VERU INC. (registrant name in filing: The Female Health Company) — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; filed July 30, 2015. The filing identifies the registrant as The Female Health Company, so the company name in the request does not match the filing cover page.
Business context
The company manufactured and sold FC2, a female condom used for contraception and prevention of sexually transmitted infections. FC2 was its sole product. Sales were primarily to public-health agencies and distributors, with orders often dependent on tenders and government program timing.
Key financial results
| Metric | Three months ended June 30, 2015 | Year-over-year change | Nine months ended June 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $7.81 million | Down 1% | $25.45 million | Up 34% |
| Gross profit / margin | $4.63 million / 59% | Up 11%; margin up from 53% | $14.85 million / 58% | Up 45%; margin up from 54% |
| Operating income | $1.45 million | Down 28% | $5.86 million | Up 33% |
| Net income | $1.17 million | Up 1% | $3.64 million | Up 21% |
| Diluted EPS | $0.04 | Unchanged | $0.13 | Up from $0.10 |
- Quarterly unit sales increased 5%, while average selling price fell 6% due to sales mix and reduced public-sector pricing. For the nine-month period, unit sales rose 44% and average selling price fell 6.8%.
- Operating expenses increased 48% in the quarter and 54% year to date, including Brazil distributor marketing and management fees, the company’s $398,000 share of Brazil tariff costs, incentive compensation accruals, product development, and diversification consulting.
- Cash from operations was negative $3.04 million for the nine months, versus positive $1.48 million a year earlier. The $9.48 million adverse impact from changes in operating assets and liabilities was driven principally by receivables growth.
- Cash declined to $2.62 million from $5.80 million at September 30, 2014. Current assets were $20.85 million and current liabilities $4.61 million at June 30, 2015. Cash includes $88,823 of restricted cash.
- No borrowings were outstanding. The company had a revolving credit facility of up to $2 million, secured by substantially all assets, with a stated term through August 1, 2015; management expected renewal for one year. The facility’s borrowing availability is subject to a borrowing base.
- Total liabilities were $4.79 million and stockholders’ equity $32.38 million. No dividends were declared in the nine-month period; quarterly dividends had been suspended in July 2014.
Material changes, outlook, and risks
- Nine-month growth reflected higher unit shipments, including 25 million units ordered under a Brazil public tender and shipped during the period. Quarterly revenue was nearly flat despite higher unit volumes because of lower pricing and mix.
- Management said quarter-to-quarter results can vary substantially with large-order and tender timing. It believed available cash was adequate for the next 12 months, while cautioning that adequacy was not assured. No quantitative earnings or revenue guidance was provided.
- Brazil-related collection risk increased: Semina represented 71% of accounts receivable, and the Brazilian government had been slower to pay vendors. Accounts receivable rose to $14.34 million from $2.94 million at September 30, 2014; average days sales outstanding was approximately 105.
- Brazil eliminated a condom tariff exemption effective April 1, 2015. The company agreed to bear half of the tariff, recording approximately $398,000 in the quarter.
- Other material risks include dependence on FC2 alone, reliance on a limited number of large customers and public-sector programs, increasing female-condom competition and potential pricing pressure, reliance on a single supplier for the principal nitrile raw material, foreign-currency exposure, and regulatory and manufacturing compliance requirements.
- Management continued to pursue FC2 sales and marketing initiatives and evaluate complementary acquisitions or other diversification opportunities. The company also noted significant deferred tax assets and net operating loss carryforwards; their realization depends on future taxable income by jurisdiction.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- Whether Semina and the Brazilian government pay the concentrated receivable balance on schedule, and the resulting effect on cash flow.
- Renewal and actual borrowing availability under the $2 million credit facility after its stated August 1, 2015 expiration.
- Whether tender timing, public-sector pricing changes, and increased competition affect future FC2 volumes and margins.
- Whether higher operating spending on Brazil programs, marketing, product development, and diversification generates sustainable returns.
- The assumptions supporting deferred tax asset recoverability and management’s stated 12-month liquidity assessment.