AYTU BIOSCIENCE, INC. — Form 10-Q Summary
Business context and reporting period. Aytu is a commercial-stage specialty life sciences company focused on urology and women’s health products. The filing covers the three months ended September 30, 2017, the first quarter of fiscal 2018 (although the request metadata labels the period “2017 Q1”). Results are unaudited.
Key financial results
| Metric | Quarter ended Sept. 30, 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $1.076 million | $698,000 |
| Cost of sales / gross profit | $287,000 / approximately $789,000 | $192,000 / approximately $506,000 |
| Gross margin | Approximately 73.3% | Approximately 72.5% |
| Operating expenses | $5.432 million | $6.664 million |
| Loss from operations | $4.356 million | $5.967 million |
| Net loss | $4.245 million | $5.724 million |
| Net loss per common share | $1.76 | $23.37 |
| Cash used in operating activities | $4.218 million | $5.332 million |
Revenue increased about 54% year over year; management attributed growth to Natesto sales, broader commercialization, and Fiera revenue following the Nuelle acquisition. Net loss narrowed about 26%. The filing reports no conventional borrowing balance; liabilities included $7.823 million of acquisition-related contingent consideration and a $3.818 million warrant derivative liability.
- Liquidity: September 30 cash and cash equivalents were $7.022 million, with another $75,000 in restricted cash. Current assets were $9.742 million and current liabilities $3.508 million. The cash-flow statement’s ending cash total of $7.097 million includes restricted cash.
- Cash flows and financing: Investing activities used no cash. Financing provided $10.437 million net, principally from an August offering that raised approximately $11.8 million gross and incurred $1.403 million of costs.
- Balance sheet: Total assets were $21.246 million, total liabilities $14.893 million, and stockholders’ equity $6.353 million. Accumulated deficit was $73.315 million.
Material changes and notable items
- Aytu issued 3.197 million common shares and 2,250 Series A preferred shares in the August financing, plus warrants to purchase approximately 6.315 million common shares. Preferred shares convert at $3.00 per common share; the offering materially increased potential dilution. The company reported 4.225 million common shares outstanding at quarter-end and 4.403 million as of November 1.
- Operating expenses fell about 18% year over year, principally due to lower stock-based compensation and lower occupancy, travel, and other costs. Research and development declined about 50% as the company shifted focus toward commercial products.
- In May 2017, Aytu acquired Nuelle, adding the Fiera women’s personal-care product. The acquisition includes revenue-based earn-outs and potential milestone payments of up to $24 million. Aytu also sold the Primsol business in March 2017; the filing states this was not presented as discontinued operations.
- ProstaScint intangible assets had been impaired in fiscal 2017. The company was evaluating strategic options for the product; related manufacturing and supply contracts remained on hold.
- Other income included $300,000 of derivative income from remeasurement of the warrant liability. The warrants were valued using Level 3 assumptions, including estimated volatility.
Outlook, risks, and contingencies
Management estimated that available resources would fund operations through fiscal 2018 and into the first half of fiscal 2019, when it expected to approach or reach cash-flow breakeven. This depends on continued sales growth and cost control; it is not assured. The company warned that future financing may be difficult or unavailable on acceptable terms and that it might need to delay or reduce commercialization or research programs if it cannot raise capital.
- Management expected cost of sales to rise with product sales, research and development expense to decline in fiscal 2018, general and administrative expense to remain approximately flat, and amortization expense to remain flat for the remainder of fiscal 2018.
- Contingent payments include Natesto sales milestones and Nuelle revenue and milestone earn-outs. The filing lists $16.358 million of commitments and contingencies, including a $15 million Natesto amount; timing and payment depend on contractual terms and, in part, sales milestones.
- The company reported no material pending legal proceedings, no material market-risk exposure identified, and effective disclosure controls. It cautioned that forward-looking statements are subject to risks and actual results could differ materially.
- After quarter-end, Aytu began trading on Nasdaq, extended its Englewood office lease, issued additional Nuelle-related shares, and issued 495,000 restricted shares to executives, directors, and consultants.
Important facts for investors to verify
- Whether product revenue growth—particularly Natesto and Fiera—can continue and translate into improved cash flow.
- Cash runway assumptions, operating cash burn, and the timing and likelihood of reaching cash-flow breakeven.
- The potential dilution and valuation effects of the 6.315 million offering warrants, preferred-stock conversion, and subsequent share issuances.
- The assumptions and possible cash impact of Natesto and Nuelle contingent consideration and other contractual commitments.
- Whether ProstaScint can remain commercially viable and whether further impairment or related costs may arise.