AYTU BioScience, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019. The filing’s financial statements are unaudited. The company is a specialty pharmaceutical business focused on products addressing hypogonadism, insomnia, and male infertility.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net product revenue | $1.432 million | $1.076 million |
| Cost of sales | $411,000 | $287,000 |
| Gross profit and margin | $1.021 million; 71.3% | $789,000; 73.3% |
| Operating expenses | $4.849 million | $5.432 million |
| Operating loss | $3.417 million | $4.356 million |
| Net loss | $3.446 million | $4.245 million |
| Operating cash used | $2.744 million | $4.218 million |
| Investing cash used | $303,000 | $0 |
Revenue grew approximately 33% year over year; management said Natesto revenue increased 44%. Gross product revenue was $2.320 million, reduced by $888,000 of discounts, coupons, fees, and other provisions, compared with $2.243 million gross revenue and $1.167 million of provisions in the prior-year quarter. Cost of sales rose faster than revenue, and gross margin declined about 2 percentage points.
Sales, general and administrative expense, including $254,000 of related-party co-pay program costs, was approximately $3.830 million, down from $4.618 million. Lower professional fees and occupancy, travel, and other costs drove the decrease; the filing cites an FDA waiver/refund of PDUFA fees. Research and development was $156,000 versus $141,000. Intangible amortization was $452,000 versus $386,000. Interest expense was $77,000; derivative income was $47,000, compared with $300,000 in the prior-year quarter.
Financial position and liquidity
At September 30, 2018, cash and cash equivalents were $3.965 million and restricted cash was $100,000, compared with $7.013 million and $100,000, respectively, at June 30. Current assets were $6.872 million and current liabilities $3.587 million. Total liabilities were $7.855 million, including $4.470 million of contingent consideration; the balance sheet reports no conventional borrowings. Accumulated deficit was $82.704 million. The company used $2.744 million in operating cash and ended the quarter with $4.065 million in total cash, cash equivalents, and restricted cash.
On October 9, 2018, after quarter-end, Aytu raised $15.2 million gross in a public offering of common and Series C preferred shares and warrants. Management said that, including this financing, it expected cash resources to fund operations into the first half of fiscal 2020, assuming projected revenue growth; additional capital could be needed thereafter. The filing also stated that existing cash was expected to cover fiscal 2019 operating requirements. These are management expectations, not guarantees.
Material changes, outlook, and risks
- Product sales growth and lower operating cash use improved the year-over-year results, but the company remained loss-making and dependent on financing.
- Management expected revenue to continue growing, aimed to reduce Natesto couponing and discounting, and expected operating expenses to remain approximately flat for the rest of fiscal 2019. It anticipated higher R&D spending for MiOXSYS and Natesto studies.
- Aytu adopted ASC 606 on July 1, 2018; adoption had no material effect on reported results or opening accumulated deficit.
- ZolpiMist, licensed in June 2018, added $116,000 of quarterly amortization. The company recorded $4.470 million of contingent consideration related to Natesto and ZolpiMist; these Level 3 estimates depend on projected revenues, payment probabilities, and discount rates. A ZolpiMist royalty payment of approximately $52,000 was expected for the quarter.
- Commitments included $625,000 for prescription database access, a $2.5 million Natesto milestone payment specified as payable even if the milestone is not reached, a $188,000 ZolpiMist supply order, and office lease obligations.
- On November 2, 2018, the company entered an exclusive U.S. license agreement for Tuzistra XR and a complementary product pending FDA approval. The agreement involved an upfront payment, 400,000 Series D preferred shares issued to TRIS, and ongoing royalties. A separate planned financing of up to $5 million was described in the filing as a strategic financing plan.
- Management warned that failure to achieve projected revenue growth or obtain acceptable additional financing could require reductions or delays in commercialization or R&D, or relinquishment of product rights. The company reported no material pending legal proceedings, no material changes to its prior annual-report risk factors, and no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether Natesto and other product sales grow as forecast, and whether couponing and discounts decline enough to improve net revenue and margins.
- Cash burn, actual runway after the October offering, and the company’s future need and ability to raise capital.
- The dilution and potential proceeds associated with Series C preferred shares and warrants, including their conversion and exercise terms.
- The expected timing, commercial costs, royalties, and regulatory status of ZolpiMist, Tuzistra XR, and the pending complementary product.
- The assumptions underlying contingent consideration and the timing of the $2.5 million Natesto commitment.