A Tangled Balance Sheet and a History of Cash Burn
Aytu’s long-term track record for shareholder value creation is only cause for further concern. Since 2013 the company has burned cash at an accelerating rate while continuing to tap capital markets to raise cash. In my opinion, for pre-revenue companies with clinical pipeline candidates in need of research and development, this is an acceptable dynamic. For a company like Aytu, however, which mostly licenses and acquires marketed products and should be trying to sell them at a profit, this raise-and-burn profile is a problem.
Meanwhile, the current capital structure is difficult to disentangle, as the company has engaged in a series of financing transactions and agreements since its 2/14/2020 10-Q filing. Among the subsequent financing 8-Ks, I identified the following items:
2/14: Innovus merger closed; Aytu acquisition sub merged with Innovus; all outstanding Innovus common stock exchanged for 3.8 million shares of AYTU and $16 million in CVRs; outstanding Innovus stock exchanged for Aytu preferred stock and retired. Cash warrants exchanged for Series H Preferred stock -- 1,997,736 shares. Series H preferred is convertible at the conversion price.
3/13: Aytu entered into a securities purchase agreement with institutional investors pursuant to which the company agreed to sell and issue an aggregate of 16,000,000 shares of common stock at $1.25 and warrants to purchase up to 16,000,000 shares of common stock at an exercise price of $1.25 per share for aggregate gross proceeds of $20 million before fees
3/20: Aytu entered securities purchase agreement with institutional investors -- agreement to sell and issue in a direct offering 12,539,197 shares @ $1.595; warrants to purchase up to 12,539,197 shares of common stock at $1.47 per share, aggregate gross proceeds of $20 million before fees, warrants immediately exercisable -- shelf originally registered 11/22/2017
4/7: Company announces "it has received over the preceding three weeks $23 million in cash proceeds from warrant exercises with prices ranging from $1.25 to $1.50. The warrants had a weighted-average exercise price of $1.35. In total, approximately 17.1 million warrants were exercised." Cash balance $62.5 million.
If the mentioned securities are convertible to common shares on a 1:1 basis, then here is my estimate of the updated share count given the transactions subsequent to the 10-Q.
Seeking Alpha currently lists AYTU’s market cap at $125.51 million. I can’t fully account for the $45 million discrepancy, although you can get close by looking at the warrants issued March 13 and March 20: $1.50 x 28.5 million = $39.6 million. The point is not that my analysis is exactly correct, but instead that given the frequency of shareholder transactions and difficulty understanding terms of preferred stock conversions (or the triggers of such conversions) the market may very well be failing to account for all potential dilution under existing agreements. This is to say nothing of any future financing transactions. Given management’s history, I view further dilution as probable.
As a quick aside, Aytu disclosed in its 10-Q a series of risks associated with ownership of its shares by Armistice Capital, including a scenario where Armistice would own more than 50% of Aytu (while also noting Armistice is restricted from owning more than 40% of Aytu’s outstanding common stock). Armistice, which has a director on Aytu’s board, was a holder in both Aytu and Innovus, a company Aytu finished acquiring earlier this year. In this context, I think it’s simply relevant to know that such a shareholder exerts substantial influence over the company.
Taking all this evidence together, I believe Aytu is likely to engage in additional transactions that will dilute shareholders, and there's a risk that such transactions will disproportionately benefit insiders. These deals are opaque (at least to me), making it difficult for outsiders to properly assess shareholder value.
