Business context and reporting period
The Female Health Company, which did business as Veru Healthcare, filed this unaudited Form 10-Q for the quarter ended March 31, 2017 (fiscal Q2) and the six months then ended. The business combined its FC2 female-condom operations with pharmaceuticals and consumer-health products acquired in the October 31, 2016 Aspen Park Pharmaceuticals (APP) merger. Nearly all revenue in the reported periods remained from FC2.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2017 | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2017 | Six months ended Mar. 31, 2016 |
|---|---|---|---|---|
| Revenue | $2.41 million | $4.77 million | $5.65 million | $13.00 million |
| Gross profit / margin | $1.28 million / 53% | $2.85 million / 60% | $2.93 million / 52% | $8.25 million / 63% |
| Operating income (loss) | ($2.58 million) | $0.07 million | ($4.45 million) | $2.46 million |
| Net income (loss) | ($1.78 million) | $0.04 million | ($3.14 million) | $1.53 million |
| Diluted earnings (loss) per share | ($0.06) | $0.00 | ($0.10) | $0.05 |
- Six-month operating cash use was $1.06 million, versus $1.31 million in the prior-year period. Investing cash use was $83,000; cash declined by $1.14 million to $1.24 million.
- At March 31, cash was $1.24 million, current assets $11.70 million, current liabilities $3.41 million, and working capital about $8.29 million. Total liabilities were $5.66 million. No borrowings were outstanding under the $10 million revolving credit facility.
- Despite the facility’s stated limit, the company reported no borrowing capacity under its financial covenants at March 31 and was discussing covenant changes with its lender. The facility was scheduled to expire December 29, 2017.
- Accounts receivable were $7.31 million and other trade receivables $7.84 million. Cash included $129,000 of restricted cash. The filing reports average days sales outstanding of about 424 days.
Material changes versus the prior comparable period
- Six-month revenue fell 57% and FC2 unit sales fell 55%; Q2 revenue declined 50% and unit sales declined 50%. The company attributed the declines primarily to the prior-year Brazil tender shipments and shipment timing. The prior-year six months included 11.5 million Brazil tender units, or $6.0 million of revenue.
- Six-month FC2 average selling price fell 2.5%; gross margin declined to 52% from 63%, reflecting lower public-sector prices and higher fixed costs per unit at lower volumes, partly offset by favorable currency effects on material purchases.
- Six-month R&D expense rose to $1.61 million from $73,000, principally due to development programs acquired from APP. SG&A was broadly flat at $5.78 million, including merger-related legal and accounting costs.
- The APP merger added $19.81 million of purchase consideration, including $18.0 million of in-process R&D, $2.4 million of PREBOOST technology, and $6.88 million of goodwill, offset in part by assumed liabilities. Purchase-price allocation remained provisional.
Outlook, commentary, risks, and unusual items
- Management said current cash was expected to fund operations for the next 12 months, but gave no assurance; timing of Semina receivable collections and drug-development spending could lead the company to seek additional equity, convertible debt, or other capital.
- Management warned that significant orders from two large FC2 customers were unlikely during the remainder of fiscal 2017 because of tender status or expiration, and cited pressure on spending by global agencies and donor governments. Tender awards do not guarantee minimum purchases, and orders can be delayed or reduced.
- In April 2017, the company received $1.1 million from Semina, its Brazilian distributor. Semina represented 87% of accounts receivable plus other long-term receivables at March 31; the filing cites delayed Brazilian government payments. The company also reported two customers represented 45% and 11% of current assets, respectively.
- Development plans included advancing Tamsulosin DRS through the final stage of a bioequivalence study; after the quarter, the company reported Stage 1 completion. It planned an NDA submission in late 2017 and, if approved, a late-2018 launch. The company also planned to file an IND for MSS-722 in 2017 and advance it to Phase 2. These are plans, not assurances.
- In connection with the merger, 546,756 Series 4 preferred shares were issued, valued at $17.98 million and classified as temporary equity. Conversion requires shareholder approval; each preferred share converts into 40 common shares. A merger-related lawsuit seeks, among other relief, rescission and damages; the company said it would defend the case.
- Other risks include reliance on a small number of customers, tender and funding uncertainty, slow collections, competition and pricing pressure, product-development and regulatory risks, and possible need for additional capital. The company reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Semina and other major customers pay outstanding receivables on schedule, and the extent of future Brazilian public-sector orders.
- Whether covenant changes restore borrowing capacity and whether the company needs additional financing before the credit facility expires.
- Shareholder approval, conversion terms, dilution, and voting consequences of the Series 4 preferred stock, as well as the status and potential impact of the merger litigation.
- Progress, costs, regulatory milestones, and funding needs for Tamsulosin DRS, MSS-722, and other APP development programs; also confirm the provisional acquisition valuation.