Business context and reporting period
Aytu BioScience, Inc. filed this Form 10-K for the fiscal year ended June 30, 2017. This is an FY2017 annual report, not a 2016 Q4 report. Aytu is a commercial-stage specialty healthcare company focused primarily on urology. Its portfolio included Natesto, ProstaScint, MiOXSYS/RedoxSYS and, after its May 2017 acquisition of Nuelle, the Fiera women’s personal-care device. Aytu sold its Primsol business in March 2017.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $3.22 million | $2.56 million |
| Product and service revenue | $3.22 million | $2.05 million |
| Cost of sales | $1.42 million | $0.96 million |
| Gross profit and margin | Approximately $1.80 million; 56% | Approximately $1.09 million on product and service revenue; 53% |
| Operating loss | $20.13 million | $21.70 million |
| Net loss | $22.51 million | $28.18 million |
| Cash used in operating activities | $13.83 million | $10.66 million |
Product and service revenue increased about 57%, primarily reflecting Natesto sales and expanded commercialization; FY2016 also included $512,000 of license revenue, which did not recur. Net loss narrowed by about $5.67 million, while operating cash use increased. FY2017 expenses included a $1.27 million impairment charge, $1.71 million of intangible amortization and $2.50 million of stock-based compensation.
At June 30, 2017, cash and cash equivalents were $802,000 and restricted cash was $75,000; current assets were $3.03 million and current liabilities were $3.61 million, implying a working-capital deficit of approximately $582,000. Total assets were $15.00 million, total liabilities $11.00 million, and stockholders’ equity $4.00 million. The balance sheet lists $7.65 million of contingent consideration, mostly acquisition-related; it does not show a conventional borrowings balance at year-end. The company had an accumulated deficit of $69.07 million.
Material changes and notable items
- Natesto U.S. rights were acquired in 2016 and U.S. commercialization began in summer 2016. Product revenue growth reflects its launch and expanded marketing.
- Aytu acquired Nuelle in May 2017 for 125,000 common shares, with additional sales-based earn-outs and potential milestone payments. FY2017 Fiera revenue was limited because the acquisition occurred near year-end.
- Primsol was sold for $1.75 million, producing a reported gain of approximately $428,000. Aytu also recorded a $1.27 million ProstaScint impairment and planned to sell the product only through mid-FY2019, near its expiration.
- Research and development expense fell approximately 79% to $1.35 million, while sales, general and administrative expense approximately doubled to $17.61 million, reflecting commercial staffing, travel and stock compensation.
- Three customers represented 74% of FY2017 net revenue and 60% of gross accounts receivable at year-end, creating material customer-concentration exposure.
Outlook, risks and contingencies
Management said the $11.8 million gross financing completed in August 2017 was expected to fund operations through FY2018 and into mid-FY2019, with cash-flow breakeven and potentially profitability dependent on continued sales growth. The company expected substantial losses in FY2018; it provided no specific revenue or earnings guidance. At June 30, 2017, the auditor and management disclosures described substantial doubt about the company’s ability to continue as a going concern; management said the subsequent financing addressed that uncertainty for the anticipated funding period.
Key execution risks include limited commercial history, ongoing losses and cash consumption, dependence on additional financing, product acceptance and reimbursement, manufacturing and supply continuity, and concentrated customers. MiOXSYS still required FDA 510(k) clearance for U.S. clinical marketing, with clinical and regulatory work ahead. Natesto is a Schedule III controlled substance and faces class-wide testosterone safety scrutiny, including potential cardiovascular risks and post-marketing study requirements. The filing also highlights possible dilution and financing constraints: the August 2017 financing issued common and preferred securities and warrants to purchase up to 5,919,998 common shares, alongside contractual restrictions on future financings.
Most important facts for investors to verify
- Whether post-year-end financing proceeds and cash use support management’s stated runway through mid-FY2019, and whether the company can approach cash-flow breakeven.
- Natesto sales trajectory, net revenue after rebates and discounts, gross margin, reimbursement coverage and any FDA-required safety-study costs or labeling changes.
- MiOXSYS U.S. clinical-study design, timing, cost and likelihood of 510(k) clearance, as well as the scale and economics of international sales.
- ProstaScint’s remaining supply, manufacturing plans and actual sales through its expected mid-FY2019 end date; also assess the assumptions behind its impairment.
- Customer concentration, receivables collection, inventory reserves and the terms, potential dilution and financing restrictions associated with the August 2017 securities and warrants.