AYTU BIOPHARMA, INC quarterly report, Q3 FY2020

Aytu BioScience, Inc. — Form 10-Q Summary

Reporting period: The filing covers the quarter and nine months ended March 31, 2020, for Aytu’s fiscal 2020 third quarter. Although the request metadata says “2019 Q3,” the filing itself is for 2020 Q3. The company is a commercial-stage specialty pharmaceutical business; the period includes the acquisition of Cerecor’s pediatric portfolio and the February 2020 merger with Innovus, which added consumer health products.

Financial performance and position

Metric	Three months ended March 31	Nine months ended March 31
Revenue, 2020	$8.16 million	$12.77 million
Revenue, 2019 comparable	$2.38 million	$5.60 million
Net loss, 2020	$5.33 million	$10.48 million
Net loss, 2019 comparable	$4.50 million	$12.60 million
Operating loss, 2020	$4.79 million	$14.50 million
Cost of sales, 2020	$2.00 million	$2.98 million

• Quarterly revenue grew 243% year over year; nine-month revenue grew 128%. Management attributed the increase primarily to the Cerecor pediatric portfolio and Innovus, rather than solely to growth in legacy products.
• Gross profit was approximately $6.16 million for the quarter and $9.79 million for the nine months, implying gross margins of about 75.5% and 76.7%, respectively. These are calculated from reported revenue and cost of sales.
• Quarterly net loss increased 19% year over year as operating expenses rose 94%, including higher selling, general and administrative costs and amortization. Nine-month net loss improved 17%, helped by a $5.20 million non-cash gain from eliminating Natesto contingent consideration.
• Cash used in operating activities was $20.61 million for the nine months, versus $10.36 million in the prior-year period. Investing activities used $5.61 million; financing activities provided $77.44 million.
• At March 31, cash and cash equivalents were $62.26 million, with another $0.25 million of restricted cash. Current assets were $83.25 million and current liabilities $42.03 million; the resulting current ratio was about 1.98. Total assets were $158.95 million, total liabilities $73.25 million, and stockholders’ equity $85.70 million.
• Current notes payable, net, were $3.62 million. Separately, fixed payment arrangements totaled about $25.56 million, including a $15 million payment due in January 2021; the filing also reports contingent consideration of $18.75 million and CVR liabilities of $5.22 million. These are substantial obligations and are distinct from notes payable.

Material changes versus the prior comparable period

• Quarterly and year-to-date revenue increased substantially, principally reflecting acquired businesses. In the quarter, the new Consumer Health segment contributed $3.45 million of revenue; the BioScience segment contributed $4.70 million.
• Operating expenses rose with the larger business: quarterly selling, general and administrative expense increased 77% to $9.50 million, while nine-month expense increased 51% to $21.16 million. Amortization also increased following the acquisitions.
• Common shares outstanding increased from 17.54 million at June 30, 2019 to 100.61 million at March 31, 2020; 120.26 million were outstanding as of May 1, 2020. Equity offerings, warrant exercises, acquisition consideration and conversions drove substantial dilution.
• Cash increased from $11.04 million at June 30, 2019, primarily due to equity financings and warrant exercises. The company reported approximately $71.5 million of net proceeds from the March offerings and related warrant exercises, including exercises of older warrants.

Outlook, risks and unusual items

• Management expects revenue to grow over the long term, commercial costs to increase modestly during integration, and operating cash needs to decline over time. It provided no numeric revenue, earnings or cash-flow guidance. Management stated cash on hand was sufficient for the 12 months following filing and reported no substantial doubt about going concern, while noting there was no assurance funding would last until profitability.
• The company may seek additional capital; availability and terms are uncertain. If financing is unavailable, management said it could reduce or delay commercial programs, headcount or R&D, narrow plans, or potentially relinquish product rights.
• COVID-19 risks include disruption to supply, operations and sales, and regulatory uncertainty for the antibody tests. Management said the impact on product sales through March 31 was limited but demand was lower in April 2020 than in April 2019, with expected adverse effects on new patient starts while restrictions continued.
• The COVID-19 rapid tests and Healight technology are uncertain opportunities, not established revenue streams. Risks include FDA guidance or authorization, test reliability, manufacturing scale and supply, demand, and third-party clinical development. Healight remained investigational and pre-clinical; human studies were planned.
• The Cerecor portfolio carries fixed and variable payment obligations, royalties and product minimums. The Innovus merger included CVRs of up to $16 million; the first $2 million revenue milestone was settled with approximately 1.2 million shares in March 2020.
• The Natesto license amendment eliminated remaining revenue-based milestones and produced a $5.20 million gain. This non-cash, non-recurring gain benefited nine-month results.
• Nasdaq notified the company in March that it had regained compliance with the bid-price rule. Management also reported stockholders’ equity above the stated $2.5 million minimum and effective disclosure controls.
• Legal matters included a tentative Presmar settlement subject to board approval, a Marin County advertising-related stipulation with $204,500 in penalties, investigative costs and restitution awaiting court approval, and dismissed merger-related stockholder suits with possible mootness-fee claims still unresolved. A May 2020 Hikma agreement requires three FlutiCare product purchases of $1 million each through fiscal 2022.

Important facts for investors to verify

• Whether acquired products generate sustained organic growth, and how much reported growth reflects acquisition timing and consolidation.
• Cash burn, working-capital needs and the company’s ability to meet the $15 million January 2021 payment and other portfolio-related obligations.
• Current fully diluted share count, warrant exercises and remaining potential dilution; the filing reports materially different outstanding share counts at March 31 and May 1.
• COVID-19 test regulatory status, supply commitments, actual orders and margins, and any resulting revenue; also, the clinical and regulatory progress of Healight.
• Final purchase accounting for the Cerecor and Innovus transactions, including preliminary acquired-asset values, goodwill and contingent liabilities.
• Effects of COVID-19 on April and subsequent product demand, inventory, supply continuity and operating cash flows.