AYTU BIOPHARMA, INC quarterly report, Q1 FY2017

Business context and reporting period

Aytu BioScience, Inc. is a commercial-stage specialty pharmaceutical company focused on urology. This Form 10-Q covers the three months ended September 30, 2016, the first quarter of fiscal 2017; financial statements are unaudited. The company is commercializing Natesto, ProstaScint and Primsol, and developing MiOXSYS.

Key financial metrics

At September 30, 2016, cash and cash equivalents were $2.75 million, with a further $75,000 of restricted cash. Total assets were $20.20 million, current assets $6.36 million, current liabilities $8.73 million, total liabilities $13.01 million, and stockholders’ equity $7.19 million. Current liabilities included $5.69 million payable for Natesto; contingent consideration was $3.93 million. Convertible notes had converted to equity in May 2016. The filing reports no material pending legal proceedings or off-balance-sheet arrangements.

Material changes versus the prior comparable period

• Revenue rose approximately 43%, reflecting product commercialization and acquisitions, but gross margin fell from 87.9% to 72.5% as cost of sales increased.
• Net loss widened to $5.72 million from $2.28 million. Selling, general and administrative expense rose to $5.70 million from $1.56 million, chiefly due to commercialization staffing, stock compensation and occupancy/travel costs. Amortization increased to $437,000 from $57,000 following product acquisitions.
• Research and development expense fell to $232,000 from $856,000, primarily as the company shifted resources toward commercial products and discontinued Zertane development.
• Operating cash use increased to $5.33 million from $2.16 million. Cash and cash equivalents declined by $5.30 million from June 30, 2016; the company also spent $500,000 on the Primsol acquisition installment and received $607,000 net from Lincoln Park stock sales.
• Shares outstanding increased to 5.11 million from 3.74 million during the quarter, including restricted stock and shares issued as executive bonuses.

Outlook, commentary, risks and unusual items

• Management estimated fiscal 2017 operating cash needs at approximately $3.0 million per quarter, with higher burn expected in the first half. It said available resources, October financing and potential proceeds from selling its Acerus investment were expected to fund operations through fiscal 2017.
• After quarter-end, the company priced an October 2016 public offering expected to generate approximately $8.6 million gross; the liquidity discussion reports approximately $7.7 million net proceeds. A further $4.0 million Natesto upfront payment was due in January 2017, in addition to substantial product, supply and other commitments.
• Natesto U.S. commercialization began in July 2016. The company has exclusive U.S. rights and faces additional upfront and sales-based milestone obligations to Acerus, with aggregate milestone payments capped at $37.5 million.
• Management expected fiscal 2017 increases in R&D for MiOXSYS clinical work and ProstaScint manufacturing transfer, and in G&A as the company grows. It cautioned that financing may not be available on acceptable terms; insufficient capital could delay or curtail commercialization or R&D.
• Notable non-cash and unusual items included $1.04 million of stock-based compensation, $437,000 of intangible amortization, warrant derivative expense, and a $728,000 unrealized gain on the Acerus investment. The MD&A separately describes the quarter’s unrealized gain as $2.4 million, which conflicts with the financial statements and should be reconciled.
• Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing says there were no material changes to prior annual-report risk factors except risks concerning warrant liquidity and access to the Lincoln Park equity facility.

Investor verification priorities

1. Reconcile the $728,000 unrealized Acerus investment gain in the statements with the $2.4 million figure in MD&A.
2. Verify the actual net proceeds and share dilution from the October 2016 offering, and the timing and availability of Lincoln Park funding.
3. Assess Natesto sales uptake, gross-to-net deductions, the $5.69 million payable, future upfront payments and potential sales milestones.
4. Review cash runway against the stated quarterly cash needs and the company’s $15.32 million of disclosed commitments.
5. Monitor product margins, commercialization spending, and the expected costs and progress of MiOXSYS studies and ProstaScint manufacturing transfer.