Aytu BioScience, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
This is Aytu BioScience, Inc.’s annual report for the fiscal year ended June 30, 2020, filed October 6, 2020. It is not a report for calendar 2019 Q4. Aytu is a commercial-stage specialty pharmaceutical and consumer health company. Its portfolio included prescription primary-care products, a pediatric portfolio acquired from Cerecor in November 2019, and Innovus consumer health products acquired in February 2020. The company also began distributing COVID-19 antibody tests and licensed the investigational Healight medical-device platform.
Financial performance and position
| Metric | FY2020 / June 30, 2020 | FY2019 / June 30, 2019 |
|---|---|---|
| Revenue | $27.6 million | $7.3 million |
| Cost of sales | $7.6 million | $2.2 million |
| Gross profit and margin | Approximately $20.1 million; 72.7% | Approximately $5.1 million; 69.9% |
| Operating expenses | $48.8 million | $24.2 million |
| Loss from operations | $21.1 million | $16.8 million |
| Net loss | $13.6 million; $0.30 per share | $27.1 million; $3.48 per share |
| Cash used in operations | $28.4 million | $13.8 million |
| Cash, cash equivalents and restricted cash | $48.3 million | $11.3 million |
| Total assets / total liabilities | $152.8 million / $57.8 million | $34.7 million / $27.6 million |
| Stockholders’ equity | $95.0 million | $7.1 million |
- Revenue increased 277%, primarily reflecting the acquired pediatric and consumer health businesses and COVID-19 test sales. FY2020 revenue comprised $8.0 million from primary care and devices, $9.3 million from the pediatric portfolio, and $10.4 million from consumer health.
- Operating expenses more than doubled, driven by acquisition integration and commercial costs, increased selling, general and administrative expense, and higher amortization. R&D increased to $1.7 million, chiefly due to Healight development.
- The smaller net loss did not reflect improved operating profitability alone. Other income included a $10.4 million gain from reduced contingent-consideration liabilities; operating loss increased year over year.
- Financing provided $71.1 million of cash, mainly from stock offerings, warrant exercises, and an at-the-market offering. Investing used $5.7 million, including acquisition spending.
- Reported current assets were $75.0 million and current liabilities $28.3 million. Current assets included $10.0 million of inventory, with a $1.3 million reserve for slow-moving inventory. The filing stated that cash on hand was sufficient for expected net cash outflows for the twelve months following filing, and management reported no substantial doubt about going concern.
- Balance-sheet debt was $1.0 million at June 30, 2020; this excludes material fixed-payment, contingent-consideration, CVR, royalty, and other commitments. Total fixed-payment arrangements were reported at $13.5 million, and contingent consideration at $13.6 million; the balance sheet also reported $5.6 million of CVR liabilities.
Material changes versus the prior comparable period
- The Cerecor pediatric acquisition and Innovus merger broadened the portfolio and contributed substantial revenue, while adding goodwill, intangible assets, liabilities, integration costs, and future payment obligations.
- Cash used in operations more than doubled despite higher revenue, partly due to working-capital investment and expanded operations.
- Common shares outstanding rose from 17.5 million to 125.8 million during the year, reflecting financing, warrant exercises, conversions, and acquisition-related issuances. Further dilution remained possible from outstanding warrants, options, and restricted stock.
- Customer concentration eased but remained significant: three customers represented 46% of FY2020 gross revenue, and four customers represented 61% of gross receivables.
- The company wrote off the remaining $0.2 million carrying value of the MiOXSYS patent portfolio, citing reduced demand for fertility services during the pandemic.
Outlook, commentary, risks, and unusual items
- Management expected revenue growth, cost stabilization as acquisitions were integrated, and expense efficiencies. It also planned to expand product sales and introduce products, including proposed 2021 consumer-health launches subject to applicable regulatory approvals. No specific financial guidance was provided.
- Management cautioned that COVID-19 test revenue could be temporary. The serology tests are for screening and do not provide confirmatory results. After FDA guidance and discussions, the company chose to sell remaining kits under Section IV.D of the FDA policy, which requires purchasers to have access to high-complexity laboratories; management expected a limited sales impact but acknowledged a narrower customer base.
- COVID-19 disrupted physician access, sales activity, MiOXSYS demand, consumer-health manufacturing, and direct-mail marketing. Management said the commercial sales force was returning toward pre-pandemic activity levels as restrictions eased.
- Healight remained investigational and required FDA authorization or clearance before U.S. marketing. Its potential benefits were based on preclinical work; human safety and efficacy, development timing, and regulatory outcomes were uncertain.
- Significant commitments included approximately $18.0 million of pediatric fixed payments and product minimums, plus other listed commitments. The company had prepaid a $15.0 million balloon obligation in June 2020; remaining fixed payments and product-linked obligations continued. Certain pediatric product agreements include royalties and minimum-sales or make-whole terms.
- The company relied on third-party manufacturers and distributors and faced risks from product acceptance, reimbursement, regulation, supply availability, controlled-substance rules, competition, customer concentration, and access to future capital. Management noted that capital might be required before profitability and could be unavailable on acceptable terms.
- Four shareholder lawsuits over transaction disclosures were dismissed after supplemental proxy disclosures; the company agreed to pay plaintiffs’ attorneys’ fees. The filing reported no other pending legal proceedings in this discussion.
- The company returned approximately $2.5 million of PPP loan proceeds during FY2020 after reviewing its liquidity position. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor was not required to attest to internal-control effectiveness.
Important facts for investors to verify
- How much of the revenue increase came from acquired portfolios and COVID-19 test sales, and whether those sales are repeatable.
- Whether operating cash burn declines as management expects, and how long the reported cash balance supports operations after ongoing commitments and integration costs.
- The full timing and terms of pediatric fixed payments, royalties, minimum-sales obligations, CVRs, contingent consideration, and other acquisition-related liabilities.
- The amount and potential dilution from outstanding warrants, options, restricted shares, and any future equity financing.
- The status of FDA requirements and commercial eligibility for the COVID-19 tests, including the impact of the Section IV.D laboratory condition.
- Whether Healight advances beyond preclinical development and obtains the required regulatory authorization; it was not an approved treatment in this filing.
- Customer and receivable concentration, inventory quality and reserves, and the collection of approximately $3.6 million owed by Cerecor at June 30, 2020.