Business context and reporting period
Aytu BioPharma, Inc. filed this Form 10-Q for the quarter ended March 31, 2021, its fiscal 2021 third quarter, with comparisons to the three and nine months ended March 31, 2020. The request metadata says “2020 Q3,” but the filing itself reports 2021 Q3. Aytu is a commercial-stage specialty pharmaceutical and consumer-health company. Its portfolios include prescription products, consumer-health products, and, following the March 19, 2021 acquisition of Neos Therapeutics, ADHD medicines and related manufacturing capabilities.
Financial results and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net revenue | 2021: $13.5 million; 2020: $8.2 million (+65%) | 2021: $42.1 million; 2020: $12.8 million (+230%) |
| Cost of sales | 2021: $13.7 million; 2020: $2.0 million | 2021: $23.5 million; 2020: $3.0 million |
| Gross profit (loss), calculated | 2021: $(0.2) million | 2021: $18.6 million |
| Operating expenses | 2021: $39.1 million; 2020: $12.9 million | 2021: $76.9 million; 2020: $27.3 million |
| Operating loss | 2021: $(25.7) million; 2020: $(4.8) million | 2021: $(34.8) million; 2020: $(14.5) million |
| Net loss | 2021: $(25.5) million; 2020: $(5.3) million | 2021: $(39.3) million; 2020: $(10.5) million |
| Basic and diluted loss per share | 2021: $(1.41); 2020: $(1.51) | 2021: $(2.71); 2020: $(4.63) |
Reported cost of sales includes a $7.0 million inventory write-down in the quarter, primarily reflecting changing market conditions for COVID-19 test kits. Revenue growth largely reflects acquired portfolios and COVID-19 test-kit sales; Neos contributed approximately $0.9 million of revenue after its acquisition date.
For the nine months, operating cash use was $19.7 million, compared with $20.6 million in 2020. Investing activities used $0.4 million and financing activities provided $18.5 million. Cash, cash equivalents and restricted cash totaled $46.8 million at March 31, 2021, down from $48.3 million at June 30, 2020.
At March 31, 2021, current assets were $100.0 million and current liabilities were $83.7 million (approximately 1.2x current-asset coverage). Borrowings included a $4.7 million short-term revolving balance and approximately $17.7 million of long-term debt, including current maturities and finance leases. The company reported $143.1 million in stockholders’ equity and an accumulated deficit of $159.3 million.
Material changes and notable transactions
- Neos acquisition: Aytu issued approximately 5.47 million common shares and paid approximately $15.4 million in connection with the March 19 acquisition. The acquisition added ADHD products, manufacturing operations, assets and debt; preliminary goodwill recorded was $37.7 million. Aytu also prepaid $15.0 million of Neos senior secured debt.
- Natesto termination: On March 31, Aytu ended its Natesto license and ceased sales and promotion. Acerus agreed to pay Aytu $7.5 million in 30 monthly installments. Aytu recognized no future payment asset at quarter-end and impaired the remaining $4.3 million Natesto intangible-asset carrying value.
- Equity and dilution: Common shares outstanding increased from 12.6 million at June 30, 2020 to 23.5 million at March 31, 2021, principally reflecting financing and acquisition-related issuance. The filing reports 25.2 million shares outstanding as of May 10, 2021.
- Acquired and restructuring costs: Nine-month acquisition-related costs were $2.8 million and restructuring costs were $4.9 million, primarily related to Neos. Intangible amortization and impairment totaled $9.0 million for the nine-month period.
Outlook, risks and contingencies
Management expects revenue to grow and says the Neos transaction is intended to accelerate a path toward profitability. It estimates annualized cost synergies of up to approximately $15 million beginning in fiscal 2022; this is an expectation, not a guarantee. Management also expects operating costs to rise as it integrates Neos, develops products and pursues sales growth and acquisitions. It stated that available resources were adequate for potential net cash outflows over the 12 months following the filing, while acknowledging that future capital-market access is not assured. The company has historically used cash in operations and expects continued cash needs.
Other notable items include a $4.8 million quarterly inventory write-down; a $0.4 million gain related to an Innovus CVR milestone payment; and a $0.7 million quarterly gain from changes in fair value of certain contingent consideration. The filing lists approximately $35.1 million of contractual commitments and contingent obligations, including pediatric-product fixed payments, CVRs, inventory commitments and product milestones; amounts and timing depend on the applicable terms and, in some cases, milestones.
Subsequent to quarter-end, Aytu acquired Enzastaurin-related assets for $1.5 million cash, with potential earn-out payments of up to $67.5 million subject to regulatory and commercial milestones. Key disclosed risks include continued cash burn and financing availability, successful integration and realization of Neos synergies, inventory demand and obsolescence, dependence on suppliers and manufacturing capacity, regulatory compliance, product development and commercialization, COVID-19 effects, and opioid-related litigation. Harris County and Walker County opioid-related cases remain disclosed; several lawsuits relating to the Neos merger were dismissed. Management reported disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether revenue growth persists after accounting for acquisitions, COVID-19 test-kit sales and Natesto’s exit, and whether product sales generate sustainable gross profit.
- Progress against the stated potential annualized Neos synergies of up to $15 million from fiscal 2022, alongside integration, severance and other operating costs.
- Cash burn, working-capital needs, debt maturities and covenants, and whether management’s stated 12-month liquidity expectation remains supportable.
- Potential further inventory write-downs, the collectability and timing of Acerus’s $7.5 million Natesto payments, and the final purchase-accounting values for Neos.
- Share-count changes and potential dilution from future financing, acquisition consideration, warrants, equity awards or milestone payments.
- Exposure to contingent obligations, opioid-related litigation, manufacturing and supply interruptions, and the development and regulatory prospects of Healight and Enzastaurin.