AYTU BIOPHARMA, INC

Previous wording

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.

Current wording

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 and six months ended December 31, 2024, and our financial condition as of December 31, 2024. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and notes thereto.

Previous wording

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.

Current wording

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 positive 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.

Previous wording

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.

Current wording

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 various product commercialization resources. 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.

Previous wording

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.

Current wording

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 significant 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.

Previous wording

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.

Current wording

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 timely filed a patent infringement lawsuit on December 11, 2024, 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.

Previous wording

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

Current wording

The results of operations for the three and six months ended December 31, 2024, compared to the three and six months ended December 31, 2023, is as follows:

Previous wording

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

Current wording

Net revenue by portfolio for the three and six months ended December 31, 2024, compared to the three and six months ended December 31, 2023, is as follows:

Previous wording

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.

Current wording

During the six months ended December 31, 2024, net revenue decreased by $3.8 million, or 10%, compared to the same period ended December 31, 2023, primarily due to a decrease in net revenue from the Pediatric Portfolio driven by payer changes last fiscal year that negatively affected prescription coverage and a decrease in ADHD Portfolio net revenue partially offset by a $3.3 million increase in net revenue in the first quarter of fiscal 2025 related to a decrease in estimated variable consideration as a result of successful negotiations with a vendor.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, gross profit decreased by $3.8 million, or 26% and $4.9 million, or 18%, compared to the same periods ended December 31, 2023, respectively. Gross profit percentage was 66% and 69% for the three and six months ended December 31, 2024, compared to 78% and 76% for the same periods ended December 31, 2023, respectively. The decrease in gross profit percentage is primarily related to increased cost of sales for our ADHD Portfolio inventory as we sell through self-manufactured inventory burdened with certain fixed costs associated with its manufacture, which were capitalized into inventory costs in prior periods and is expected to normalize in the coming quarters as we finish selling through our self-manufactured inventory.

Previous wording

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.

Current wording

During the three months ended December 31, 2024, selling and marketing expense was relatively flat compared to the same period ended December 31, 2023, and during the six months ended December 31, 2024, selling and marketing expense decreased by $0.4 million, or 3%, compared to the same period ended December 31, 2023. Selling and marketing expense decreases are primarily driven by reduced commission expense and variable commercial marketing program fees in response to lower revenue, partially offset by increases in labor and service costs.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, general and administrative expense decreased by $0.4 million, or 7% and $1.5 million, or 14% compared to the same periods ended December 31, 2023. The decrease is primarily a result of continued cost reduction efforts and improved operational efficiencies.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, research and development expense was relatively flat compared to the same periods ended December 31, 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, for which we have indefinitely suspended clinical development.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, amortization expense of intangible assets, excluding amounts included in cost of sales, was relatively consistent compared to the same periods ended December 31, 2023.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, we incurred $1.3 million and $2.1 million of restructuring costs, respectively, related to our previously announced operational realignment and related costs. During the three and six months ended December 31, 2023, no restructuring costs were incurred.

Previous wording

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

Current wording

During the three and six months ended December 31, 2024, other income, net was relatively consistent compared to the same periods ended December 31, 2023.

Previous wording

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.

Current wording

During the three and six months ended December 31, 2024, interest expense decreased by $0.2 million, or 15% and $0.5 million, or 19%, compared to the same periods ended December 31, 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.

Previous wording

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.

Current wording

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 and six months ended December 31, 2024, we recognized an unrealized gain of $3.0 million and $5.9 million, respectively, from the fair value adjustment primarily driven by a decrease in our stock price during the three and six months ended December 31, 2024. For the three and six months ended December 31, 2023, we recognized an unrealized loss of $0.6 million and $6.5 million, respectively, from the fair value adjustment primarily driven by an increase in our stock price during the three and six months ended December 31, 2023.

Previous wording

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.

Current wording

For income (loss) from continuing operations we recorded an income tax benefit of $0.3 million, which represented an effective tax rate of negative 74.1% and income tax expense of $0.8 million, which represented an effective tax rate of 55.8%, for the three months ended December 31, 2024, and 2023, respectively. For income (loss) from continuing operations we recorded an income tax expense of $0.1 million, which represented an effective tax rate of 6.5% and income tax expense of $0.8 million, which represented an effective tax rate of negative 12.8% for the six months ended December 31, 2024, and 2023, respectively. These effective tax rates were 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, the divestiture of our Consumer Health business that occurred during the first quarter of fiscal 2025 and changes to our first quarter of fiscal 2025 projections, which resulted in an income tax benefit for the current quarter.

Previous wording

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

Current wording

The following table shows cash flows for the six months ended December 31, 2024, and 2023:

Previous wording

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.

Current wording

Net cash provided by (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.

Previous wording

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.

Current wording

During the six months ended December 31, 2024, net cash provided by operating activities totaled $1.7 million, which was primarily the result of an increase in accounts payable and accrued liabilities and a decrease in inventories, partially offset by increases in accounts receivable, prepaid expenses and other current assets and cash used in operations (net income of $2.3 million offset primarily by non-cash depreciation, amortization and accretion, stock compensation expense and derivative warrant liabilities adjustment).

Previous wording

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 (seeNote 2 – Summary of Significant Accounting Policies andNote 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).

Current wording

During the six months ended December 31, 2023, net cash used in operating activities totaled $0.4 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 (seeNote 2 – Summary of Significant Accounting Policies andNote 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).

Previous wording

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.

Current wording

Net cash provided by investing activities for the six months ended December 31, 2024, was driven by cash received from the sale of fixed assets, partially offset by cash payments for fixed asset purchases.

Previous wording

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

Current wording

Net cash used in investing activities was nominal during the six months ended December 31, 2023.

Previous wording

Net Cash Used in Operating Activities

Current wording

Net Cash Used In Financing Activities

Previous wording

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.

Current wording

Net cash used in financing activities of $1.8 million during the six months ended December 31, 2024, was primarily from payments made to fixed payment arrangements and payments made on borrowings, partially offset by net proceeds received from the revolving credit facility.

Previous wording

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.

Current wording

Net cash used in financing activities of $2.9 million during the six months ended December 31, 2023, was primarily from payments made to fixed payment arrangements and net payments made on revolving credit facility.

Previous wording

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.

Current wording

In May 2022, we entered into the Tuzistra License Agreement. Pursuant to such termination, as of December 31, 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.

Previous wording

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.

Current wording

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 December 31, 2024, the Tris Karbinal Agreement accrued fixed payment arrangement balance was $1.2 million recorded in other current liabilities on the consolidated balance sheet.

Previous wording

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.

Current wording

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. We 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 milestone payments payable to these parties.

Previous wording

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.

Current wording

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 critical accounting estimates, refer to our 2024 Form 10-K.