AYTU BIOSCIENCE, INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2018; comparable periods ended March 31, 2017. This is fiscal 2018 third quarter, although the request metadata says “2017 Q3.” Figures below are in U.S. dollars.
Business context
Aytu is a commercial-stage specialty life sciences company focused on urological products and women’s health. Products include Natesto, ProstaScint, Fiera, and MiOXSYS/RedoxSYS. Natesto is the principal revenue source. The company acquired Nuelle in 2017; its women’s-health product assets were impaired during this quarter.
Key financial results
| Metric | Three months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2018 | Comparison |
|---|---|---|---|
| Revenue | $607,000 | $2.735 million | Quarter down 32% from $894,000; nine months up 15% from $2.386 million |
| Cost of sales | $1.137 million | $1.809 million | Quarter included $0.8 million of Aytu Women’s Health inventory impairment |
| Gross profit/(loss), derived | $(529,000) | $926,000 | Approximate gross margin: (87%) and 34%, respectively |
| Operating loss | $(7.525) million | $(15.875) million | Prior-year comparable losses were $(4.860) million and $(15.025) million |
| Net loss | $(2.818) million | $(10.735) million | Prior-year comparable losses were $(5.216) million and $(15.758) million |
| Operating cash used | Not separately stated | $11.397 million | Prior-year nine-month use was $10.561 million |
| Cash, cash equivalents and restricted cash | $12.082 million at period end | — | Cash and cash equivalents alone were $12.006 million |
Quarterly net loss benefited substantially from $3.140 million of derivative income and a $1.754 million other gain, principally related to remeasurement of Nuelle contingent consideration. These non-operating items are not equivalent to product revenue or operating cash generation. Nine-month results also included a $1.856 million impairment of intangible assets.
At March 31, 2018, total assets were $23.375 million, total liabilities $10.624 million, and stockholders’ equity $12.750 million. Current assets were $14.595 million versus current liabilities of $4.342 million. The balance sheet lists no conventional interest-bearing debt; it includes $6.192 million of contingent consideration and a $120,000 warrant derivative liability.
Material changes and financing
- Net revenue rose 15% for the nine-month period, but fell 32% in the quarter. Management reported Natesto revenue increased 7% year over year in the quarter and 165% for the nine months.
- Gross-to-net deductions rose sharply: deductions were $1.341 million on $1.948 million of quarterly gross product and service revenue, leaving $607,000 net revenue. The filing attributes deductions to items including coupons, discounts, chargebacks, fees, returns, and rebates.
- In March 2018, the company raised approximately $12.9 million gross through an offering and over-allotment; cash offering costs were approximately $1.3 million. It also received about $640,000 from warrant exercises. Financing activities provided $22.683 million net cash over nine months, including the August 2017 offering.
- Common shares outstanding increased from 824,831 at June 30, 2017 to 35,820,069 at March 31, 2018. The company reported 37,720,387 warrants outstanding, in addition to potential dilution from equity awards and contingent stock payments.
Outlook, risks and unusual items
- Liquidity and going concern: The filing states substantial doubt exists about the company’s ability to continue as a going concern, given cash use and its operating history. Management nevertheless believed available resources and anticipated financing would fund operations through the second quarter of fiscal 2019. The filing warns additional capital may be required and may not be available on acceptable terms or at all.
- Costs and revenue outlook: Management expected revenue to increase, sought to improve Natesto net revenue by reducing couponing and discounting, and expected R&D and SG&A to remain near the March-quarter level. It expected SG&A to be approximately flat for the remainder of fiscal 2018; cost of sales was expected to rise with product revenue.
- Product and asset risks: Aytu decided to discontinue ProstaScint sales in early fiscal 2019 as existing supply expires. Nuelle/Aytu Women’s Health assets were impaired based on sales performance and the manufacturer’s decision to stop supporting the product; related intangible assets and contingent consideration were written down to zero. The quarter also included a $210,000 write-off of AWH manufacturing equipment.
- Contingent commitments: The company disclosed up to $15 million in Natesto milestone payments, including a $2.5 million milestone payable under specified circumstances even if its sales threshold is not reached. It also has prescription-database and lease commitments; aggregate commitments presented totaled $16.205 million.
- Listing risk: Nasdaq notified the company on April 9, 2018 that its share price did not meet the $1.00 minimum bid-price requirement. It had a 180-calendar-day period to regain compliance.
- Other items: The Tax Cuts and Jobs Act led to provisional tax expense of $6.6 million in the December quarter and an additional $0.1 million in the March quarter, offset by valuation allowance. Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether Natesto’s reported growth translates into higher net revenue and improved cash generation, particularly given the large gross-to-net deductions.
- The assumptions and timing behind management’s cash runway estimate and its expectation of access to future financing, in light of the going-concern warning and $11.397 million of nine-month operating cash use.
- The status of Nasdaq minimum-bid-price compliance and any actions taken to maintain listing.
- The potential dilution from 37.7 million warrants, including their exercise prices and terms, and from outstanding equity awards.
- The likelihood and timing of Natesto milestone payments, Nuelle earn-outs, and other contractual commitments.
- The financial consequences of discontinuing ProstaScint and the impaired Aytu Women’s Health assets, including any remaining product, manufacturing, or contractual obligations.