Veru Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparative periods ended June 30, 2016. The filing is unaudited. The company changed its name from The Female Health Company to Veru Inc. on July 31, 2017.
Business context
Veru is a biopharmaceutical company focused on urology and oncology. FC2 female condom sales remained the principal revenue source; the company also began U.S. prescription-channel sales of FC2 in April 2017 and sells PREBOOST directly to consumers. The October 2016 acquisition of Aspen Park Pharmaceuticals (APP) expanded the development pipeline and added PREBOOST.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Nine months ended June 30, 2017 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $4.31 million | $9.96 million | $5.56 million and $18.56 million |
| Gross profit / margin | $2.29 million / 53% | $5.22 million / 52% | $3.23 million / 58%; $11.48 million / 62% |
| Operating income (loss) | $(1.27) million | $(5.72) million | $0.85 million; $3.31 million |
| Net income (loss) | $(0.79) million | $(3.93) million | $0.57 million; $2.10 million |
| Net income (loss) per diluted share | $(0.03) | $(0.13) | $0.02; $0.07 |
- Quarterly revenue declined 22%; management attributed the decrease mainly to shipment timing and a 21% reduction in unit sales. Nine-month revenue fell 46%, including the absence of $6.0 million of Brazil tender sales recorded in the prior-year period; unit sales declined 45%.
- Gross margin weakened, reflecting lower unit prices and higher fixed overhead cost per unit as sales volumes fell. For the quarter, the average FC2 selling price was down 1.5%; for the nine-month period it was down 2.4% year over year.
- Cash was $2.67 million at June 30, 2017, versus $2.39 million at September 30, 2016. Current assets were $12.03 million and current liabilities $4.87 million, or approximately $7.16 million of working capital. Total liabilities were $6.63 million; no line-of-credit borrowings were outstanding.
- Operating cash flow was $405,472 for the nine months, compared with cash used of $891,705 in the prior year. The cash-flow statement reports a $286,050 net increase in cash. The filing’s MD&A gives operating cash flow as $405,452, a $20 difference.
- Receivables, including other long-term trade receivables, totaled approximately $13.6 million at June 30, down from $18.6 million at September 30, 2016, following $5.0 million of payments from Brazilian distributor Semina. Semina still represented 80% of accounts receivable and other long-term receivables; average days sales outstanding was approximately 429.
Material changes and unusual items
- APP was acquired on October 31, 2016 for estimated consideration of $19.8 million, including common and Series 4 preferred stock. The acquisition added $20.9 million of intangible assets, including $18.0 million of in-process research and development, and $6.88 million of goodwill. The purchase-price allocation remained provisional.
- APP-related research and development spending contributed to operating expenses rising substantially: nine-month R&D was $2.03 million versus $96,138 a year earlier. Nine-month SG&A rose 10% to $8.91 million, including the $542,930 warrant issued to the financial adviser in the merger.
- The Series 4 preferred shares automatically converted into common stock effective July 31, 2017 after shareholders approved the required share authorization and conversion proposals. The filing says the former APP holders would own approximately 45% of common shares after conversion, based on the stated transaction terms.
Outlook, risks and contingencies
- Management said existing cash was expected to fund operations for the next 12 months, but gave no assurance. Depending on collection of Semina receivables and development spending, the company might seek additional capital through equity, convertible debt or other equity-linked securities.
- The $10 million revolving credit facility had no outstanding balance, but covenant calculations left no borrowing capacity at June 30. The company was discussing covenant changes with BMO Harris Bank; the facility was scheduled to expire December 29, 2017. The APP merger had triggered covenant defaults, which the bank waived through an amendment.
- Management warned that major customer tender timing and reduced spending by large global agencies and donor governments could constrain FC2 sales for the remainder of fiscal 2017. Tender awards do not guarantee orders or minimum purchases; public-sector orders can be delayed or reduced.
- Development milestones: Tamsulosin DRS had completed the first stage of its bioequivalence study; the company planned an NDA submission in early 2018 and a potential launch in late 2018 or early 2019, subject to approval. VERU-722 was planned for Phase 2 development, and an IND filing for VERU-944 was expected in the first quarter of 2018. These are forward-looking plans, not assured outcomes.
- A consolidated lawsuit related to the APP merger alleged fiduciary-duty and voting-law violations and sought remedies including rescission and damages. The company said it would vigorously defend the case; a motion to dismiss was pending. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Semina and other major customers pay outstanding balances on schedule, given the 429-day average days sales outstanding and customer concentration.
- Whether FC2 tender orders and sales volumes recover, and whether gross margins stabilize amid lower pricing and fixed-cost absorption.
- Cash needs and financing plans, plus the status and terms of any extension or amendment to the credit facility and covenant capacity.
- APP pipeline progress, clinical and regulatory milestones, and the assumptions underlying the provisional acquisition valuations and in-process R&D.
- Developments in the APP-merger litigation and the effects of preferred-stock conversion and resulting share dilution.
- The cash-flow discrepancy: $405,472 in the financial statements versus $405,452 in MD&A.