Aytu BioPharma (NASDAQ:AYTU) Q3 2020 Earnings Call

0:00 The substantial increase is largely due to the recognition of the fair value of the acquired assets, including the associated goodwill. Other key items driven by the asset purchase include a higher AR balance, which reflects increased sales and some changes to the administrative processes related to AR collections. Inventory and prepaid asset balances each increased due to the asset purchase, and a new asset, other current assets, was recognized for amounts owed to the company by third parties for certain reimbursable operating costs. Our Q2 ending cash balance totaled $5.5 million.

0:47 and the liability side, our accounts payable increased by approximately $7.3 million as a result of assuming $4.1 million of liabilities related to the asset acquisition, increased operating expense associated with absorbing the former Seracor commercial team and transaction costs. Accrued liabilities increased approximately $1 million due primarily to the assumption of new royalty and other product-related fees tied to the asset purchase. Our long-term liabilities now include fixed payment obligations in the stated amount of approximately $26 million, which were assumed with the asset purchase.

1:35 One portion of the fixed payment obligations matures in January of 2021, requiring a payment of approximately $15 million. So in summary, we have a much larger balance sheet as a result of the asset purchase and have assumed certain fixed liabilities and other obligations. Looking ahead. We expect top-line growth to continue with the addition of the acquired product portfolio and the burn rate to decline as revenue grows and we shed overlapping costs that resulted from the asset purchase over the next two to three quarters. And with that, I'll turn the call back over to Josh.

2:16 Thank you, Dave. Again, it was an extremely busy and transformational quarter, particularly on the corporate and also on the scientific development front. Natesto had a breakout quarter with respect to its clinical story. On October 17th, the company announced positive results from the Natesto's spermatogenesis study, which were presented at the annual meeting of the American Society for Reproductive Medicine. Dr. Ranjith Ramasamy, the study's principal investigator and director of reproductive urology at the University of Miami, presented that over the course of a six-month treatment period with Natesto, hypogonadal men increased their serum testosterone levels while maintaining normal sperm concentration, sperm motility, and total modal sperm count. This data readout convincingly separates Natesto from other low-T treatments in that men maintain their fertility while taking Natesto, something no other testosterone replacement therapy has demonstrated.

3:08 We're excited about getting these data into the scientific domain, and following that, we'll look to begin discussions on potential label modification for Natesta. We'll work in concert with our partners at Aceris to move that initiative forward. Now on to our corporate transformation. In Q2, again, we closed that SeraCore asset purchase of the commercial RX portfolio. This commercial portfolio generated $12.7 million in revenue for the 12 months into 1231, and consists of five novel and differentiated therapeutics. Following the asset purchase, we moved immediately to bring over much of the former Cerakor commercial group and their leader, Matt Phillips. In conjunction with that move, we rationalized multiple low-performing or overlapping legacy sales territories and kept the highest performers across both legacy organizations.

3:55 With the acquisition of the commercial portfolio, we've increased RX portfolio revenues to $20 million on an annual basis, and we believe more growth is in store. The sales teams have come together as one as we've just concluded our first national sales meeting a few weeks ago. At that meeting, we conducted extensive cross-training on the testo such that all former Seracor reps are now out there promoting the testo alongside the Aytu legacy reps. We'll continue to evaluate and implement cross-selling opportunities across the product line and put the best resources to work for our portfolio. Now for the most recent component of our transformation, a pending acquisition of an office. Just this morning, both companies held their special shareholder meetings with the merger that was approved. With this approval, we expect to close the transaction in general.

4:45 Aytu Bioscience issued a press release earlier this afternoon with details of the company's operational and financial results for this third quarter. The company of the press release is available on the news page of the company's website at AytuBio.com.

5:01 I'd like to remind everyone that today's call is being recorded. The replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, the webcast will be accessible live and archived on Aytu's website within the investor section under the event and presentation at atubio.com. Finally, I'd like to call your attention to the customary safe harbor disclosure regarding forward-looking information. Talkers called today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of Aytu Bioscience. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, May 14, 2020, These statements are not guarantees of future performance.

5:55 Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including but not limited to the factors set forth in a company's filings with the SEC. Aytu undertakes no obligation to update or revise any of these forward-looking statements. I'd now like to turn the call over to Aytu's CEO, Josh Disbrow. Please go ahead, Mr. Disbrow.

6:28 Thank you, Jarrett. Good afternoon, everyone. Thanks for joining today's call during which Dave and I will review our fiscal Q3 performance and highlight the company's operational developments and key achievements. And we'll provide an important update on our COVID-19 initiatives. To say the least, we had an exceptional quarter and one I'd call transformative in multiple ways. First, looking at the top line, Q3 was our highest revenue quarter in the company's history with $8.2 million in sales. Importantly, that quarterly revenue number exceeds what we did all of last fiscal year combined, yet only includes half of the quarter for the newly acquired Inovus consumer health business segment. Also, that revenue number does not include any sales related to the COVID-19 rapid tests, as those sales didn't begin until our Q4.

7:18 Next, from an operational perspective, we achieved an important milestone midway through the quarter as we successfully closed the Inovus Pharmaceuticals acquisition. We are now well underway in integrating that business. Beginning with the current June quarter, our fiscal Q4, we are booking the entire consumer and Rx business revenues. We're also now booking COVID-19 test revenue. So we expect this quarter to look very different than Q3. Also, from an operational perspective, Q3 was the first full quarter of having the former Seracor commercial business integrated, an asset purchase we closed six months ago back in November. I'm pleased with the progress on that front and believe we have strong growth ahead of us on the RX side of the business.

8:04 Perhaps the most important highlight from the quarter is that we entered the COVID-19 fight. We acquired the distribution rights to a COVID-19 rapid test, and subsequent to the end of the March quarter, began distributing the test in the U.S. Following Q3, we acquired the distribution rights to a second COVID-19 rapid test from Singapore-based Biolytics, and we're excited about adding this to our rapid test distribution efforts. Q3 was also transformative for us from a capitalization standpoint. in that the company raised substantial equity capital and ended the quarter with $62.5 million in cash, cash equivalents, and restricted cash. Additionally, given the large number of warrant exercises and the conversion of all preferred shares to common shares, we cleaned up the cap table this quarter.

8:50 There are no longer any preferred shares outstanding, and over 17 million warrants were exercised for cash over a three-week period in March, raising approximately $23 million. For the first time in a long time, the company's cap structure is clean, so to speak, and the balance sheet is the strongest in the company's history. Given our strong cash balance, we believe that we have enough cash to get to profitability based on our current operations and revenue expectations and based on what we're seeing today in the business. We are a very different company today than we were just three months ago, and I couldn't be prouder of our team for all their hard work in making this transformation happen. Before I get into some specific operational highlights, let me hand the call over to Dave to cover the quarterly financials.

9:35 Dave? Thank you, Josh, and thank you all for joining us. Today, I'll review the financial results for our third quarter that ended March 31st, 2020. As a reminder, we have a June 30th fiscal year end. I'll preface my comments today by sharing that this has been a most productive time for Aytu. Despite the disruption many have felt as a result of the COVID-19 pandemic, we at Aytu have been more productive than ever. From acquiring and distributing COVID-19 antibody test kits to first responders and others, to integrating two transformational transactions, taking on the development of the promising Helite technology, and finally, raising more than $70 million during the quarter.

10:29 This has been an incredibly productive period for Aytu, and our results show it. Top line net revenue for Q3 is an all-time high of $8.2 million, substantially higher than the $3.2 million reported last quarter and the $2.4 million reported for Q3 last year. In fact, our Q3 2020 revenue of $8.2 million is greater and the revenue Aytu generated in all of fiscal year 2019. The substantial growth was due to recognizing revenue from both the Seracor and Inovus transactions on top of legacy Aytu revenue. In Q3, we recognized a full quarter of revenue from the Seracor products acquired in Q2 and we captured a partial quarter of Inovus revenue after closing the merger in February.

11:27 Year-to-date 2020 net revenue is $12.8 million, more than doubling the $5.6 million reported for the same nine-month period last year. Gross profit for Q3 was $6.2 million, representing a gross profit margin of 75.5%. Going forward, we expect gross profit margins in the range of 70% to 75%, depending on business mix. Operating expenses excluding cost of goods sold were $10.95 million for the quarter. This compares to $7.5 million last quarter and $6.1 million in the year-ago quarter.

12:16 This higher level of operating expenses includes normal expense levels supporting the business, plus transaction costs and other costs that we expect to rationalize as we continue to integrate the acquired businesses. You should note that we recognized only a partial quarter of revenue from Inovus. We also recognized only a partial period of Inovus operating expense. Operating loss for the quarter narrowed to $4.8 million compared to $5 million last quarter. operating loss for the year-ago quarter was $4.3 million. If we subtract out non-cash costs from the operating expenses, the operating loss for the quarter was $3.1 million compared to $3.8 million in Q2 and $3.3 million in Q3 of 2019. Taking it one step further by subtracting out non-recurring transaction costs The operating loss for Q3 would be in the range of $2.4 to $2.5 million, a substantial improvement over prior quarters.

13:33 I expect the operating loss to decline as we move forward due to active elimination of duplicative operating costs and transaction expenses and as we continue to grow the top line. Net loss for the quarter was $5.3 million and $4.5 million in the year-ago quarter. Loss per share for Q3 was $0.15 compared to $0.50 in the year-ago quarter, and that's based on 35.3 billion and 9.1 million weighted average shares outstanding, respectively. In the balance sheet, the picture has also improved substantially. Total assets were $159 million as of 3-31, compared to approximately $35 million as of our prior fiscal year end, June 30, 2019. We reported $83.3 million of current assets, including $62.5 million of cash and receivables of $10.2 million.

14:44 Our cash position was improved after we executed three separate registered direct financings in March, raising $49 million in gross proceeds. In addition to the RD offerings, investors exercised approximately 17.1 million warrants for cash proceeds of $23 million for total financing proceeds of $72 million during the quarter. The exercise warrants included a portion of the warrants sold in the March offerings, plus some of the pre-existing warrants with an exercise price of $1.50. The higher-than-normal receivables balance is largely due to a lag in customer collections and true-ups with asset seller Seracor related to the acquired product portfolio.

15:42 With regard to liabilities, I discussed the more significant liabilities related to the Seracor asset transaction last quarter, so I won't go into detail on those. The new liabilities this quarter are notes payable, with approximately $3 million of short-term debt assumed in the Inovus transaction, and CVRs, which represent the Inovus milestone-based earnouts. The CVR payment was made to the former Inovus shareholders. The first CVR payment was made to the former Inovus shareholders after it was determined that Inovus revenue for the 2019 calendar year was in excess of the $24 million milestone threshold.

16:30 The $2 million CVR was paid during the quarter in Aytu common stock. Finally, as a result of the Q3 capital transactions and warrant exercises after the end of Q3, we have approximately 120 million common shares outstanding today. We have zero preferred shares outstanding and approximately 21 million unexercised warrants with exercise prices ranging from $1.25 to $2. All together, and in summary, The company continues to make progress toward achieving break-even operations and is better capitalized now than at any time in the past.

17:16 And with that, I'll turn the call back over to Josh.

17:20 Thank you, Dave. As it relates to the company's operations, let me first touch on the core Rx and consumer health businesses. I'll come back to our COVID-19 efforts near the end of my prepared remarks. I'll first speak to the newly acquired consumer health business unit, Inovus Pharmaceuticals. Again, we closed this acquisition on February 14th and only have half of the quarter's revenue for the consumer segment, which was $3.45 million. It was a solid quarter for this business segment, and we're excited about the growth ahead. We're also looking forward to realizing some key synergies, and we've already begun to rationalize many of the consumer segments' overlapping G&A functions with the aim of getting this unit to profitability. Importantly, Inovus' unique blend of direct-to-consumer marketing and e-commerce has enabled the consumer health segment of our business to continue with relatively little disruption due to COVID-19.

18:15 While we do expect some impact, we'd expect it to be relatively modest. People, more than ever, are of course staying home due to the virus, so the e-commerce function in particular has continued to be strong for our consumer health business. An important product launch for the Inovus team was Rigoxidine, a hair loss treatment for men and women that competes with Rogaine. This is a consumer health category with approximately 50 million retail units sold in the U.S. annually. The team has been pleased with the product sales performance in the early weeks. For the consumer health business, the plan is to continue to build out the OTC medicines and supplements franchise and launch new products over the coming quarters, and they're right on track in preparing for these product launches.

19:00 The product selection strategy we apply to both business segments is similar. We identify novel products competing in very large markets in order to address significant patient and consumer health needs. I look forward to sharing more as the new consumer health products come to market. The Rx business also had a productive quarter in our first full quarter with the newly expanded prescription portfolio. and while we are seeing a short-term impact of COVID on prescription sales, the expected COVID rapid test sales should more than supplement our prescription revenue. Before I speak to that though, I'll note that Natesto had an important recent clinical development. Just after Q3, we announced the publication of Natesto clinical data demonstrating the maintenance of fertility in hypogonadal men treated with Natesto for six months.

19:47 The clinical data were published in the reputable peer-reviewed journal of urology. We believe that this research is resonating and will continue to resonate in the urology community and stands to further separate the testo from other testosterone replacement therapies in this nearly 7 million prescription category. Turning to the rest of the Rx portfolio, we had solid revenue contribution across the Rx portfolio as we now have numerous products contributing to the revenue mix. One specific highlight, we saw notable prescription growth from Carbonyl ER starting late last calendar year and continuing into the spring allergy season. We're excited about how we're positioned with respect to the Rx business, and we see solid growth ahead. Despite the fact we've had most of our reps out of the field since late March due to COVID, they have still been able to have impact.

20:36 Importantly, as a company, we've been using this time to have our reps sharpen their selling skills and enhance their product knowledge. Our commercial leadership team has spent considerable time developing important sales training. The reps have done a great job and have remained busy learning and refining their territory and customer knowledge. They've been doing this while also getting creative and maintaining contact with some important physician accounts. Reps have been conducting virtual sales meetings with prescribers, and we've had some great successes reported from the field as the reps find new and creative ways to access their prescribers. We're all anxious to get back to some semblance of normalcy in our personal and professional lives, but the company will be prudent in how we and our reps ease back into making calls in a safe and effective way as states and municipalities are now starting to open back up.

21:27 With respect to our COVID rapid test selling efforts, we've been effectively servicing healthcare accounts purchasing the COVID rapid test and have had minimal disruption. Nearly all of the test selling is being done remotely. Also, the warehousing and shipping has been done with safe social distancing measures put in place. So with respect to COVID-19 and the high interest in our various COVID projects, I have some important updates. As we've previously announced, we've received an initial shipment of 100,000 tests into Colorado in early April that we immediately began distributing and selling. I'm pleased to inform you today that we have since received a large number of COVID rapid tests into our U.S. warehouse and are now released for distribution.

22:13 We had been expecting these, and while we did experience a delay in receiving the product, I'm happy to say that the tests are now here and they're going out to customers. Perhaps made obvious by the fact that the tests are actually here is the fact that these tests were indeed cleared for export by China. So the tests are in our warehouse, more tests are coming, and we expect a steady supply of rapid tests going forward. Finally, in my prepared remarks, I'll touch on the HealLite medical device opportunity. As we announced on April 20th, we have signed an exclusive worldwide licensing agreement with Cedars-Sinai Medical Center in Los Angeles. The researchers at the Cedars MAST program, led by Dr. Mark Pimentel, have developed a novel approach to treat infections using UV light administered via a novel catheter. The research began back in 2016, and with the onset of the COVID crisis, the group pivoted to study the Hill Light device as a potential treatment for the COVID virus.

23:09 Significant preclinical research has been carried out with the device with promising results observed. Very recently, as it relates to the COVID effort, the team has been in discussions with FDA, and both the MAS team and Aytu have engaged with Sterling Medical Devices to finalize the device's development. We're collectively seeking clarity from FDA on a path forward for the device, and upon receiving such clarity, we expect to move into small-scale production of the devices for human use. We're excited about this potential treatment for COVID, and we're enthusiastic about the device's potential utility in other conditions, such as ventilator-associated pneumonia. There are between 250,000 and 300,000 cases of ventilator-associated pneumonia in the US each year. And influenza caused over 700,000 hospitalizations in the US this past flu season alone. So to wrap up our prepared comments, it was a strong and transformational quarter for the company.

24:07 To summarize, we've recorded our highest quarterly revenue in the company's history. We entered the COVID-19 fight through two test kit distribution agreements, and now with a large quantity of tests just received. We closed on the Inovus acquisition. We completed our first full quarter as a combined RX business. We ended the quarter with over $62 million in cash. We substantially cleaned up our cap table, having converted all preferred shares into common stock. and finally, we're now moving forward with a novel opportunity with HealLife. With that, thank you for joining today's call and we'll now open the call up for questions from the analysts. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad.

24:55 A confirmation tone will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We have a question from Jeffrey Cohen, Landenburg Palman. Please go ahead, sir.

25:23 Well, hi, Josh and Dave. How are you? Hi,

25:26 Jeff. Doing well. Thank you.

25:28 So, firstly, just for clarification, I believe you already sold the first lot of the LB test, and you were referring to the second lot we're talking about that you received in your U.S. warehouse, or was that a reference to the first lot?

25:44 The second batch that we had been talking about that we'd been expecting, yes. That's what I was referring to.

25:50 Okay. So you received some portion of it. I imagine you didn't receive all of it because it's pretty big.

25:57 We've got a big supply, so we'll leave it at that. We want to steer clear of giving people up to the second of exactly how many and exactly when it's coming, but the bottom line is we have a very adequate supply at the moment and expect to have additional supply going forward.

26:15 Okay. Can you give us any further color on the revenue composition for the quarter? I know you called out Inovus at approximately $3.5 million, and I'm assuming that was the portion for half the quarter that you booked, correct?

26:29 That is correct, and then the other portion would have been attributable to the RX business and really fairly well spread out. It's a pretty good distribution of revenue across the product mix. Yeah, and Jeff, going forward, we'll be breaking out, you know, we'll have two segments now. We'll have the consumer health segment and the RX segment. So we'll always talk about the RX segment as, you know, one business and the consumer health business as a business.

27:01 Okay. And I'm assuming also the first lot from LB was included in the quarter as well. Yeah, so just to be clear, there was no revenue in Q3 from the COVID-19 test kits. No revenue at all. It will begin falling in Q4.

27:24 Got it. Okay. Thanks for the clarification. Can you give us any color on the experience that Inovus has had over the past, say, six or eight weeks? Yes. I imagine that some businesses online in this situation have been somewhat weak over the past six to eight weeks. Any color there or any flavor as far as what's been going on there, what you're seeing? Yeah, so the Anovus business is actually holding in there pretty strongly, I'd say. There's really two pieces of their business. The direct mail approach has had some slowing, largely due to the U.S. mail moving slow, and that's due to the COVID-19 pandemic. The online sales has been as expected, so really no interruptions, no slowdowns there at all. So overall, we're pleased with how Inovus is operating right now.

28:29 Fantastic. And then lastly for me, based on this quarter at least and your forward guidance on margins in the 70% to 75% mix, is it safe to say at that point then call it, I don't know, $12 million to $14 million per quarter on a top-line basis gets you producing cash? Well, you know, so here's the, with the merger and the acquisition, Jeff, we're still not fully, you know, consistent on our operating expenses. I mean, the gross profit margin, we're confident, will fall in that 70 to 75% range. You know, the Inovus gross profit margin is a little bit lower, quite a bit lower than the RX side of the business.

29:22 But, you know, as we look at the expected revenue contributions from both sides. We're confident in that range. The operating expenses, there's still these duplicative costs that we're running through. There's some adjustments and headcounts. There's shuffling of resources and such. So operating expenses will go up a little bit next quarter because we will have a full quarter of Inovus. But we do expect to have some reductions as well. So it won't be an exact increase of expenses due to the other half of Inovus. So there will be some economies there.

30:08 But after we get through next quarter, we'll have a much better view to what the kind of ongoing cost structure is going to look like.

30:19 Got it. OK. And then lastly for me, the helite development at Sterling. I'm assuming that would be a Class II 510 filing?

30:29 That's the expectation. There's a near-term thought, obviously, around COVID that would be an abbreviated pathway if the FDA clears it that way. But yeah, the expectation is that would be a Class II 510 . And as we mentioned, we'll look at other conditions outside of COVID, obviously thinking beyond the pandemic, such as ventilator-associated pneumonia, influenza, and potentially beyond that. So I think the potential for it is quite broad, but obviously we're in the very early stages of really establishing what the specific clinical applications will be, frankly, because it may be so broad.

31:04 Okay. Got it. That does it for me. Thanks for taking the questions. Thanks, Jeff. Thanks, Jeff. There are no further questions. I'd like to turn the conference back over to Josh Disbrow for closing remarks. Please go ahead, sir.

31:22 Thank you, Jerry. Thank you, Jeff, for the questions. Thanks to everyone for joining our call this afternoon. We're looking forward to sharing our fourth quarter and our full year fiscal 2020 results when we report those out in September. So in the meantime, we will continue to keep you informed of important updates along the way. Thanks very much. Have a good evening. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.