Veru Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. The interim financial statements are unaudited. Veru operates a commercial business, primarily FC2, alongside oncology and urology drug development.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue, 2019 | $9.7 million, up 77% | $23.1 million, up 116% |
| Gross profit / gross margin, 2019 | $6.6 million / 68% | $15.8 million / 69% |
| Operating loss, 2019 | $1.8 million | $5.0 million |
| Net loss, 2019 | $2.8 million; $0.04 per share | $9.0 million; $0.14 per share |
| Net loss, prior-year comparable period | $7.9 million | $16.0 million |
- Revenue mix: FC2 generated $9.3 million in quarterly revenue and $22.5 million over nine months. The U.S. prescription channel contributed $4.4 million and $9.4 million, respectively; global public-sector FC2 contributed $4.9 million and $13.0 million. PREBOOST contributed $0.4 million and $0.6 million.
- Margins and spending: Higher U.S. prescription-channel sales, which carry higher margins, lifted gross margin from 56% to 68% in the quarter and from 52% to 69% for nine months. R&D expense increased to $4.9 million for the quarter and $10.1 million for nine months. Nine-month SG&A was $10.7 million, compared with $10.9 million.
- Cash flow: Operating activities used $4.5 million in the nine months, versus $8.7 million in 2018; investing activities used $0.1 million. Financing provided $8.9 million, including $9.1 million net proceeds from an October 2018 public offering and $3.6 million from Aspire Capital share sales, partly offset by $4.0 million in credit-agreement payments.
- Liquidity: Cash was $8.0 million at June 30, compared with $3.8 million at September 30, 2018. Working capital was $5.5 million, versus a $2.4 million deficit; stockholders’ equity was $34.7 million. Management said cash and its ability to obtain additional financing should fund planned operations for the next 12 months.
- Debt and financing obligations: The balance sheet reported $4.7 million of short-term and $4.5 million of long-term credit-agreement amounts. The reported credit-agreement total includes a $1.8 million embedded derivative liability; the separate residual royalty liability was $1.8 million. The agreement requires revenue-based FC2 payments, with approximately $4.7 million of payments estimated over the 12 months after June 30. The $10 million original financing carries an aggregate repayment obligation of $17.65 million before prior payments and other contractual provisions.
Material changes and developments
- Quarterly FC2 unit sales increased 9%, while average selling price per unit rose 56%, principally because of the U.S. prescription-channel mix. U.S. prescription-channel FC2 revenue rose 1,074%; public-sector FC2 revenue fell 4%. For the nine-month period, FC2 unit sales rose 51%, average price per unit rose 39%, public-sector revenue rose 33%, and U.S. prescription-channel revenue rose 1,033%.
- Veru amended the SWK credit agreement on May 13, 2019, reducing the revenue-payment calculation percentages for 2019, restoring the original percentages for 2020, and increasing percentages for 2021 and later. The company said the amendment reduced the effective interest rate; quarterly interest expense fell to $1.1 million from $1.4 million.
- The company issued 7.1 million shares in its October 2018 public offering and sold 2.0 million shares to Aspire Capital during the quarter for $3.6 million. As of June 30, $8.4 million remained available under the Aspire agreement. Common shares issued increased to 67.0 million from 57.5 million at September 30, 2018.
- Veru began shipping FC2 under its South Africa tender award in the third quarter. The award covers up to 29.8 million units in the first year of a three-year tender, but a tender award does not guarantee orders or minimum purchases.
- On July 10, 2019, after quarter-end, the court granted summary judgment for Veru in litigation concerning the APP acquisition. Plaintiffs may appeal; no loss had been accrued.
Outlook, commentary and risks
- Management expects R&D expense to continue increasing during the remainder of fiscal 2019 as multiple drug candidates advance. The filing does not provide a specific revenue or earnings forecast.
- Pipeline milestones described include anticipated entry of VERU-100 into a Phase 2 dose-finding study in early 2020 and an expected summer 2020 NDA submission for TADFIN. VERU-111 was in a Phase 1b/2 trial and zuclomiphene citrate in a Phase 2 trial.
- Veru anticipates continued cash consumption and substantial losses while developing drug candidates. Additional capital may be needed; financing availability and terms are uncertain.
- Public-sector revenue can vary substantially with tender timing, shipment schedules, government funding and order volumes. Management also cited pricing pressure from large global agencies and donor governments. Revenue and receivables are concentrated: three customers represented 64% of nine-month revenue and 76% of net receivables at June 30.
- Other risks include clinical and regulatory outcomes, product commercialization, intellectual-property matters, manufacturing or supply interruptions, FC2-linked debt terms, and potential impairment of acquired development assets. The company added Brexit-related risks, including possible trade disruption and foreign-exchange volatility.
- Veru reported no material change in internal control over financial reporting and concluded disclosure controls were effective. Adoption of the new lease standard was expected to materially affect the balance sheet, but not operating results or cash flows.
Important facts for investors to verify
- Whether U.S. prescription-channel growth and improved gross margins continue, and how much growth offsets public-sector pricing pressure and tender variability.
- Whether actual FC2 orders and shipments under the South Africa award approach the stated maximums.
- Cash use, financing access, share issuance and dilution, and the ability to meet the estimated $4.7 million of near-term revenue-based payments.
- Clinical-trial progress and timing for VERU-111, zuclomiphene citrate and VERU-100, plus the expected TADFIN NDA submission.
- Whether plaintiffs appeal the July 2019 judgment and whether any new developments affect litigation exposure.