VERU INC. (The Female Health Company) — Form 10-Q Summary
Business context and period: The filing covers the three months ended December 31, 2016, the first quarter of fiscal 2017. The registrant, then named The Female Health Company and doing business as Veru Healthcare, completed its acquisition of Aspen Park Pharmaceuticals, Inc. (APP) on October 31, 2016. The transaction expanded the business from its historical focus on FC2 female condoms into pharmaceuticals and consumer health products. Financial statements are unaudited.
Key financial results
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter |
|---|---|---|
| Net revenue | $3.24 million | $8.23 million |
| Gross profit / margin | $1.65 million / 51% | $5.40 million / 66% |
| Operating income (loss) | $(1.87) million | $2.39 million |
| Net income (loss) | $(1.37) million | $1.49 million |
| Basic and diluted EPS | $(0.04) | $0.05 |
| Operating cash flow | $1.17 million | $(0.43) million |
Revenue fell approximately 61%; FC2 unit sales declined 58%, while average selling price fell 5.1%. Management attributed the decline primarily to the timing of Brazilian tender shipments in the prior-year quarter and lower pricing for major public-sector purchases. Gross margin contracted by 15 percentage points, reflecting price reductions and less favorable currency effects on material purchases. Operating expenses rose 17% to $3.53 million, including $826,370 in acquisition-related costs and expenses associated with the merger advisor warrant, compensation and legal costs.
Cash was $3.49 million at quarter-end, versus $2.39 million at September 30, 2016. Working capital was reported as $10.7 million. Accounts receivable plus other long-term receivables totaled approximately $16.2 million; a $2.8 million payment from Brazilian distributor Semina contributed to the quarter’s receivable decrease. Semina represented 81% of accounts receivable and other long-term receivables. The company reported average days sales outstanding of approximately 385 days. No borrowings were outstanding under the $10 million revolving credit facility, but covenant-based borrowing capacity was only $375,950 at December 31, 2016. The facility matures December 29, 2017 and is secured by substantially all company assets and specified subsidiary shares.
Material changes, outlook and risks
- APP merger: Purchase consideration was approximately $19.8 million, paid in 2.0 million common shares and 546,756 Series 4 preferred shares. The provisional allocation included $18.0 million of in-process research and development and $6.9 million of goodwill. Series 4 preferred stock is classified as temporary equity, has a liquidation preference and is convertible into 40 common shares per preferred share subject to shareholder approvals. Conversion could materially dilute existing shareholders.
- Products and development: PREBOOST launched in the United States on January 9, 2017. Management planned to begin a bioequivalence study for Tamsulosin DRS by the first quarter of 2017, submit an NDA in 2017 and, if approved, launch in early 2018. The company also planned to file an IND for MSS-722 in 2017 and advance it into a Phase 2 trial. These are plans, not assurances of regulatory approval or commercialization.
- Near-term business outlook: Management said significant FC2 orders from two major customers were unlikely during the remainder of fiscal 2017 because of tender timing, and cited pressure on FC2 spending by large global agencies and donor governments. No numerical revenue or earnings guidance was provided. Management believed cash was adequate for the next 12 months, while cautioning that additional capital might be needed depending on collections from Semina and development spending.
- Other risks and contingencies: Two shareholder lawsuits allege fiduciary-duty breaches and other misconduct related to the APP merger; the company says it considers the claims without merit and intends to defend them. The filing also highlights reliance on a small number of customers, delayed government payments and tender uncertainty, financing and covenant constraints, product-development and regulatory risks, competition, and manufacturing and foreign-market risks.
- Cash-flow context: Positive operating cash flow included a favorable $2.1 million impact from changes in operating assets and liabilities, including collections. It should not be assumed that the quarter’s cash generation reflects recurring earnings.
- Controls: Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Timing and collectability of Semina’s large receivable balance, including the Brazilian government’s payment delays and the 360-day terms applicable to a recent Brazil order.
- Actual covenant headroom and any revised terms or additional availability under the BMO Harris credit facility.
- Shareholder approvals required for Series 4 preferred conversion and related authorized-share changes; confirm potential dilution and the applicable share counts.
- Final purchase-price allocation for APP, the progress, cost and regulatory status of its development programs, and whether product launch plans remain achievable.
- Outcome and potential cost of the two merger-related lawsuits, and the effect of FC2 tender timing and reduced public-sector spending on future revenue and margins.