VERU INC. (formerly The Female Health Company) — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015. The filing identifies the registrant as The Female Health Company, which marketed, manufactured and sold the FC2 Female Condom. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $8.23 million | $6.66 million |
| Gross profit / margin | $5.40 million / 66% | $3.82 million / 57% |
| Operating expenses | $3.01 million | $2.37 million |
| Operating income | $2.39 million | $1.45 million |
| Net income | $1.49 million | $0.80 million |
| Diluted EPS | $0.05 | $0.03 |
| Cash from operations | $(0.43) million | $(1.22) million |
- Revenue rose 24%, reflecting 27% higher unit sales; average selling price per unit fell 2.3% due to sales mix and a public-sector price adjustment.
- Gross margin improved mainly because currency exchange rates reduced production costs. Operating expenses increased 27%, primarily from Brazilian distributor marketing and management fees, a U.S. direct-to-consumer study, and business-development work.
- Cash and cash equivalents were $3.67 million at December 31, 2015, down from $4.11 million at September 30, 2015. Working capital was $19.1 million. Current assets were $23.54 million and current liabilities $4.48 million.
- Operating cash use reflected a $2.91 million adverse impact from changes in operating assets and liabilities, including higher receivables. Accounts receivable increased to $17.68 million from $14.09 million at September 30.
- No borrowings were outstanding. A new revolving credit facility with BMO Harris provides up to $10 million through December 29, 2017; it is secured by substantially all company assets and subject to financial and other covenants. The prior $2 million facility was terminated.
- Income tax expense was $0.83 million, while cash income taxes paid were $0.07 million, with net operating loss carryforwards reducing cash tax payments.
Material changes, outlook and risks
- Brazil was the largest reported revenue source at $4.76 million. The company said the quarter’s revenue growth was supported by shipments under the Brazil 2014 tender.
- Semina, the Brazilian distributor, represented 83% of accounts receivable at quarter-end. The company noted slower Brazilian government payments and agreed to terms of up to 360 days for the most recent Brazil tender order, subject to earlier payment when Semina receives government payment. Average days sales outstanding over the prior twelve months was approximately 156.
- Management believed available cash was adequate for operations over the next 12 months, but gave no assurance and no quantified earnings or revenue guidance. It said additional capital could be raised through equity or borrowing under the BMO facility if needed.
- The business depended entirely on FC2 and on a limited number of large customers, public-health programs, tenders and distribution partners. Management cited quarter-to-quarter shipment volatility, increasing competition in public-sector markets and possible FC2 pricing pressure.
- Other disclosed risks include foreign-exchange and raw-material price exposure, dependence on a principal nitrile-polymer supplier, regulatory compliance, and the possibility of customer payment delays. The company reported $10 million of product-liability insurance. It reported no material change to previously disclosed risk factors and no material change in internal control over financial reporting.
- The company continued evaluating U.S. consumer-market opportunities and product diversification; its stated growth strategy included increased FC2 marketing and pursuit of potential acquisitions or other proprietary products. No firm timing or financial targets were provided.
Important facts for investors to verify
- Collection timing and recoverability of the concentrated Semina/Brazil receivable, including the impact of extended credit terms and government payment delays.
- Whether higher unit sales and improved gross margin persist, given the quarter’s dependence on tender shipments and favorable currency effects.
- Availability and covenant compliance under the $10 million BMO credit facility, and whether cash resources remain adequate if receivables are collected slowly.
- Progress, costs and expected returns from consumer-market expansion and product-diversification plans.
- Realizability of deferred tax assets and use of tax-loss carryforwards; the filing reports substantial deferred tax balances but does not provide a clear near-term cash-tax forecast.