VERU INC. (then The Female Health Company) — FY2016 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended September 30, 2016; it is an annual report, not a standalone Q4 filing. Before the subsequent Aspen Park Pharmaceuticals (APP) merger, the business was principally dependent on FC2, a female condom sold to public-health and consumer markets. The company also marketed PREBOOST and was developing pharmaceutical candidates. It did business as Veru Healthcare as well as The Female Health Company.
On October 31, 2016, after year-end, the company completed the APP merger to diversify its business. Former APP holders received common and convertible preferred shares; assuming conversion, they would own approximately 45% of the company’s common shares. The merger’s estimated purchase price was approximately $22.7 million, and the purchase-price allocation was still being determined.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $22.13 million | $32.60 million |
| Gross profit / gross margin | $13.35 million / 60% | $18.97 million / 58% |
| Operating income | $3.02 million | $6.62 million |
| Net income | $0.345 million | $4.346 million |
| Diluted earnings per share | $0.01 | $0.15 |
| Cash used in operating activities | $1.71 million | $1.55 million |
FY2016 FC2 unit shipments were approximately 42.0 million, down from 61.0 million. Cash and cash equivalents were $2.39 million at September 30, 2016, versus $4.11 million a year earlier. Working capital was $15.0 million; total assets were $38.6 million and stockholders’ equity was $33.9 million. The company had no borrowings under its revolving credit facility at year-end. The facility provided up to $10 million through December 29, 2017, subject to covenants; after the APP merger, the lender waived merger-related covenant defaults and APP became a co-borrower.
Receivables warrant attention: net trade receivables were $18.61 million, including $7.84 million classified as long-term. Semina, the Brazilian distributor, represented 85% of trade receivables. The company reported average days sales outstanding of approximately 304 days and said Brazilian government payment delays affected collections. Income tax expense was $2.47 million, an 87.7% effective rate; cash income taxes paid were $0.35 million.
Material changes versus prior period
Revenue fell 32% and unit shipments fell by about 19 million, primarily because 28 million units from the 2014 Brazilian tender shipped in FY2015 compared with 12 million in FY2016. Average selling price declined 1.4%, including a public-sector price reduction effective April 1, 2016. Gross margin improved from 58% to 60%, mainly from cost reductions and favorable currency effects, but operating income declined as the lower revenue outweighed reduced expenses. Net income also fell substantially, reflecting lower operating income and higher tax expense; merger-related acquisition costs were $1.48 million.
For the unaudited fourth quarter of FY2016, revenue was $3.56 million and the company reported a net loss of $1.75 million, or $0.06 per share. The filing attributes the annual revenue volatility primarily to the timing of large public-sector orders and shipments.
Outlook, commentary and principal risks
- Management said year-end cash was expected to fund operations for the next 12 months, but qualified this assessment; additional financing could be needed depending on collections and development spending. Potential sources included equity, convertible securities, or the credit facility.
- Management planned a Tamsulosin DRS bioequivalence study by Q1 2017, an NDA submission in 2017, and a possible early-2018 launch if approved. These are plans, not assured outcomes.
- PREBOOST’s interim analysis covered 21 subjects and reported favorable efficacy and tolerability findings. The company planned a U.S. launch before the end of 2016; interim results are preliminary and do not establish commercial success.
- The FDA advisory committee provided clinical-trial design guidance for MSS-722; the company planned an IND filing and possible Phase 2 study in 2017. APP-944 was planned for pre-IND discussions and later clinical development; APP-111 and APP-112 remained earlier-stage candidates.
- Key risks include dependence on a small number of public-sector customers and tender timing, Semina receivable concentration and delayed collections, FC2 pricing and competition, dependence on one Malaysian manufacturing site and a key raw-material supplier, and the need for additional capital to develop drug candidates.
- Drug-development and regulatory approval are uncertain, and the company had limited experience commercializing pharmaceuticals. Merger integration, potential dilution, purchase-accounting charges, and two shareholder lawsuits relating to the APP transaction were also disclosed. The company said it intended to defend the lawsuits.
Important facts for investors to verify
- Whether Semina and the Brazilian government paid the substantial outstanding receivable, and the timing and collectability of long-term amounts.
- Subsequent FC2 tender awards, shipments, unit pricing, and customer concentration, particularly following the FY2016 shipment decline.
- Actual post-merger cash, liabilities, credit-facility compliance, funding needs, and the final purchase-price allocation.
- Progress and results for the Tamsulosin DRS study and NDA plans, MSS-722 development, and PREBOOST launch and full clinical-study results.
- The potential dilution and governance effects of Series 4 preferred-stock conversion, APP-related awards and warrants, and the status and outcome of the merger-related litigation.