Veru Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019. The quarter is Veru’s second fiscal quarter. Figures below are unaudited.
Business context
Veru is developing oncology and urology medicines, while most current revenue comes from commercial products, principally FC2 female condoms. Its pipeline includes VERU-111 and zuclomiphene citrate; commercial products also include PREBOOST. FC2 sales serve public-health markets and U.S. prescription channels.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $7.0 million | $13.35 million |
| Gross profit / margin | $4.61 million / 66% | $9.25 million / 69% |
| Operating loss | $2.12 million | $3.14 million |
| Net loss | $4.03 million; $0.06 per share | $6.18 million; $0.10 per share |
- Quarterly revenue rose 171% year over year. Management attributed growth mainly to FC2: unit sales increased 137% and average selling price per unit increased 12%. For the six months, revenue rose 159%, FC2 units increased 101%, and average selling price per unit increased 27%.
- Research and development expense was $2.91 million for the quarter and $5.27 million for six months, up from $2.08 million and $4.04 million, respectively. Quarterly SG&A was approximately unchanged at $3.82 million; six-month SG&A increased to $7.12 million from $6.85 million.
- Interest expense was $1.26 million for the quarter and $2.54 million for six months, mostly noncash amortization and accretion associated with the SWK financing. Six-month income tax expense was $118,000, versus a $4.55 million benefit in the prior-year period.
- Operating cash use was $4.00 million for six months, compared with $4.18 million a year earlier. Investing cash use was negligible. Financing provided $6.14 million, including $9.13 million net from an October 2018 stock offering, partly offset by $3.19 million of SWK payments. Cash at March 31 was $5.90 million.
- Current assets were $14.14 million and current liabilities $11.27 million, implying working capital of approximately $2.87 million. Stockholders’ equity was $33.54 million. Balance-sheet credit-agreement obligations, including embedded derivatives, totaled approximately $8.55 million; the separate residual royalty liability was $2.34 million.
Material changes versus the prior comparable period
- Quarterly gross margin improved from 47% to 66%, reflecting higher-margin U.S. prescription-channel sales. Operating loss narrowed from $4.70 million to $2.12 million, but net loss increased from $3.83 million to $4.03 million, principally amid higher financing costs and derivative remeasurement expense.
- Six-month net loss narrowed from $8.09 million to $6.18 million. The comparison is affected by a $3.76 million Brazil receivable-settlement loss in the 2018 period; current-period interest expense was substantially higher.
- Cash increased from $3.76 million at September 30, 2018, aided by the public offering. The offering issued 7.14 million shares for $9.13 million net, and the company increased authorized common shares from 77 million to 154 million. Weighted-average shares outstanding rose year over year.
Outlook, risks and unusual items
- Management expects continued cash consumption and substantial losses while advancing drug candidates, with higher R&D spending expected for the remainder of FY2019. It believes cash on hand and access to potential financing are adequate for planned operations for the next 12 months; this depends partly on its ability to obtain financing.
- Management anticipated an NDA submission for TADFIN under the 505(b)(2) pathway between Q4 calendar 2019 and Q1 calendar 2020. VERU-111 was in an open-label Phase 1b/2 trial and zuclomiphene citrate in a Phase 2 trial, according to the filing.
- FC2 revenue is exposed to irregular tender and large-order timing. Management cited spending pressure among large global agencies and donor governments. The South Africa tender award covered up to 29.8 million units in its first year, but no units had shipped by March 31; the company expected shipments to begin in FY2019 Q3. A tender award does not guarantee minimum purchases, and the award could be affected by local-manufacturing initiatives.
- On May 13, 2019, after quarter-end, Veru amended the SWK financing: 2019 revenue-based payment percentages were reduced, but the repayment amount increased from 175% to 176.5% of amounts advanced; later payment percentages increase from 2021 onward. The estimated May 15 payment fell from approximately $1.7 million to $0.9 million. The company said the modification may cause an extinguishment loss in the quarter ending June 30, 2019; the amount was not yet estimable.
- A class was certified in litigation relating to the APP acquisition; cross-motions for summary judgment were scheduled for July 11, 2019. Veru denied liability and said it would defend the case; no loss was accrued because a loss was not both probable and reasonably estimable.
- Other risks include clinical and regulatory uncertainty, financing needs, customer concentration, product and tender demand, and potential Brexit-related trade, currency and regulatory disruption. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether FC2 shipment growth and higher-margin U.S. prescription sales persist, and whether the South Africa tender converts into orders and shipments.
- Cash burn, financing availability and dilution risk, including potential use of the Aspire Capital facility; $12.0 million remained available under that agreement at March 31.
- The actual cash-payment and accounting effects of the May 13 SWK amendment, including any extinguishment loss and the higher ultimate repayment obligation.
- Clinical-trial progress and the timing and regulatory pathway for TADFIN and other pipeline candidates.
- Developments and potential financial consequences of the APP-acquisition litigation; the filing provides no clear estimate of possible loss.