Aytu BioScience, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019 (the company’s fiscal first quarter of 2020); filed November 14, 2019. The filing’s financial statements are unaudited. Aytu is a specialty pharmaceutical company commercializing products for hypogonadism, cough and upper respiratory symptoms, insomnia, and male infertility.
Financial results and liquidity
| Metric | Quarter ended Sept. 30, 2019 | Prior-year quarter |
|---|---|---|
| Net product revenue | $1.440 million | $1.432 million |
| Cost of sales | $0.376 million | $0.411 million |
| Gross profit / approximate gross margin | $1.064 million / 73.9% | $1.021 million / 71.3% |
| Operating expenses | $6.175 million | $4.849 million |
| Loss from operations | $(4.735) million | $(3.417) million |
| Net loss | $(4.929) million | $(3.446) million |
| Basic and diluted loss per share | $(0.32) | $(1.96) |
| Cash used in operating activities | $2.988 million | $2.744 million |
At September 30, cash and cash equivalents were $7.014 million, with $0.250 million of restricted cash. Total current assets were $11.983 million and current liabilities were $6.102 million. The resulting current ratio was approximately 2.0. Cash, restricted cash, and cash equivalents together declined $4.030 million during the quarter. Investing activities used $1.042 million, including a $1.0 million loan to Innovus; there was no financing cash flow.
Total liabilities were $28.700 million and stockholders’ equity was $2.324 million, down from $7.088 million at June 30, 2019. Liabilities included $23.509 million of acquisition-related contingent consideration and $0.394 million of lease liabilities. The filing does not identify conventional borrowings as a material balance-sheet liability.
Changes versus the prior-year quarter
- Revenue increased just $8,017, or about 0.6%; U.S. revenue declined slightly while international revenue increased.
- Gross margin improved as cost of sales fell despite nearly flat revenue.
- SG&A increased $1.570 million, or 43.9%, primarily due to Tuzistra XR launch-related sales and marketing, staffing, occupancy, travel, and stock compensation. Amortization increased $0.123 million.
- Research and development expense fell about 50%, mainly due to lower MiOXSYS-related costs.
- Net loss widened by $1.483 million, and operating cash use increased by $0.243 million.
Outlook, transactions, and risks
- Management expected commercial costs to remain roughly flat or increase modestly, with long-term revenue growth intended to reduce reliance on cash and financing. No specific revenue or profitability guidance was provided. Management expected R&D expense to rise slightly in fiscal 2020 to support a MiOXSYS study.
- The company disclosed substantial doubt about its ability to continue as a going concern because, at September 30, cash on hand was not sufficient to cover potential net cash outflows for the following 12 months. It stated that future capital availability, timing, and terms were uncertain; possible responses to a funding shortfall included reducing programs, headcount, or R&D, or renegotiating or relinquishing product rights.
- After quarter-end, Aytu completed a $10 million securities offering, receiving approximately $9.3 million net, through Series F convertible preferred stock and warrants. The warrants have a $1.25 exercise price and require shareholder approval before exercise.
- The November 1, 2019 Cerecor asset acquisition involved $4.5 million cash, approximately 9.8 million Series G preferred shares, and assumed obligations. Disclosed obligations included approximately $16.6 million of fixed payments to a third-party creditor, up to $3.5 million for rebates and returns, $15 million due in January 2021, recurring and revenue-based payments, and product royalties of 15%–23.5%. Management said the acquisitions could increase revenue capacity and create cost synergies, but success and timing were uncertain.
- The proposed Innovus merger was expected to close no earlier than the quarter ending March 31, 2020 and required shareholder approvals. Consideration included up to $8 million in Aytu shares, subject to deductions, and up to $16 million in additional milestone payments. Aytu had advanced Innovus a $1.0 million note, later increased by approximately $0.4 million, bearing 10% interest.
- At quarter-end, equity was below Nasdaq’s stated $2.5 million minimum. The company said the subsequent offering and Cerecor transaction increased equity and that it believed it was compliant at filing. Acquisitions also bring integration, execution, dilution, payment, and potential listing risks.
- Management reported effective disclosure controls and no material pending legal proceedings. It reported no material market-risk exposure or off-balance-sheet arrangements.
Important facts for investors to verify
- Cash runway and cash burn after the offering and acquisitions, including whether additional financing will be needed.
- Final acquisition consideration, acquired product count and portfolio scope, integration costs, realized sales, and whether projected synergies materialize.
- The timing and full schedule of Cerecor-related fixed, variable, royalty, rebate, and return obligations, especially the $15 million January 2021 payment.
- Innovus merger approval and closing, the bridge loan balance and repayment terms, and any resulting share issuance or milestone payments.
- Potential dilution and current fully diluted share count. The filing reports differing September 30 common-share figures in its balance sheet and equity statement, while the cover gives a later outstanding-share count.
- Nasdaq equity compliance after subsequent transactions and the terms, conversion, and dilution effects of the Series F and Series G preferred stock and warrants.