Aytu BioScience, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019; filed February 13, 2020. The filing describes a specialty pharmaceutical business commercializing products in testosterone therapy, cough and cold, insomnia, male infertility, and pediatric care. Results are unaudited.
Financial performance and liquidity
- Revenue: $3.18 million for the quarter, up 77% from $1.80 million; $4.62 million for six months, up 43% from $3.23 million. Management attributed the increases primarily to the Cerecor pediatric portfolio acquired November 1, 2019.
- Profit and margins: Quarterly net loss was $0.21 million versus $4.66 million; six-month net loss was $5.14 million versus $8.10 million. The quarter included a $5.20 million gain from eliminating Natesto contingent consideration, so the reported quarterly loss does not reflect the underlying operating loss. Quarterly operating loss widened to $4.97 million from $4.55 million; six-month operating loss widened to $9.70 million from $7.97 million. Gross margin was approximately 80.9% for the quarter and 78.7% for six months, compared with 70.8% and 71.0% in the respective prior periods.
- Cash flow: Six-month operating cash use was $9.09 million, versus $7.05 million a year earlier; investing cash use was $5.95 million, including $4.5 million for the Cerecor acquisition and $1.35 million in Innovus bridge financing. Financing provided $9.26 million, chiefly from the October offering. Cash, cash equivalents, and restricted cash declined $5.78 million to $5.51 million.
- Balance sheet and obligations: At December 31, cash and cash equivalents were $5.26 million, current assets $18.34 million, and current liabilities $15.95 million. Total assets were $74.48 million, total liabilities $57.39 million, and stockholders’ equity $16.76 million. The balance sheet reports $26.06 million in fixed payment arrangements and $18.45 million in contingent consideration. The filing also identifies significant assumed pediatric-product payment, royalty, and rebate obligations; these are not all conventional borrowings.
- Share issuance: Common shares outstanding rose to 20.73 million from 17.54 million at June 30, 2019; preferred shares rose to 10.22 million from 3.59 million. The October financing generated approximately $9.3 million net proceeds and included warrants. Two million warrants were cashlessly exercised in January 2020.
Material changes and significant transactions
- Aytu acquired six Cerecor pediatric products for $4.5 million cash and approximately 9.8 million Series G preferred shares, while assuming related obligations. The preliminary purchase accounting recorded $22.7 million of product technology rights and $15.4 million of goodwill.
- The acquisition added substantial fixed and variable payments, including monthly payments and a $15 million balloon payment due in January 2021, as well as product royalties and minimum-payment commitments. The filing’s descriptions of certain assumed payment totals and variable-payment caps differ in places; investors should consult the detailed agreements and notes.
- Operating expenses rose 34% for the quarter and 28% for six months. Quarterly and six-month SG&A increased 29% and 35%, respectively, while intangible amortization also increased following the acquisition. Research and development expense declined, primarily due to lower MiOXSYS-related costs.
- The Natesto license amendment became effective December 1, 2019 and eliminated related revenue-based milestone liabilities, producing the $5.2 million non-operating gain.
Outlook, risks, and contingencies
- Management expected revenue to grow over the long term and anticipated modestly higher commercial costs as it integrated the pediatric portfolio. It also expected research and development spending to increase in fiscal 2020 for a MiOXSYS study. The filing provides no quantified revenue or earnings guidance.
- Going concern: Management stated that cash on hand was insufficient to cover potential net cash outflows for the twelve months following filing and disclosed substantial doubt about the company’s ability to continue as a going concern. It was pursuing refinancing of fixed obligations, discussions with lenders, and other funding strategies; none was assured. Failure to obtain capital could require cuts to commercial programs, staffing, or research, or renegotiation or relinquishment of product rights.
- The Innovus merger had been approved by both companies’ shareholders on February 13, 2020 and was expected to close February 14. Consideration included up to approximately 3.7 million Aytu common shares and up to $16 million in contingent value rights, payable in cash or stock if specified milestones are achieved. The filing discusses substantial integration, financing, dilution, debt-service, and milestone-achievement risks.
- The company reported that it was in compliance with Nasdaq stockholders’ equity requirements at December 31 after the October financing and Cerecor share issuance. It also noted ongoing dependence on capital markets and the risk of losing Nasdaq listing compliance.
- Other material risks include product commercialization and integration execution, royalty and minimum-sales commitments, potential impairment of acquired intangible assets and goodwill, and dilution from preferred stock, warrants, and merger consideration. The company reported no material pending legal proceedings and no material changes to its stated risk factors other than those described in the filing.
Important facts for investors to verify
- Cash runway and whether the company secured financing or refinanced the major fixed obligations, particularly the $15 million January 2021 payment.
- Actual revenue contribution, margins, and cash requirements of the acquired Cerecor products, including royalties, minimums, rebates, and returns.
- Final Cerecor purchase accounting and the assumptions supporting the acquired technology-rights and goodwill valuations.
- Completion and terms of the Innovus merger, any resulting debt and share issuance, and whether contingent value right milestones are achieved.
- Current fully diluted share count, including preferred-stock conversions, outstanding warrants, restricted stock, and merger-related securities.