Aytu BioScience, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2019, Aytu’s fiscal third quarter—not 2018 Q3. The nine-month comparison is against the nine months ended March 31, 2018.
Business context and reporting period
Aytu is a specialty pharmaceutical company focused on commercializing products addressing hypogonadism, cough and upper respiratory symptoms, insomnia, and male infertility. Its portfolio includes Natesto, Tuzistra XR, ZolpiMist, MiOXSYS, and RedoxSYS. Management identified Natesto as the largest contributor to product revenue. The unaudited results cover the three and nine months ended March 31, 2019.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Prior-year comparable | Nine months ended March 31, 2019 | Prior-year comparable |
|---|---|---|---|---|
| Total revenue | $2.38 million | $0.61 million | $5.60 million | $2.73 million |
| Operating loss | $4.30 million | $7.52 million | $12.27 million | $15.87 million |
| Net loss | $4.50 million | $2.82 million | $12.60 million | $10.73 million |
| Net loss per share | $0.50 | $4.75 | $2.18 | $42.86 |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $10.36 million | $11.40 million |
- Net product revenue grew about 291% year over year for the quarter and 105% for the nine-month period. Quarterly product revenue was $2.37 million; license revenue was approximately $6,000.
- Product gross profit, calculated as product revenue less cost of sales, was approximately $1.76 million for the quarter and $4.05 million for nine months. This equates to approximate gross margins of 74% and 72%, respectively. Prior-year quarterly gross margin was negative, reflecting an inventory impairment; prior-year nine-month gross margin was approximately 34%.
- Quarterly operating loss improved, but net loss increased because the prior-year quarter included substantial derivative income and other gains. For the nine-month period, net loss also increased despite a smaller operating loss, in part because prior-year non-operating gains were larger.
- At March 31, 2019, cash and cash equivalents were $14.65 million; restricted cash was $0.10 million. Current assets were $18.46 million and current liabilities $4.50 million, implying working capital of approximately $13.96 million and a current ratio of about 4.1.
- Total liabilities were $22.30 million, including $5.13 million of related-party debt and $13.44 million of contingent consideration. The debt’s face amount was $5.0 million and carried 8% interest.
Material changes versus the prior comparable period
- Revenue growth followed the expansion of the commercial portfolio and improved net sales realization. The share of gross product sales retained as net sales rose to 70.5% in the quarter from 31.2% a year earlier, and to 61.9% for nine months from 44.0%.
- Quarterly cost of sales fell to $0.62 million from $1.14 million, partly because the prior-year period included an impairment of inventory associated with a discontinued product. Selling, general and administrative expense increased 16% for the quarter, to $5.37 million, primarily with commercial-team expansion, the Tuzistra XR launch, and higher stock-based compensation.
- Cash used in operations declined to $10.36 million from $11.40 million for the nine-month period. Financing provided $18.96 million, including the October 2018 public offering and $5.0 million of related-party debt; cash and restricted cash increased by $7.64 million.
- Common shares outstanding rose from 1.79 million at June 30, 2018 to 12.85 million at March 31, 2019, alongside preferred shares and warrants. The company completed a 1-for-20 reverse stock split in August 2018; reported share and per-share data reflect it.
Outlook, commentary, risks and unusual items
- Management said available cash was expected to fund operations through May 2020, based on its operating plan and revenue-growth assumptions. It cautioned that additional capital may be needed thereafter if revenue does not grow as projected, and that financing may not be available on acceptable terms.
- Management expected sales to continue growing and anticipated that reduced Natesto discounting would improve net revenue and lower cash use. It expected slightly higher SG&A during the remainder of fiscal 2019, increased research and development spending for MiOXSYS and Natesto studies, and cost of sales to rise with product sales. No quantified revenue or earnings guidance was provided.
- In April 2019, after quarter-end, Aytu exchanged the $5.0 million Armistice note for 3,120,064 common shares, 2,751,148 Series E preferred shares, and a warrant for 4,403,409 common shares. This removed the note without a cash repayment but creates substantial potential dilution.
- Contingent consideration increased to $13.44 million, primarily following the Tuzistra XR licensing transaction. The filing also reports $5.5 million of future sales-based milestone payments and total commitments of approximately $8.05 million across prescription-data arrangements, milestones, and leases.
- Aytu reported an accumulated deficit of $91.9 million and continuing operating losses. It stated that there were no material changes to the risk factors in its latest Form 10-K, no material pending legal proceedings, and no off-balance-sheet arrangements. Management reported disclosure controls as effective.
Important facts for investors to verify
- Whether product-revenue growth—particularly Natesto sales and improved gross-to-net realization—continued after March 31, 2019.
- Actual cash burn and the assumptions behind management’s stated runway through May 2020, including the effects of launch costs and working-capital needs.
- The full economic and dilution effects of the Armistice note exchange, outstanding preferred shares, warrants, and restricted stock.
- The estimates and payment timing underlying the $13.44 million contingent consideration liability, $5.5 million of milestones, and other contractual commitments.
- Whether the expected Tuzistra XR launch and planned clinical studies produced the anticipated commercial results without materially increasing expenses.