VERU INC. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 14, 2018. The filing is unaudited. Fiscal Q3 should not be confused with the calendar-year third quarter.
Business context and reporting period
Veru sells FC2 female condoms, primarily to public-sector and international customers, and is developing urology and oncology drug candidates following its acquisition of Aspen Park Pharmaceuticals. Nearly all reported revenue in the periods came from FC2; PREBOOST and U.S. prescription-channel sales were not material.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $5.50 million, versus $4.31 million | $10.66 million, versus $9.96 million |
| Gross profit and margin | $3.08 million; 56%, versus 53% | $5.59 million; 52%, broadly consistent with prior year |
| Operating loss | $4.96 million, versus $1.27 million | $17.10 million, versus $5.72 million |
| Net loss | $7.93 million, or $0.15 per share | $16.02 million, or $0.30 per share |
| Research and development expense | $3.79 million, versus $0.30 million | $7.82 million, versus $1.68 million |
| Cash from operating activities | Not separately reported for the quarter | $(8.73) million, versus $0.41 million provided |
Quarterly revenue rose 28%, reflecting 18% higher unit sales and an 8% increase in average selling price per unit. Nine-month revenue increased 7%, as a 12% higher average price more than offset a 4% decline in unit sales. Revenue timing is affected by large, irregular orders and tenders.
At June 30, cash, including restricted cash, was $5.58 million, compared with $3.28 million at September 30, 2017. Working capital was $0.1 million, down from $4.8 million; management attributed the reduction mainly to SWK payments classified as due within 12 months. Total assets were $53.47 million and stockholders’ equity was $35.87 million.
Veru received a $10 million initial advance under its SWK synthetic royalty financing and reported $11.08 million of net financing cash inflows for the nine months, including Aspire Capital share sales. The balance sheet reported $6.43 million of current and $4.27 million of long-term credit-agreement obligations, plus a $0.52 million residual royalty liability. The SWK facility’s contractual repayment amount is 175% of advances, less payments; FC2 revenue-based payments and change-of-control provisions apply. Nine-month interest expense was $1.73 million, substantially noncash amortization and accretion.
Material changes versus prior comparable periods
- Research and development spending increased substantially as Veru advanced acquired and other development programs. Management expected R&D expenses to rise further during the rest of fiscal 2018 and into fiscal 2019.
- Operating and net losses widened. Nine-month results included a $3.99 million loss settling the Semina receivable, $1.73 million of SWK-related interest expense, and a $0.40 million noncash charge from changes in fair value of embedded derivatives.
- Veru recorded a $1.21 million income tax expense in Q3, versus a $0.51 million benefit a year earlier; for the nine months it recorded a $3.34 million tax benefit, versus $1.86 million. Tax items included a valuation allowance and write-off of foreign tax credits, as well as effects of the U.S. tax-rate change.
- FC2’s Q3 gross margin improved to 56% from 53%, while the nine-month margin remained 52%. Selling, general and administrative expense also rose, including approximately $0.5 million in severance tied to a change in U.S. sales strategy.
Outlook, management commentary, risks and contingencies
- Management said current cash and the ability to secure equity or other financing were expected to fund planned operations for the next 12 months. This outlook depends on access to financing; the company reported continuing operating losses and cash consumption, and noted authorized-share constraints could limit equity issuance.
- Management cited development plans including a 2018 NDA filing target for Tamsulosin DRS, subject to further bioequivalence work, and expected 2019 NDA filings for Tadalafil/Finasteride and Solifenacin DRG. VERU-111 was expected to enter Phase 1/2 development in late 2018. These are plans, not assured milestones.
- On August 10, 2018, SWK agreed to defer until November 15, 2018 the revenue-based payment otherwise due in August. This was a subsequent event, after the June 30 reporting date.
- Semina failed to make a scheduled $1.5 million payment. In July, Veru agreed to accept $1.3 million in settlement; the company reported receiving it on July 26, 2018. The settlement contributed to the nine-month receivable loss.
- FC2 demand and revenue are exposed to public-sector funding, tender and shipment timing, customer concentration, and distributor payment delays. Management reported pressure on spending by large agencies and donor governments. Semina represented 35% of accounts receivable at June 30.
- A lawsuit related to the APP acquisition remained in discovery. Certain claims survived a motion to dismiss; Veru said it believed the case was without merit and had accrued no loss because a loss was not both probable and reasonably estimable.
- Other material risks include clinical-trial and regulatory uncertainty, the need for capital, potential impairment of acquired in-process R&D and other intangibles, and uncertainty about the Tax Act’s full effects. No numerical earnings or revenue guidance was provided.
Most important facts for investors to verify
- Whether the $1.3 million Semina settlement was received as reported and whether remaining customer balances are collectible.
- The cash runway and financing needs, including the effect of SWK’s revenue-based payment terms and the November 15, 2018 deferral.
- FC2 sales volumes, prices, customer concentration and public-sector tender timing, which can drive substantial quarter-to-quarter variability.
- Clinical, bioequivalence and regulatory progress against the company’s stated development and filing timelines.
- The status and potential financial impact of the APP-acquisition litigation, deferred tax assets and future impairment assessments.
- Potential dilution: 55,284,956 common shares were outstanding as of August 10, 2018; the Aspire facility and outstanding equity awards may add shares.