AYTU BioScience, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended December 31, 2018; filed February 7, 2019. The company is a specialty pharmaceutical business commercializing products including Natesto, Tuzistra XR, ZolpiMist, MiOXSYS, and RedoxSYS. Figures are unaudited; share and per-share amounts reflect the August 2018 1-for-20 reverse split.
Key financial results
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Net product revenue | $1.80 million | $1.05 million | $3.23 million | $2.13 million |
| Cost of sales | $0.53 million | $0.39 million | $0.94 million | $0.67 million |
| Gross margin | 70.7% | 63.3% | 71.0% | 68.4% |
| Operating loss | $(4.55) million | $(3.99) million | $(7.97) million | $(8.35) million |
| Net loss | $(4.66) million | $(3.67) million | $(8.10) million | $(7.92) million |
| Operating cash use | — | $7.05 million | $7.32 million |
Quarterly revenue increased about 71% year over year; six-month revenue increased about 52%. The filing says most revenue came from Natesto. Gross product sales were reduced by $1.57 million in the quarter and $2.46 million in the six-month period for discounts, coupons, fees, returns, rebates, and other provisions.
Quarterly operating expenses were $6.35 million, versus $5.05 million a year earlier. For six months, operating expenses were $11.19 million versus $10.48 million. Quarterly SG&A increased 12.8%, while six-month SG&A decreased 2.2%. R&D expense comparisons are affected by reversals of previously accrued liabilities in the 2017 periods.
Financial position and liquidity
- At December 31, 2018, cash and cash equivalents were $17.80 million and restricted cash was $0.10 million, compared with $7.01 million and $0.10 million, respectively, at June 30, 2018.
- Current assets were $21.98 million and current liabilities were $4.66 million, implying working capital of approximately $17.32 million. Total assets were $42.40 million; total liabilities were $22.50 million.
- The company used $7.05 million in operating cash and $0.86 million in investing cash during the six months. Financing provided $18.70 million, principally from the October equity offering and November debt issuance.
- Long-term debt was $5.04 million at period end. The $5.0 million Armistice note bears 8% interest and is secured by future revenue from products licensed under the TRIS agreement. The filing describes a three-year term but also states no cash payment is due until November 2022; verify the maturity date.
- Contingent consideration totaled $13.38 million, including $12.78 million classified long-term and $0.59 million current. Stockholders’ equity was $19.90 million; accumulated deficit was $87.36 million.
Material developments and comparisons
- In October 2018, Aytu raised $15.2 million gross in a public offering of common and Series C preferred shares and warrants. Offering costs were approximately $1.48 million. The offering warrants generally have a $1.50 exercise price and five-year term.
- In November 2018, Aytu entered a license, development, manufacturing, and supply agreement with TRIS for Tuzistra XR and a complementary product candidate, CCP-08. The agreement included cash and Series D preferred consideration, royalties, and contingent consideration; the licensed assets were valued at $9.9 million.
- Licensed intangible assets increased to $20.00 million from $11.12 million at June 30, reflecting new product rights, including the TRIS agreement. Amortization expense increased to $0.53 million for the quarter and $0.99 million for six months.
- Common shares outstanding increased from 1.79 million at June 30 to 10.50 million at December 31; preferred shares outstanding were 4.53 million at period end. The filing reports 12,390,435 common shares outstanding as of February 6, 2019. Restricted stock issuance and preferred-stock conversions also affected share counts.
- After quarter end, Armistice agreed, subject to shareholder approval and other conditions, to exchange its note and accrued obligations for common shares, Series E preferred shares, and a warrant for 4.40 million common shares. The proposed warrant has a $1.00 exercise price and five-year term. A separate Series C conversion notice was also received in February.
Outlook, risks, and other matters
- Management believes available cash will fund projected operations through February 2020, based on its operating plan and assumptions about continued revenue growth. The company may seek additional capital sooner; if revenue or financing falls short, it may need to reduce or delay commercialization or R&D activities.
- Management expects revenue growth, citing improved sales trends and efforts to reduce Natesto couponing and discounting. It expects cost of sales to rise with sales, SG&A to increase slightly due to Tuzistra XR launch and sales-team expansion, and R&D to increase for planned MiOXSYS and Natesto studies.
- Management reported a $87.4 million accumulated deficit and continuing operating losses. Revenue growth, access to additional financing, product launches, and commercial execution are material uncertainties. The company sells principally through a limited number of wholesale distributors and pharmacies, and net revenue depends on estimates of variable sales deductions.
- Commitments include $2.19 million remaining for prescription database services, $5.5 million of future sales-based milestones, and approximately $197,000 of office lease payments. The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. Adoption of ASC 606 had no material impact. The company was evaluating lease-accounting adoption, with approximately $197,000 of future operating lease payments identified.
Important facts for investors to verify
- Whether the February 2019 Armistice debt exchange received shareholder approval and closed, and its resulting dilution and ownership effects.
- The Armistice note’s stated maturity: the filing gives both a three-year term from November 2018 and a November 2022 payment date.
- Actual product-level revenue, launch progress, and the extent to which gross-to-net deductions and Natesto discounting affect reported net sales.
- Cash burn and financing needs relative to management’s February 2020 liquidity estimate, including the assumptions behind forecast revenue growth.
- Potential dilution from preferred stock, warrants, restricted stock, and the substantial increase in shares outstanding.
- Timing and likelihood of contingent consideration and sales-based milestone payments, including the valuation assumptions for the $13.38 million contingent consideration balance.