VERU INC. (Registrant: The Female Health Company) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016, compared with the corresponding 2015 periods. The filing identifies the registrant as The Female Health Company; the supplied company metadata says VERU INC.
Business context
The company manufactured and sold FC2, a female condom, its sole revenue-producing product. Sales were primarily to public-health customers and distributors, with shipments to 144 countries. Results can fluctuate substantially with large tender orders and shipment timing.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $5.56 million, down 28.8% from $7.81 million | $18.56 million, down 27.1% from $25.45 million |
| Gross profit / margin | $3.23 million / 58%, versus $4.63 million / 59% | $11.48 million / 62%, versus $14.85 million / 58% |
| Operating income | $0.85 million, down 42% | $3.31 million, down 43% |
| Net income | $0.57 million, versus $1.17 million; diluted EPS $0.02 versus $0.04 | $2.10 million, versus $3.64 million; diluted EPS $0.07 versus $0.13 |
| Operating cash flow | Not separately reported for the quarter | $(0.89) million, versus $(3.04) million |
Quarterly gross margin eased, while nine-month margin improved, which management attributed mainly to lower costs and favorable exchange rates. The nine-month operating cash outflow included a $4.47 million adverse impact from changes in operating assets and liabilities, including increased receivables.
Balance sheet and liquidity
- At June 30, cash was $3.21 million, working capital $20.0 million, total assets $40.62 million, and stockholders’ equity $35.51 million. Current liabilities were $4.99 million; no borrowings were outstanding.
- Cash declined $0.90 million from September 30, 2015. Accounts receivable rose to $18.64 million from $14.09 million, chiefly due to Brazil tender sales; inventory increased to $2.34 million from $1.75 million.
- Management reported average days sales outstanding of about 245 days. Semina, the Brazilian distributor, represented 85% of receivables; one customer’s receivable balance equaled 64% of current assets.
- A $10 million revolving credit facility with BMO Harris Bank runs to December 29, 2017, is secured by substantially all company assets and includes financial covenants. No amount was drawn at quarter-end.
Changes, outlook, and risks
- Revenue declines chiefly reflected lower unit sales and the prior-year comparison with record Brazil tender shipments. Brazil revenue for the nine-month period fell to $6.01 million from $13.01 million. Average selling price also declined 2.2% year to date, following a price reduction for major public-sector purchases effective April 1, 2016.
- Operating expenses fell year to date, but included $1.56 million of diversification-related costs and $0.31 million for a U.S. consumer-market study. Nine-month net income also reflected foreign-currency transaction losses of $0.13 million, versus gains of $0.05 million a year earlier.
- Management believed available cash was adequate for operations over the next 12 months, while noting there could be no assurance. No quantified revenue or earnings guidance was provided.
- The proposed APP merger would give existing company shareholders approximately 55% and APP shareholders approximately 45% of the combined company, before specified subsequent equity issuances. It required shareholder approval and customary conditions and was expected in fiscal Q4 2016. A July 18, 2016 amendment to the merger agreement is listed among the exhibits.
- Merger completion would trigger a change-of-control default under the BMO facility. The credit line would not remain in place, and outstanding amounts could become due, unless the bank granted waivers; discussions were underway.
- Key risks include dependence on FC2 and public-sector funding, customer and receivables concentration and collection delays, tender timing, growing international competition and price pressure, reliance on a principal raw-material supplier, regulatory requirements, and merger execution and financing risks. Management reported no material changes to previously disclosed risk factors.
- The company had no debt outstanding and had suspended quarterly dividends in 2014. Its $10 million credit facility and possible equity financing were identified as potential sources of additional capital.
Important facts for investors to verify
- Confirm the issuer identity: this supplied filing names The Female Health Company, not VERU INC.
- Track collection and aging of Brazil-related receivables, including Semina’s balance and the stated extended payment terms.
- Verify merger status, shareholder approval, final ownership dilution, and whether BMO waived the change-of-control and related covenant provisions.
- Assess whether competition, public-sector tender awards, and the April 2016 pricing reduction affect FC2 volumes and margins.
- Review cash conversion and liquidity: nine-month operating cash flow was negative despite reported net income, and management’s 12-month cash assessment was not guaranteed.