VERU INC. (then The Female Health Company) — Q2 FY2016 Form 10-Q
Period: Fiscal quarter and six months ended March 31, 2016. The filing is under the name The Female Health Company and reports an unaudited business focused on manufacturing and selling the FC2 Female Condom.
Financial results
| Metric | Three months ended March 31, 2016 | Prior-year quarter | Six months ended March 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $4.77 million | $10.98 million | $13.00 million | $17.64 million |
| Gross profit / margin | $2.85 million / 60% | $6.39 million / 58% | $8.25 million / 63% | $10.21 million / 58% |
| Operating income | $0.07 million | $2.95 million | $2.46 million | $4.40 million |
| Net income | $0.04 million | $1.67 million | $1.53 million | $2.47 million |
| Diluted EPS | $0.00 | $0.06 | $0.05 | $0.09 |
Quarterly revenue fell 56% and unit sales fell 56%, primarily because the prior-year quarter included record Brazil tender shipments. For the six-month period, revenue declined 26% and unit sales declined 25%. Average selling price per unit was down 1.5% for the quarter and 1.1% for the half, reflecting sales mix and, for the half, the public-sector pricing adjustment. Six-month gross margin improved mainly due to favorable currency effects on production costs.
Cash flow and liquidity: Operating cash use was $1.31 million in the six months, versus $2.83 million in the prior-year period; working-capital changes used $3.99 million. Cash declined to $2.79 million from $4.11 million at September 30, 2015. Working capital was $19.3 million at March 31, 2016. The company reported no borrowings under its $10 million BMO Harris revolving facility; the facility is secured by substantially all company assets and has financial covenants. No dividends were paid in the period.
Balance sheet: Accounts receivable rose to $18.57 million from $14.09 million at September 30, 2015, largely due to Brazil tender shipments. Total liabilities were $5.04 million and stockholders’ equity was $34.85 million. The filing reports no outstanding debt at quarter-end.
Management commentary, outlook, and risks
- Management attributed substantial quarter-to-quarter sales swings to timing of large public-sector orders and tenders, rather than a fundamental change in demand. It said cash was adequate for operations over the next 12 months, while noting there was no assurance it would be sufficient.
- The company incurred $648,683 in six-month expenses with no current return for evaluating U.S. consumer marketing and diversification opportunities, including APP transaction-related work. The board approved increased U.S. consumer marketing activity subject to review of a detailed plan and budget. No quantified revenue or earnings guidance was provided.
- On April 6, 2016, after quarter-end, the company announced a proposed merger with Aspen Park Pharmaceuticals (APP). Following the transaction, existing company shareholders were expected to own approximately 55% and APP shareholders approximately 45% of the combined company, before specified potential dilution. Completion was expected in Q4 FY2016 and required shareholder approval and customary closing conditions.
- The proposed merger would trigger a change-of-control default under the BMO facility. The company said the facility would not remain in place after closing, and outstanding amounts would become due unless the bank waived the relevant provisions; discussions were underway.
- Key exposures include dependence on a single product, public-sector procurement and funding, competition and pricing pressure, long customer payment cycles, foreign exchange, and reliance on a single supplier for the principal raw material. Semina accounted for 86% of receivables; its payments depended on Brazil’s government, which was paying vendors more slowly. Average days’ sales outstanding was approximately 212 days.
- Management cited increased competition: three other female condoms had recently obtained WHO prequalification and UNFPA clearance. The company also noted operational, regulatory, product-liability, and transaction risks. Product-liability insurance coverage was $10 million.
Important facts for investors to verify
- Brazil government payment timing, collection of the large Semina balance, and the effect of extended credit terms on cash flow.
- Whether shareholder approval and other conditions for the APP merger are met, and whether BMO grants the necessary credit-agreement waivers.
- APP’s development, regulatory, financing, and commercialization prospects, and the potential dilution and costs of the transaction.
- Whether FC2 sales, pricing, and margins withstand increased competition and variable public-sector tender demand.
- Availability of adequate liquidity if operating cash use continues or the BMO facility is unavailable after a transaction.