Aytu BioScience, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. Although the request metadata refers to “2017 Q4,” this filing is an annual report for FY2018, with FY2017 comparative results. Amounts below are U.S. dollars.
Business context
Aytu is a commercial-stage specialty pharmaceutical company focused on Natesto for hypogonadism, MiOXSYS for male infertility assessment, and, following a June 2018 license, ZolpiMist for short-term insomnia treatment. It operates a U.S. sales force and international distribution network. ZolpiMist was added late in the fiscal year; the company planned a U.S. sales-force launch in late 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net product revenue | $3.66 million | $3.22 million |
| Cost of sales | $2.05 million | $1.42 million |
| Gross profit / gross margin | $1.61 million / 44% | $1.80 million / 56% |
| Operating loss | $19.70 million | $20.13 million |
| Net loss | $10.19 million | $22.51 million |
| Cash used in operations | $15.94 million | $13.83 million |
| Cash provided by financing | $22.66 million | $10.19 million |
- Revenue increased about 14%; Natesto revenue increased 155%. Gross product and service revenue was $7.86 million before $4.20 million of deductions, including coupons, discounts, rebates and other allowances.
- FY2018 cost of sales included a $0.8 million inventory impairment. SG&A was $17.73 million, broadly level with FY2017; R&D fell 88% to $0.17 million. Intangible-asset impairment was $1.86 million, primarily related to discontinuing Fiera.
- The net loss improvement included $6.28 million of other gain and $3.98 million of derivative income, as well as lower interest expense. These non-operating items materially affected the comparison.
- At June 30, cash and cash equivalents were $7.01 million, with $0.10 million restricted; total current assets were $9.47 million and current liabilities $3.39 million, implying working capital of approximately $6.08 million. Total liabilities were $7.64 million, including $4.69 million of contingent consideration and $0.09 million of warrant derivative liability. The balance sheet does not show conventional interest-bearing debt.
- Cash used in investing was $0.48 million. The company raised net financing proceeds mainly through August 2017 and March 2018 equity/preferred-stock and warrant offerings, plus warrant exercises. This increased the share count and created potential dilution.
Changes, outlook and material risks
- Management said revenue had risen in each of the prior two fiscal years and expected further growth, while prioritizing Natesto, launching ZolpiMist, advancing MiOXSYS toward U.S. FDA clearance, and pursuing cash-flow breakeven. It anticipated R&D spending to rise in FY2019 for MiOXSYS and Natesto studies and SG&A to remain broadly consistent.
- The company reported substantial doubt about its ability to continue as a going concern: it had recurring losses, $7.1 million of cash, cash equivalents and restricted cash, and used an average of about $4.0 million of operating cash per quarter. Management expected to seek additional capital and believed financing would be available, but acknowledged there was no assurance. The auditor’s financial-statement opinion was unmodified and included a going-concern emphasis.
- In FY2018’s fourth quarter, Natesto net revenue rose 178% from the prior quarter to $805,212, while unit volume declined 12%. Management attributed the change largely to a patient-support program and eliminating company-funded $0 vouchers; coupons as a share of gross revenue declined to 23% in June from 62% in March. Sustained results are uncertain.
- Three wholesale customers represented 86% of FY2018 gross revenue in the MD&A table (the notes state 84%, an inconsistency to verify); the same three customers represented 81% of gross accounts receivable. Loss or payment delays from these customers could materially affect results.
- The company abandoned ProstaScint and Fiera in FY2018 and had previously sold Primsol; it did not expect FY2019 revenue from these products. The Fiera business was impaired after weak sales and the manufacturer stopped supporting it.
- ZolpiMist’s license required $400,000 upfront and a further $300,000 payment in July 2018, plus royalties of 20%, 15% and 10% over successive periods through May 2025. A 45,000-unit supply order was expected in FY2019. Natesto also carries a $2.5 million milestone commitment described as payable even if the specified sales milestone is not achieved, subject to stated exceptions.
- Key risks include ongoing cash burn and dependence on further financing; potential shareholder dilution; controlled-substance regulation of Natesto and ZolpiMist; reimbursement and market-acceptance uncertainty; reliance on third-party manufacturers and distributors; MiOXSYS’s need for FDA clearance and clinical work; and regulatory scrutiny of testosterone-therapy safety. The filing states no material legal proceedings were pending.
Important facts for investors to verify
- Current cash runway, subsequent financing needs and whether management’s funding plans have been executed.
- Whether Natesto’s post-voucher revenue improvement persists, including net sales, prescription volume, coupon/rebate deductions and payer access.
- ZolpiMist launch performance, supply availability, total license economics and royalty obligations.
- Timing, cost and FDA feedback for MiOXSYS studies and its U.S. regulatory pathway.
- Customer concentration and the filing’s inconsistent 84% versus 86% gross-revenue concentration disclosure.
- Potential dilution from outstanding warrants, preferred-stock conversions and other equity securities; the filing reports 1.88 million warrants outstanding at June 30, 2018 and 1.80 million common shares outstanding at August 31, 2018.