Aytu BioScience, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2017; filed May 11, 2017. The filing metadata’s “2016 Q3” does not match the report: this is the quarter ended March 31, 2017. Aytu was a commercial-stage specialty pharmaceutical company focused on urology products.
Key financial results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2017 | $893,548 | $2,385,701 |
| Revenue, 2016 | $668,541 | $1,625,140 |
| Operating loss, 2017 | $(4,859,827) | $(15,025,019) |
| Net loss, 2017 | $(5,216,342) | $(15,757,916) |
| Net loss per share, 2017 | $(0.48) | $(2.08) |
| Net cash used in operating activities, 2017 | Not presented by quarter | $(10,560,768) |
Revenue increased approximately 34% for the quarter and 47% for the nine-month period year over year. Product revenue comprised Natesto, ProstaScint, Primsol and MiOXSYS; the filing does not provide a clear product-by-product revenue breakdown. License revenue was zero in 2017 periods. Gross margin, calculated as revenue less cost of sales, was approximately 64% for the quarter and 55% for the nine months, versus approximately 49% and 62%, respectively, in the comparable 2016 periods.
For the nine months, cost of sales was $1.07 million; research and development expense was $774,526, plus $387,960 of related-party R&D; selling, general and administrative expense was $13.73 million, plus $137,311 of related-party SG&A; and amortization of finite-lived intangibles was $1.31 million. The quarter’s SG&A rose to $4.39 million from $2.17 million, while R&D fell to $279,049 from $1.14 million. Management attributed the SG&A increase mainly to staffing and commercialization costs, and lower R&D mainly to reduced Zertane work and a shift toward commercial products.
At March 31, 2017, cash and cash equivalents were $3.47 million, with restricted cash of $75,107. Current assets were $4.44 million and current liabilities $3.35 million, implying a current ratio of approximately 1.32. Total assets were $15.92 million; total liabilities $7.40 million; and stockholders’ equity $8.52 million. The balance sheet showed no conventional borrowings at period-end; contingent consideration liabilities totaled approximately $4.08 million. Cash, cash equivalents and restricted cash declined by $4.51 million over the nine months.
Changes, transactions and unusual items
- Net loss worsened to $15.76 million for the nine months from $12.88 million a year earlier, despite higher revenue; operating expenses increased substantially, particularly SG&A and intangible amortization.
- Cash used in operations increased to $10.56 million from $7.99 million. Financing provided $10.13 million, principally from a November 2016 public offering and the February 2017 warrant tender offer. The offering and warrant exercise added shares and contributed to dilution; common shares outstanding rose from 3.74 million at June 30, 2016 to 13.84 million at March 31, 2017.
- Aytu completed its $8.0 million upfront payment for U.S. Natesto rights in January 2017. The agreement includes sales-based milestone payments up to $37.5 million, including a $2.5 million first milestone payment that may be due even if the sales threshold is not met in specified termination circumstances.
- On March 31, 2017, Aytu sold the Primsol assets for $1.75 million and recognized a gain of approximately $428,000. The transaction was treated as continuing operations. Aytu also sold its Acerus shares, receiving gross proceeds of approximately $1.07 million and recording an investment loss.
- Unusual non-cash compensation included $2.24 million of stock-based compensation for the nine months, plus restricted-stock and executive share compensation. The quarter included accelerated recognition of compensation after an executive resigned. Aytu also repriced options and modified warrants.
- Subsequent event: Aytu acquired Nuelle, Inc. on May 5, 2017, issuing 2.5 million common shares. Nuelle holders may also receive sales-based earn-outs capped at $6.9 million and milestone payments up to $24 million, subject to stated terms.
Outlook, liquidity and risks
Management did not provide quantified revenue or earnings guidance. It expected R&D expense to remain around the March-quarter level or decrease slightly for the rest of fiscal 2017, SG&A to be approximately flat, and amortization expense to remain flat. Management stated that cash resources and expected operating cash flows would not support operations for more than one year from the report date. The filing says cash on hand was insufficient to fund operations beyond fiscal 2017, ending June 30, 2017, without additional capital; management expected to seek equity or debt financing, but gave no assurance of success. The financial statements disclose substantial doubt about the company’s ability to continue as a going concern.
Key risks include the need to raise capital on acceptable terms, potential dilution or restrictive debt terms, continuing operating losses, and the possibility that inadequate funding could force Aytu to reduce or discontinue commercialization or development activities. ProstaScint manufacturing arrangements were on hold while the company evaluated strategic options. Aytu reported no material pending legal proceedings and concluded its disclosure controls were effective.
Investor verification priorities
- Confirm current cash runway, subsequent financing activity and whether the company can fund operations beyond fiscal 2017.
- Review product-level sales, gross-to-net deductions and commercial performance, especially Natesto uptake and any resulting milestone obligations.
- Assess the full dilution and potential cash burden from the Nuelle share issuance and earn-out terms, alongside outstanding warrants and options.
- Verify the accounting and cash effects of the Primsol divestiture, Acerus-share sale, and stock-based compensation and executive departures.
- Review contingent consideration valuation, acquisition obligations and any changes to going-concern disclosures in subsequent filings.