VERU INC. quarterly report, Q3 FY2016

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

MetricThree months ended June 30Nine 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 $0.13
Operating cash flowNot separately reported for the quarter$(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.