Aytu BioScience, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016. Although the request metadata refers to “2015 Q4,” this filing reports FY2016 and compares it with FY2015. The company filed the report on September 1, 2016.
Business context and reporting period
Aytu is a commercial-stage specialty healthcare company focused on urology. During FY2016 it marketed ProstaScint, a prostate-cancer imaging agent, and Primsol, an oral solution for urinary tract infections; it also recorded limited RedoxSYS/MiOXSYS sales and license revenue. Aytu acquired exclusive U.S. rights to Natesto in April 2016, with those rights effective July 1, 2016, and launched the product in July 2016, after the fiscal year-end. MiOXSYS had CE marking and Health Canada approval, but still required U.S. FDA clearance for clinical marketing.
Financial highlights
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $2.56 million | $0.26 million |
| Product and service revenue | $2.05 million | $0.18 million |
| License revenue | $0.51 million | $0.09 million |
| Cost of sales | $0.96 million | $0.09 million |
| Loss from operations | $(21.70) million | $(7.63) million |
| Net loss | $(28.18) million | $(7.72) million |
| Net loss per share | $(16.18) | $(10.07) |
| Net cash used in operating activities | $10.66 million | $6.63 million |
Product and service gross profit, calculated from reported product and service revenue less cost of sales, was approximately $1.09 million, or 53% of product and service revenue. This is not a company-wide gross margin, and the filing does not present a consolidated gross-margin percentage.
At June 30, 2016, cash and cash equivalents were $8.05 million; current assets were $10.12 million and current liabilities $10.10 million. Total liabilities were $14.26 million, including $5.38 million payable for Natesto and $3.87 million of contingent consideration. Stockholders’ equity was $10.09 million and accumulated deficit was $46.56 million. No convertible notes remained outstanding at year-end; they had converted to equity. The filing reports no off-balance-sheet arrangements.
Changes versus the prior comparable period
- Revenue rose to $2.56 million from $0.26 million, mainly reflecting the ProstaScint and Primsol acquisitions and expanded marketing. The comparison is affected by the timing of acquisitions and the April 2015 merger.
- Net loss widened to $28.18 million from $7.72 million. FY2016 included a $7.50 million impairment of Zertane, approximately $4.94 million of non-cash interest expense from a beneficial conversion feature, and a $0.97 million unrealized loss on the Acerus investment.
- Research and development expense increased to $6.13 million from $3.22 million, principally due to ProstaScint manufacturing-transfer costs. Sales, general and administrative expense increased to $8.83 million from $4.29 million, reflecting growth in staffing and commercial operations.
- Operating cash use increased to $10.66 million from $6.63 million. Investing activities used $5.30 million; financing activities provided $16.66 million. Cash at year-end rose by approximately $0.70 million.
- Gross product-sales provisions increased to 22.8% of gross product and service revenue from 1.1%, including discounts, fees, returns allowances and Medicaid rebates.
Outlook, commentary, risks and unusual items
- Going concern and funding: The independent auditor and management disclosed substantial doubt about Aytu’s ability to continue as a going concern. Management said year-end cash and expected operating cash flows would not sustain operations for more than one year. The company estimated cash needs of about $3 million per quarter and said it expected resources, assuming access to Lincoln Park financing, to support operations into FY2017’s second quarter. It planned to seek up to $12.5 million of additional FY2017 capital; availability was not assured.
- Financing and dilution: A May 2016 offering generated approximately $6.3 million net. A July 2016 agreement gave Aytu the right, subject to conditions, to sell up to an additional $10 million of stock to Lincoln Park over 36 months. The company may not be able to access the full amount, and sales could dilute shareholders.
- Commercial and development plans: Management planned to expand Natesto, ProstaScint and Primsol sales, pursue international distribution, and develop MiOXSYS toward U.S. FDA clearance. The filing gives no quantified revenue or earnings guidance. Completion of MiOXSYS studies depends on additional funding.
- Natesto commitments and risks: Natesto rights became effective after year-end. Aytu had $6 million of additional upfront payments due in FY2017 and potential sales-based milestone payments, up to $37.5 million in aggregate. Testosterone cardiovascular safety scrutiny, Schedule III controlled-substance requirements, reimbursement, supply and commercialization execution are material risks.
- Asset write-down: Aytu stopped developing Zertane because it lacked resources to complete trials before patent expiry, impaired the related $7.5 million in-process R&D asset and related patents, and recognized $426,000 of remaining deferred license revenue. It intended to seek a sale or out-license, with no assurance of proceeds.
- Concentration and execution: One customer represented 86% of FY2016 net revenue and 69% of year-end gross accounts receivable. ProstaScint manufacturing was being transferred to a new contractor; disruption could affect supply. Aytu also relied on third-party manufacturers and partners.
- Investment loss: The Acerus shares purchased for approximately $2.0 million were valued at $1.04 million at year-end, generating a reported $0.97 million unrealized loss.
Most important facts for investors to verify
- Current cash runway, actual cash burn, and whether Lincoln Park or other financing was accessed on acceptable terms.
- Progress toward the planned additional capital raise and the effects of any further equity issuance, warrants or dilution.
- Natesto sales after launch, reimbursement and prescription trends, supply arrangements, and payment of the remaining upfront consideration.
- Revenue and customer concentration trends, including whether reliance on the largest customer has declined.
- ProstaScint manufacturing-transfer status and the company’s ability to maintain adequate product supply.
- MiOXSYS FDA study requirements, funding, timeline and regulatory outcome.
- Whether Zertane was sold or licensed and whether any proceeds were realized.