Aytu BioPharma(AYTU) - 2019 Q4 - Annual Report

Part I Business Aytu BioScience commercializes a portfolio of novel pharmaceutical and diagnostic products through a strategy of sales growth and asset acquisition Company Overview and Strategy The company's business model focuses on acquiring and commercializing novel products, supported by a four-pronged growth strategy - The company's business model is to acquire and commercialize novel pharmaceutical products, with a current portfolio of four FDA-approved products and one diagnostic system[13][14] - Aytu's four-pronged strategy includes growing U.S. product sales, expanding the MiOXSYS system ex-U.S, seeking FDA clearance for MiOXSYS, and acquiring new assets[31][32][33] Products and Markets The product portfolio targets large U.S. and global markets for testosterone replacement, cough, insomnia, and male infertility diagnostics Key Products and Target Markets | Product | Indication | Market Size | Key Feature | | :--- | :--- | :--- | :--- | | Natesto® | Testosterone Replacement | $1.8 billion U.S. market | Only TRT delivered via nasal gel, no black box warning for transference | | Tuzistra® XR | Cough (Antitussive) | >$3 billion U.S. market | Only FDA-approved 12-hour codeine-based antitussive | | ZolpiMist™ | Insomnia | $1.8 billion U.S. market | Only oral spray formulation of zolpidem tartrate | | MiOXSYS® | Male Infertility Diagnostic | Global market to exceed $4.7B by 2025 | Rapid, point-of-care system to measure oxidative stress in semen. CE marked, seeking U.S. FDA clearance | Government Regulation and Intellectual Property Products are subject to extensive FDA and DEA regulation, with market exclusivity protected by licensed and owned patent portfolios - Natesto®, Tuzistra® XR, and ZolpiMist™ are regulated as controlled substances by the DEA (Schedule III and IV), requiring stringent compliance[48][180] - The MiOXSYS® system is protected by a robust patent portfolio with 44 issued patents and 18 pending applications in the U.S. and key foreign jurisdictions[60][61] - The company has exclusive U.S. licenses for Natesto® (patents to 2024), Tuzistra® XR (patents to 2029), and ZolpiMist™[27][56][59] Competition and Manufacturing The company faces intense competition from large pharmaceutical firms and outsources all product manufacturing to cGMP-compliant partners - The company competes against large, well-resourced pharmaceutical companies, including AbbVie (AndroGel) for Natesto and generic manufacturers for ZolpiMist[69][70][72] - Aytu's business strategy is to use cGMP-compliant contract manufacturers for all clinical and commercial supplies[77][78][79][80] Risk Factors Key risks include a history of net losses, need for capital, intense competition, and reliance on third-party manufacturers and licensors - The company has a history of losses, with a net loss of $27.1 million for the year ended June 30, 2019, and may need to raise additional funding[87][90] - Natesto, Tuzistra XR, and ZolpiMist are controlled substances subject to strict DEA regulation, which could limit commercialization and impose significant compliance costs[179][180] - The company faces substantial competition from larger companies with greater financial and technical resources, placing it at a significant disadvantage[69][149] - Armistice Capital holds a significant ownership percentage (up to 40% potential) and has a board seat, giving it the ability to exert significant control[221][222] - The company relies on third-party manufacturers for all its products, creating risks related to regulatory compliance and supply disruptions[167][168] Unresolved Staff Comments The company reports no unresolved comments from SEC staff - None[262] Properties The company leases its principal executive offices in Englewood, Colorado and additional office space in Raleigh, North Carolina - The company maintains operating leases for its principal executive offices in Englewood, CO, and additional office space in Raleigh, NC[264][265] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is currently not party to any material legal proceedings[267] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[267] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'AYTU', and the company does not anticipate paying cash dividends - The company's common stock is listed on the NASDAQ Capital Market under the symbol 'AYTU'[269] Fiscal Year 2019 Common Stock Price Range ($) | Quarter | High | Low | | :--- | :--- | :--- | | Q1 (ended Sep 30, 2018) | $7.80 | $2.40 | | Q2 (ended Dec 31, 2018) | $3.23 | $0.68 | | Q3 (ended Mar 31, 2019) | $2.53 | $0.78 | | Q4 (ended Jun 30, 2019) | $2.61 | $1.50 | - The company has not paid cash dividends and does not intend to in the foreseeable future, planning to retain earnings for operations[274] Selected Financial Data This section is not applicable as the company is a smaller reporting company - Not applicable[276] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2019 revenue doubled to $7.3M, but net loss widened to $27.1M, raising substantial doubt about its ability to continue as a going concern Results of Operations Comparison (Years ended June 30) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $7,320,357 | $3,660,120 | +$3,660,237 | | Loss from Operations | $(16,846,637) | $(19,700,234) | +$2,853,597 | | Net Loss | $(27,131,908) | $(10,187,863) | -$(16,944,045) | - The 100% increase in product revenue in FY2019 was driven by higher Natesto sales and the launch of Tuzistra XR and ZolpiMist[285] - The significant increase in net loss was primarily due to a non-cash loss from the change in fair value of contingent consideration of $9.8 million in FY2019[283] Cash Flow Summary (Years ended June 30) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,831,377) | $(15,940,322) | | Net cash used in investing activities | $(1,061,985) | $(484,292) | | Net cash provided by financing activities | $19,075,062 | $22,659,599 | - The company has substantial doubt about its ability to continue as a going concern due to recurring losses and an accumulated deficit of $106.4 million[280][399] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company is a smaller reporting company - Not applicable[298] Financial Statements and Supplementary Data This section contains audited financial statements, with the auditor's report highlighting substantial doubt about the company's going concern status - The Report of Independent Registered Public Accounting Firm expresses substantial doubt about the Company's ability to continue as a going concern[376][383] - As of June 30, 2019, the company had cash and cash equivalents of $11.0 million and an accumulated deficit of $106.4 million[386] - Subsequent to the fiscal year-end, the company signed a definitive merger agreement with Innovus Pharmaceuticals, Inc[533] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[299] Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective as of June 30, 2019 - Management concluded that both disclosure controls and procedures and internal control over financial reporting were effective as of June 30, 2019[299][301] Other Information The company reports no other material information for this item - None[303] Part III Directors, Executive Officers and Corporate Governance This section details the company's leadership team, board structure, and corporate governance policies, including its code of ethics - The Board of Directors is comprised of five members, and key executive officers include Joshua R. Disbrow (CEO), Jarrett T. Disbrow (COO), and David A. Green (CFO)[305][306] - The Board has an Audit Committee, Compensation Committee, and Nominating and Governance Committee, with charters available on the company's website[320] - Director John A. Donofrio Jr. qualifies as an audit committee financial expert[321] Executive Compensation Executive compensation combines cash and equity, with CEO total compensation of $1.04 million in FY2019 and severance provisions in place FY 2019 Named Executive Officer Compensation | Name and Principal Position | Salary ($) | Bonus ($) | Stock Award ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Joshua R. Disbrow, CEO | 330,000 | 135,000 | 578,705 | 1,043,705 | | Jarrett T. Disbrow, COO | 250,000 | 105,000 | 438,413 | 793,413 | | David A. Green, CFO | 250,000 | 95,000 | 340,988 | 685,988 | - Non-employee director compensation includes an annual cash retainer ($25,000 base, $40,000 for chair) and stock awards (initial grant of 65,000 restricted shares)[325] - Executive employment agreements include a provision for a lump sum payment of two times base salary if terminated without cause or for good reason[339] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Armistice Capital, LLC is the largest beneficial owner with 57.06% of common stock as of August 31, 2019 Beneficial Ownership as of August 31, 2019 | Name | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | | :--- | :--- | :--- | | Armistice Capital, LLC | 16,504,008 | 57.06% | | Joshua Disbrow (CEO) | 492,830 | 2.81% | | Jarrett Disbrow (COO) | 377,256 | 2.15% | | David Green (CFO) | 274,580 | 1.57% | - Beneficial ownership is based on 17,688,071 shares of common stock outstanding as of August 31, 2019[345] Certain Relationships and Related Transactions, and Director Independence The company discloses significant transactions with affiliate Armistice Capital and reports that six of seven directors are independent - Armistice Capital is considered an affiliate and related party, holding a potential ownership stake of up to 40% of the company's common stock[353] - The company had a master services agreement with TrialCard Incorporated, where director John Donofrio was an executive officer until February 2019[354] - Six of the seven directors are independent under NASDAQ rules; CEO Josh Disbrow is not independent[358] Principal Accountant Fees and Services Total fees paid to the independent auditor, Plante Moran, PLLC, were $209,000 in FY2019 and $275,000 in FY2018 Accountant Fees | Fee Type | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Audit fees | $154,000 | $223,000 | | Audit-related fees | $55,000 | $52,000 | | Tax fees | $0 | $0 | | Total fees | $209,000 | $275,000 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and material contracts filed as part of the annual report - The report includes the company's consolidated financial statements and notes[364] - Key exhibits filed include the License and Supply Agreements for Natesto, ZolpiMist, and Tuzistra XR[368][369] Subsequent Events Post-fiscal year, the company amended its Natesto agreement and signed a definitive merger agreement to acquire Innovus Pharmaceuticals - On July 29, 2019, the company amended its License and Supply Agreement for Natesto with Acerus, which will assume regulatory and clinical responsibilities[530] - On September 12, 2019, Aytu signed a definitive agreement to merge with Innovus Pharmaceuticals, Inc. for up to $8 million in stock and $16 million in CVRs[533]