Business context and reporting period
Aytu BioScience, Inc. is a commercial-stage specialty life sciences company focused on urology and women’s health products, including Natesto, ProstaScint, MiOXSYS/RedoxSYS and Fiera. This Form 10-Q covers the quarter and six months ended December 31, 2017—the company’s fiscal second quarter and first half of fiscal 2018. Financial statements are unaudited.
Key financial results
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.05 million | $794,000 | $2.13 million | $1.49 million |
| Cost of sales | $385,000 | $551,000 | $673,000 | $743,000 |
| Gross profit / margin* | $666,000 / 63.3% | $243,000 / 30.6% | $1.45 million / 68.4% | $749,000 / 50.2% |
| Operating loss | $(3.99) million | $(4.20) million | $(8.35) million | $(10.17) million |
| Net loss | $(3.67) million | $(4.82) million | $(7.92) million | $(10.54) million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(7.32) million | $(8.17) million |
*Gross profit and margin are calculated from reported revenue less cost of sales. Natesto generated the majority of revenue; management reported Natesto revenue growth of 429% year over year for the quarter and 281% for the six-month period. Net revenue reflects significant deductions from gross product sales: deductions were $977,000 for the quarter and $2.14 million for the six months.
Financial position, liquidity and capital
- At December 31, 2017, cash and cash equivalents were $3.91 million, with $76,000 of restricted cash. Current assets were $7.74 million and current liabilities were $4.80 million.
- Total liabilities were $15.83 million, including $8.01 million of acquisition-related contingent consideration and a $3.30 million warrant derivative liability. The filing does not report conventional borrowings on the balance sheet.
- Stockholders’ equity was $3.03 million; accumulated deficit was $76.99 million. Cash, cash equivalents and restricted cash rose by $3.11 million over the six months, primarily reflecting financing proceeds.
- The August 2017 offering generated $11.84 million gross and $10.44 million net cash proceeds after $1.40 million of issuance costs. It included 3.20 million common shares and warrants for approximately 6.31 million shares, generally exercisable at $3.60. Common shares outstanding were 4.89 million at December 31, compared with 824,831 at June 30, 2017.
Material changes and unusual items
- Revenue increased about 32% year over year for the quarter, while the net loss narrowed by $1.14 million. The six-month net loss narrowed by $2.62 million.
- Quarterly selling, general and administrative expense rose by $860,000 year over year, primarily due to labor and occupancy, travel and other costs associated with commercial staffing. Six-month SG&A declined by $277,000.
- Research and development expense was reported as a credit of $277,000 for the quarter and $137,000 for the six months, largely reflecting reversal of a previously accrued $398,000 liability. The company also cited its shift toward commercial products and plans to discontinue ProstaScint sales around mid-fiscal 2019, when the product expires.
- The Tax Cuts and Jobs Act resulted in a provisional $6.6 million tax expense from remeasuring deferred tax balances, fully offset by a reduction in the valuation allowance.
- The company recorded $818,000 of derivative income for the six months, while the newly issued warrants created a $3.30 million derivative liability at period-end. Results also include acquisition-related amortization and contingent-consideration accretion.
Outlook, risks and contingencies
Management stated that cash use had averaged about $3.2 million per quarter over the most recent four quarters and expected operating cash use to remain near historical levels. The company expected its existing cash to fund operations into the fourth quarter of fiscal 2018, when it anticipated needing additional capital. The filing explicitly states that substantial doubt exists about the company’s ability to continue as a going concern; management’s plans depend on revenue growth and obtaining financing, with no assurance financing will be available on favorable terms or at all.
Management expected cost of sales to rise with product revenue, research and development expense to decline in fiscal 2018, SG&A to remain approximately flat for the remainder of fiscal 2018, and amortization expense to remain flat for the remainder of the year. These are expectations, not guarantees. Potential Natesto milestone payments total up to $37.5 million; the filing lists $15.0 million of remaining milestone commitments and says the company anticipates the second and third milestone payments upon reaching the milestones. Nuelle earn-outs and other acquisition-related contingent obligations may also require cash and/or share payments. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether additional financing was obtained after the filing and on what terms, given the stated going-concern doubt and expected funding need in fiscal Q4 2018.
- Whether Natesto revenue growth translated into improved cash generation, and how product-sales deductions, payer access and commercial costs affected net revenue and margins.
- The potential dilution and accounting effects of the 6.31 million offering warrants, preferred-stock conversion rights and restricted-stock awards.
- The timing and likelihood of Natesto milestones, Nuelle earn-outs and other contingent consideration, including the resulting cash obligations.
- Whether the planned ProstaScint discontinuation, product expirations and adoption of new accounting standards affected subsequent results.