Executive Officer of Ampio. Mr. Macaluso has been a member of Ampio’s board of directors since March 2010 and Ampio’s Chief Executive Officer since January 2012. Mr. Macaluso served in the roles of President and Chief Executive Officer of Isolagen, Inc. (AMEX: ILE) from June 2001 until September 2004. Mr. Macaluso also served on the Board of Directors of Isolagen from June 2001 until April 2005. From October 1998 until June 2001, Mr. Macaluso was the owner of Page International Communications, a manufacturing business. Mr. Macaluso was a founder and principal of International Printing and Publishing, a position Mr. Macaluso held from 1989 until 1997, when he sold that business to a private equity firm. Mr. Macaluso’s experience in executive management within the pharmaceutical industry,
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monetizing company opportunities, and corporate finance led to the conclusion that he should serve as a member of our Board of Directors.
Richard Eisenstadt – Chief Financial Officer, Secretary, and Treasurer
Richard Eisenstadt has served as our Chief Financial Officer, Secretary and Treasurer since March 31, 2021. Prior to joining us, Mr. Eisenstadt served as Chief Financial Officer from May 2014 to March 2021 of Neos Therapeutics, Inc. Mr. Eisenstadt served as Chief Financial Officer of ArborGen Inc. from January 2013 to May 2014, and as Vice President of Finance and Chief Financial Officer of Tranzyme, Inc., now part of Mallinckrodt Pharmaceuticals (NYSE: MNK) from June 2003 to December 2012. He previously held financial leadership positions at Cogent Neuroscience, Inc. and Nimbus CD International, Inc. Mr. Eisenstadt received his M.B.A. from James Madison University and his B.A. in Economics from the University of North Carolina, Chapel Hill.
Family Relationships
Jarrett T. Disbrow, our Executive VP, Corporate Operations, is the brother of Joshua R. Disbrow, our Chief Executive Officer and a director. There are no other family relationships among or between any of our other current or former executive officers and directors.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any legal proceeding in the past 10 years that would require disclosure under Item 401(f) of Regulation S-K promulgated under the Securities Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires our officers and directors and persons who own more than 10% of our outstanding common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These officers, directors and stockholders are required by regulations under the Securities Exchange Act to furnish us with copies of all forms they file under Section 16(a).
Based solely on our review of the copies of forms we have received, we believe that all such required reports have been timely filed.
Code of Ethics
The information required by this Item regarding our Code of Ethics is found in Part I, Item 1, under the caption “Code of Ethics.”
Board Committees
Our Board has established an Audit Committee, Compensation Committee and a Nominating and Governance Committee. Our Audit Committee consists of Mr. Donofrio (Chair), Mr. Macaluso and Mr. Dockery. Our Compensation Committee consists of Mr. Macaluso (Chair), Mr. Cantrell, Mr. Dockery and Mr. Donofrio. Our Nominating and Governance Committee consists of Mr. Dockery (Chair), Mr. Cantrell and Mr. Donofrio. The independence of our directors is discussed in Part III, Item 13 under the caption “Director Independence.”
Each of the above-referenced committees operates pursuant to a formal written charter. The charters for these committees, which have been adopted by our Board, contain a detailed description of the respective committee’s duties and responsibilities and are available on our website at http://www.aytubio.com under the “Investor Relations—Corporate Governance” tab.
Our Board has determined Mr. Donofrio qualifies as an audit committee financial expert, as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.
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Stockholder Proposals
Our bylaws establish procedures for stockholder nominations for elections of directors and bringing business before any annual meeting or special meeting of stockholders. A stockholder entitled to vote in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder’s intent to make such nomination or nominations has been delivered to our Corporate Secretary at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary of the prior year’s annual meeting. In the event that the date of the annual meeting is more than 30 days before or more than 60 days after the anniversary date of the prior year’s annual meeting, the stockholder notice must be given not more than 120 days nor less than the later of 90 days prior to the date of the annual meeting or, if it is later, the 10th day following the date on which the date of the annual meeting is first publicly announced or disclosed by us. These notice deadlines are the same as those required by the SEC’s Rule 14a-8.
Pursuant to the bylaws, a stockholder’s notice must set forth among other things: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder; and (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made.
There have been no changes to these nominating procedures since the adoption of the bylaws.
Item 11.Executive Compensation
Executive Compensation
In accordance with Item 402 of Regulation S-K promulgated by the SEC, we are required to disclose certain information regarding the makeup of and compensation for our company’s directors and named executive officers.
In establishing executive compensation, our Board is guided by the following goals:
Compensation of Directors
Our current compensation package for non-employee directors, effective July 1, 2020, consists of: an annual cash retainer of $70,000 for each non-executive Board chair, $40,000 for each other director, $20,000 for the committee chair of the Audit and Compensation Committees, $10,000 for each other member of the Audit and Compensation Committees, $10,000 for the committee chair of the Nominating and Governance committee, and $5,000 for each other member of the Nominating and Governance committee; a grant of 6,500 restricted shares of stock upon appointment to the board; and an annual stock option grant of 1,500 shares thereafter.
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The following table provides information regarding all compensation paid to non-employee directors of Aytu during the fiscal year ended June 30, 2021.
Fees Earned All Other
or Paid in Compensation
Name Cash (1) Total
Steven J. Boyd (2)(3)(4) $ — $ — $ —
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Executive Officer Compensation
The following table sets forth all cash compensation earned, as well as certain other compensation paid or accrued for the years ended June 30, 2021 and 2020 to each of the following named executive officers.
Change in
Pension
Value and
Non-Equity Nonqualified
Incentive Deferred
Position Year ($) ($) ($) ($)(1) ($) ($) ($) Total ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Named Executive Officers:
Joshua R. Disbrow
Richard Eisenstadt (1)
and Treasurer since April 2021
David A. Green (2)
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Our executive officers are reimbursed by us for any out-of-pocket expenses incurred in connection with activities conducted on our behalf. Executives are reimbursed for business expenses directly related to Aytu business activities, such as travel, primarily for business development as we grow and expand our product lines. On average, each executive incurs between $1,000 to $3,000 of out-of-pocket business expenses each month. The executive management team meets weekly and determines which activities they will work on based upon what we determine will be most beneficial to our company and our shareholders. No interest is paid on amounts reimbursed to the executives.
Outstanding Equity Awards at Fiscal Year-End 2021
The following table contains certain information concerning unexercised options for the Named Executive Officers as of June 30, 2021.
Option Awards Stock Awards
Equity
Equity Incentive
Incentive Plan
Plan Awards:
Awards: Market
Equity Number or Payout
Incentive Number of Value of
Plan of Market Unearned Unearned
Awards: Shares Value of Shares, Shares,
Securities Securities of of Stock Units of Other Other
Underlying Underlying Securities That Stock Rights Rights
Unexercised Unexercised Underlying Have That That That
Name (#) (#) (#) Price ($) Date (#) (1) (#) ($)
Named Executive Officers:
— — — — — 750 3,758 — —
— — — — — 48 240 — —
Richard Eisenstadt — — — $ — — 510 $ 2,555 — $ —
Chief Financial Officer — — — — — 5,440 27,254 — —
Total — — — $ 60,950 $ 305,359 — $ —
Former Chief Financial Officer
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Employment Agreements
We entered into an employment agreement with Joshua Disbrow in connection with his employment as our Chief Executive Officer. The agreement is for a term of 24 months beginning on April 16, 2015, subject to termination by us with or without Cause or as a result of officer’s disability, or by the officer with or without Good Reason (as defined below). Mr. Disbrow is entitled to receive $330,000 in annual salary, plus a discretionary performance bonus with a target of 125% of his base salary. Mr. Disbrow is also eligible to participate in the benefit plans maintained by us from time to time, subject to the terms and conditions of such plans. On April 7, 2021, we extended this agreement for another 24 months.
We entered into an employment agreement with Richard Eisenstadt, effective March 31, 2021, to serve as our Chief Financial Officer. The agreement is subject to termination by us with or without Cause (as defined below) or as a result of Mr. Eisenstadt’s disability, or by Mr. Eisenstadt with or without Good Reason (as defined below). Mr. Eisenstadt is entitled to receive $400,000 in annual salary, plus a discretionary performance bonus with a target of 40% of his base salary, based on his individual achievements and company performance objectives established by the board or the compensation committee in consultation with Mr. Eisenstadt. Mr. Eisenstadt is also eligible to participate in the benefit plans maintained by us from time to time, subject to the terms and conditions of such plans.
We entered into an employment agreement with David A. Green, effective December 18, 2017, to serve as our Chief Financial Officer. The agreement is subject to termination by us with or without Cause (as defined below) or as a result of Mr. Green’s disability, or by Mr. Green with or without Good Reason (as defined below). Mr. Green is entitled to receive $250,000 in annual salary, plus a discretionary performance bonus with a target of 50% of his base salary, based on his individual achievements and company performance objectives established by the board or the compensation committee in consultation with Mr. Green. Mr. Green is also eligible to participate in the benefit plans maintained by us from time to time, subject to the terms and conditions of such plans. Effective March 31, 2021, Mr. Green resigned from his position with the Company.
On July 1, 2020, we entered into employment agreements with Joshua Disbrow (the “CEO Amendment”) and David Green (the “Former CFO Amendment”) The material terms of the respective amendments are as follows.
CEO Amendment
● Effective January 1, 2021, increase base salary to $590,000
● Granted 100,000 options on terms set forth in a separate option agreement
Former CFO Amendment
● Effective June 1, 2020, increase base salary to $375,000
● Effective January 1, 2021, increase base salary to $400,000
● Granted 100,000 options on terms set forth in a separate option agreement
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The CEO Amendment and the former CFO Amendment are filed as exhibits to this Form 10-K. The foregoing description of the CEO Amendment and the former CFO Amendment is qualified in its entirety by reference to the text of the CEO Amendment and the former CFO Amendment as attached to this Form 10-K.
Payments Provided Upon Termination for Good Reason or Without Cause
Pursuant to the employment agreements, in the event employment is terminated without Cause by us or the officer terminates his employment with Good Reason, we will be obligated to pay him any accrued compensation and a lump sum payment equal to two times his base salary in effect at the date of termination, as well as continued participation in the health and welfare plans for up to two years. All vested stock options shall remain exercisable from the date of termination until the expiration date of the applicable award. So long as a Change in Control is not in effect, then all options which are unvested at the date of termination Without Cause or for Good Reason shall be accelerated as of the date of termination such that the number of option shares equal to 1/24th the number of option shares multiplied by the number of full months of such officer’s employment shall be deemed vested and immediately exercisable by the officer. Any unvested options over and above the foregoing shall be cancelled and of no further force or effect and shall not be exercisable by such officer.
“Good Reason” means, without the officer’s written consent, there is:
“Cause”, means:
● gross negligence in performing any of his duties;
● willful and deliberate violation of any of our policies;
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Payments Provided Upon a Change in Control
In the event of a Change in Control of us, all stock options, restricted stock and other stock-based grants granted or may be granted in the future by us to the officers will immediately vest and become exercisable.
“Change in Control” means: the occurrence of any of the following events:
Our only obligation to Joshua Disbrow and Richard Eisenstadt had a Change in Control occurred as of June 30, 2021, would be the acceleration of the vesting of all equity securities held by them at that date. On June 30, 2021, the closing price of our common stock was below the exercise price for all of the options held by Joshua Disbrow and therefore there would have been no economic benefit to them upon the acceleration of vesting of those options. RSU acceleration is now a part of our contracts.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information with respect to the beneficial ownership of our common stock as of August 31, 2021 for:
● each beneficial owner of more than 10% of our outstanding common stock;
● each of our director and named executive officers; and
● all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include common stock that can be acquired within 60 days of August 31, 2021. The percentage ownership information shown in the table is based upon 27,551,912 shares of common stock outstanding as of August 31, 2021.
Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to
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applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options and warrants held by that person that are immediately exercisable or exercisable within 60 days of August 31, 2020. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*). The information in the tables below are based on information known to us or ascertained by us from public filings made by the stockholders. Except as otherwise indicated in the table below, addresses of the director, executive officers and named beneficial owners are in care of Aytu BioPharma, Inc., 373 Inverness Parkway, Suite 206, Englewood, Colorado 80112.
Number of Percentage of
Shares Shares
Beneficially Beneficially
Owned Owned
5% Stockholders
Stonepine Capital Management, LLC and related entities(1) 1,398,776 5.1 %
Non-employee Directors
Named Officers
Richard Eisenstadt(7) 7,784 *
* Represents beneficial ownership of less than 1%.
(5)Consists of (i) 203,071 restricted shares, and (iii) 4,004 shares of common stock issuable upon the exercise of vested options..
(7) Consists of 7,784 shares of common stock.
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Item 13.Certain Relationships, Related Transactions, and Director Independence
Related Party Transactions
We describe below all transactions and series of similar transactions, other than compensation arrangements, during the last three fiscal years, to which we were a party or will be a party, in which:
● the amounts involved exceeded or will exceed $120,000; and
Tris Pharmaceutical, Inc.
On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”). On November 1, 2019, the Company acquired the rights to Karbinal as a result of the acquisition of the Pediatric Portfolio from Cerecor, Inc. (See Notes 4 and 16). Mr. Ketan Mehta serves as a Director on the Board of Directors of the Company, and is also the Chief Executive Officer of Tris Pharma, Inc. (“Tris”). During the years ended June 30, 2021 and 2020, the Company paid Tris approximately $3.2 and $1.3 million, respectively for a combination of royalty payments, inventory purchases and other payments as contractually required. The Company’s liabilities, including accrued royalties, contingent consideration and fixed payment obligations were $19.7 million and $22.9 million as of June 30, 2021 and 2020, respectively. In October 2020, the Company paid Tris approximately $1.6 million related to its Karbinal fixed payment obligation. On March 19, 2021, Mr. Ketan Mehta resigned as a Director on the Board of the Company, and Tris will no longer be considered a related party in the future.
Review, Approval or Ratification of Transactions with Related Persons
Effective upon its adoption in July 2016, pursuant to the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving all related party transactions as defined under Item 404 of Regulation S-K, after reviewing each such transaction for potential conflicts of interests and other improprieties. Our policies and procedures for review and approval of transactions with related persons are in writing in our Code of Conduct and Ethics available on our website at http://www.aytubio.com under the “Investor Relations—Corporate Governance” tab.
Prior to the adoption of the Audit Committee Charter, and due to the small size of our company, we did not have a formal written policy regarding the review of related party transactions, and relied on our Board of Directors to review, approve or ratify such transactions and identify and prevent conflicts of interest. Our Board of Directors reviewed any such transaction in light of the particular affiliation and interest of any involved director, officer or other employee or stockholder and, if applicable, any such person’s affiliates or immediate family members.
Director Independence
Our common stock is listed on the NASDAQ Capital Market. Therefore, we must comply with the exchange rules regarding director independence. Audit Committee members must satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, for listed companies. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
Six of our seven directors are independent under the definition of NASDAQ. Josh Disbrow is not independent under either definition due to being an executive officer of our Company.
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Item 14. Principal Accountant Fees and Services
Plante Moran, PLLC, or Plante Moran, (formerly known as EKS&H LLLP) has served as our independent auditor since April 2015 and has been appointed by our Audit Committee to continue as our independent auditor for the fiscal year ending June 30, 2021.
The following table presents aggregate fees for professional services rendered by our independent registered public accounting firm, Plante Moran, for the audit of our annual financial statements for the respective periods.
Year Ended June 30,
(In thousands)
Audit related fees* 63 68
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PART IV
Item 15.Exhibits and Consolidated Financial Statement Schedules
(a)(1)Financial Statements
The following documents are filed as part of this Form 10-K, as set forth on the Index to the Consolidated Financial Statements found on page F-1.
● Reports of Independent Registered Public Accounting Firm
● Consolidated Balance Sheets as of June 30, 2021 and 2020
● Notes to Consolidated Financial Statements
(a)(2)Financial Statement Schedules
Not Applicable.
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(a)(3)Exhibits
ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
3.8 Amended and Restated Bylaws. 8-K 06/09/15 3.2
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ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
4.9 Form of Pre-Funded Purchase Warrant. 8-K 03/13/20 4.1
4.10 Form of Placement Agents Warrant. 8-K 03/13/20 4.2
4.12 Form of Placement Agents Warrant. 8-K 03/13/20 4.2
4.15 Form of Wainwright Warrant. 8-K 07/02/20 4.1
4.16 Form of Underwriter's Warrant. 8-K 12/14/20 4.1
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ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
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ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
10.36 Independent Contractor Services Agreement. 8-K 05/02/19 10.1
10.41 Form of Contingent Value Rights Agreement. 8-K 09/18/19 10.1
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ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
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ExhibitNo. Description Registrant’sForm Date Filed ExhibitNumber FiledHerewith
10.77 Form of Aytu Stockholder Voting Agreement 8-K 12/10/20 10.4
10.78 Form of Neos Stockholder Voting Agreement 8-K 12/10/20 10.5
21.1 List of Subsidiaries. X
24.1 Power of Attorney (contained on signature page hereto) X
101 SCH Inline XBRL Taxonomy Schema Linkbase Document X
101 CAL Inline XBRL Taxonomy Calculation Linkbase Document X
101 DEF Inline XBRL Taxonomy Definition Linkbase Document X
101 LAB Inline XBRL Taxonomy Labels Linkbase Document X
101 PRE Inline XBRL Taxonomy Presentation Linkbase Document X
† Indicates is a management contract or compensatory plan or arrangement.
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Item 16.Form 10-K Summary
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AYTU BIOPHARMA, INC.
Date: September 28, 2021 By: /s/ Joshua R. Disbrow
Joshua R. Disbrow
Chairman and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
We the undersigned directors and officers of Aytu BioPharma, Inc. (the “Company”), hereby severally constitute and appoint Joshua R. Disbrow and Richard Eisenstadt, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our names in the capacities indicated below, to file any and all amendments to this Annual Report on Form 10‐K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‐in‐fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys‐in‐fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on September 28, 2021.
Signature Title
/s/ Joshua R. Disbrow Chairman and Chief Executive Officer
Joshua R. Disbrow (Principal Executive Officer)
/s/ Richard I. Eisenstadt Chief Financial Officer
Richard I. Eisenstadt (Principal Financial and Accounting Officer)
Director
Michael E. Macaluso
/s/ Carl C. Dockery Director
Carl C. Dockery
/s/ John A. Donofrio, Jr. Director
John A. Donofrio, Jr.
/s/ Gary V. Cantrell Director
Gary V. Cantrell
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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AYTU BIOPHARMA, INC.