Veru Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Although the request identifies 2018 Q4, this filing reports full-year results; the supplied text does not provide a standalone fourth-quarter income statement or cash-flow summary. Financial figures are in U.S. dollars.
Business context
Veru is an oncology and urology biopharmaceutical company with a marketed business and a developing drug pipeline. Nearly all revenue in FY2018 and FY2017 came from FC2, its female condom product; PREBOOST sales were not material. The pipeline includes two oncology candidates and four urology formulations, primarily at clinical or bioequivalence-study stages.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $15.9 million | $13.7 million |
| Gross profit / gross margin | $8.8 million / 55% | $7.0 million / 51% |
| Research and development expense | $10.9 million | $3.1 million |
| Selling, general and administrative expense | $14.8 million | $11.5 million |
| Operating loss | $20.9 million | $8.5 million |
| Net loss attributable to common stockholders | $23.9 million, or $0.44 per share | $8.6 million, or $0.25 per share |
| Operating cash flow | $(11.5) million | $1.0 million provided |
| Cash at year-end | $3.8 million | $3.3 million |
| Working capital at year-end | $(2.4) million | $4.8 million |
| Total assets / stockholders’ equity | $48.5 million / $29.5 million | $55.3 million / $48.5 million |
Revenue rose 16% as average FC2 selling price increased 21%, partly offset by a 4% decline in unit sales. Gross margin improved four percentage points. FC2 unit sales were 25.3 million, down from 26.3 million. The $4.0 million loss on settling the Brazilian distributor Semina receivable was a significant FY2018 item. Research and development spending increased with pipeline investment. FY2018 interest expense was $3.0 million, primarily noncash accretion and amortization related to SWK financing; a $0.9 million gain from changes in embedded-derivative fair value partly offset non-operating expense.
Liquidity, financing and debt
Cash used in operating activities was $11.5 million, while financing activities provided $12.1 million, principally from the SWK facility and Aspire Capital share sales. The company reported $3.8 million of cash at September 30, 2018 and negative working capital of $2.4 million; the working-capital decline was primarily attributed to estimated SWK payments due within 12 months. Management said available cash and its ability to obtain additional financing were expected to fund planned operations for the next 12 months, while also warning that further capital would be needed to support development.
In March 2018, Veru received a $10.0 million initial advance under a SWK synthetic royalty financing, with potential additional draws subject to distribution agreements. The arrangement requires revenue-based quarterly payments and repayment of 175% of advances, less prior payments, by maturity in March 2025; FC2-related assets secure the obligations. At September 30, the balance sheet showed $6.7 million of short-term and $2.7 million of long-term credit-agreement obligations, plus a $1.8 million residual-royalty liability. A 5% FC2 revenue royalty begins after the required credit-agreement amount is paid. The agreement includes financial and operating covenants and change-of-control payment provisions.
After year-end, Veru completed a public offering on October 1, 2018, raising $10.0 million gross and $9.2 million net. It reported approximately $10.7 million in cash, $3.9 million in net trade receivables and $4.7 million in current trade payables as of November 30, 2018. It also paid approximately $2.6 million to SWK on November 15, covering two quarterly revenue-based payments.
Material changes and outlook
- Operating expenses increased to $29.7 million from $15.5 million, reflecting higher R&D, higher SG&A and the Semina settlement loss. The net loss widened substantially from FY2017.
- The weighted-average share count rose to 53.9 million from 34.6 million, in part reflecting the 2017 conversion of Series 4 preferred stock issued in the APP acquisition and subsequent equity issuance.
- Management expected FY2019 R&D expense to increase as multiple candidates advanced. It expected to submit NDAs in 2019 for Tamsulosin DRS, Tamsulosin XR, Tadalafil/Finasteride and Solifenacin DRG. These were plans, not approvals or guaranteed filing dates.
- Zuclomiphene citrate entered a Phase 2 trial in September 2018, with top-line results expected in the first half of 2019. Veru planned to begin a Phase 1b/2 VERU-111 trial in early 2019, with early clinical assessment anticipated during that year.
- Tamsulosin DRS met the AUC bioequivalence measure in its prior study but did not meet the peak-concentration (Cmax) criterion. Veru planned a reformulated study, expected to be completed in the first quarter of calendar 2019; further delay or failure remained possible.
- FC2’s South Africa tender award covered up to 29.8 million units in the first year and up to 75% of a tender of as many as 120 million units over three years. The filing emphasizes that tender awards do not guarantee minimum purchases and could be affected by local manufacturing initiatives.
Risks, contingencies and unusual items
- Veru reported operating losses since FY2016 Q4 and expects continued cash use and losses while developing its candidates. Additional financing may be needed; equity funding could be limited by the 77 million authorized-share ceiling and may dilute shareholders.
- Three customers accounted for substantial FY2018 revenue: UNFPA ($4.1 million), USAID ($3.0 million) and Barrs Medical ($2.9 million). Three customers represented 74% of year-end receivables, creating concentration and collection risk.
- FC2 faces tender timing and funding uncertainty, pricing pressure and competition. The FDA’s 2018 reclassification of female condoms to Class II may lower barriers to new U.S. entrants. Production relies on a single Malaysian facility and a principal raw-material supplier.
- The company depends on successful clinical results, regulatory review, intellectual-property protection, third-party manufacturers and access to capital. Purchased urology intellectual property carries installment and milestone obligations secured by the assets; failure to pay could jeopardize rights. VERU-111 is licensed from Ohio State University and also entails milestone and royalty obligations.
- Litigation related to the APP acquisition remained in discovery. Plaintiffs sought equitable relief, damages and other remedies, including rescission; Veru said it believed the case was without merit. No loss was accrued because a loss was not both probable and reasonably estimable.
- The tax provision was affected by a $5.5 million increase in valuation allowance, foreign-tax-credit recharacterization and U.S. tax-law changes. Deferred-tax-asset realizability depends on future taxable income and management estimates.
Important facts for investors to verify
- Whether the post-year-end $9.2 million net offering proceeds and November cash balance adequately fund operations after SWK payments and planned development spending.
- FC2 revenue, unit volumes, pricing, tender orders actually placed and customer collections—particularly concentration in major public-sector customers and receivables.
- Progress and results of the zuclomiphene Phase 2 and VERU-111 Phase 1b/2 programs, including whether trial timing and safety or efficacy outcomes support continued development.
- Whether the revised Tamsulosin DRS formulation meets Cmax bioequivalence and whether the planned 2019 NDA submissions are achieved.
- SWK payment calculations, covenant compliance, remaining repayment burden and the terms and timing of any further financing or share issuance.
- Developments in the APP acquisition litigation and any material change in contingent-loss assessment or the valuation of acquired intangible assets and goodwill.
Audit: RSM US LLP issued an unqualified opinion that the consolidated financial statements fairly presented the company’s financial position and results in accordance with U.S. GAAP. The auditor was not engaged to opine on internal-control effectiveness; management reported its controls were effective.