Business context and reporting period
The supplied filing is The Female Health Company’s unaudited Form 10-Q for the three months ended December 31, 2011 (fiscal Q1 2012), compared with the three months ended December 31, 2010. Although the request metadata names VERU INC., the filing identifies The Female Health Company as the registrant. Its business centers on manufacturing and selling the FC2 female condom, with a small royalty stream from an Indian licensee.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net revenues | $8.63 million | $3.65 million |
| Gross profit / gross margin | $5.02 million / 58% | $2.02 million / 55% |
| Operating income | $2.78 million | $0.43 million |
| Net income | $2.66 million | $0.39 million |
| Diluted EPS | $0.09 | $0.01 |
| Operating cash flow | $1.86 million | $2.11 million |
- Revenue increased 136%; unit volume rose 150%, partly offset by a 5% decrease in average selling price due to product/customer mix.
- Gross margin improved to 58% from 55%, which management attributed to better absorption of manufacturing overhead at higher volume. Net income was 31% of revenue versus 11%.
- Operating cash flow was lower year over year, in part because changes in operating assets and liabilities used $1.13 million, compared with providing $1.47 million in the prior-year quarter.
- Cash was $4.66 million at December 31, 2011. Working capital was $7.7 million. Accounts receivable rose to $4.79 million from $2.31 million at September 30, 2011, primarily reflecting timing of large orders.
- No borrowings were outstanding under the $2 million revolving credit facility. It is secured by substantially all company assets, subject to a borrowing base, and expires August 1, 2012. Total liabilities were $4.40 million.
- The company paid approximately $1.4 million in dividends during the quarter and declared another $0.05-per-share dividend, expected to require approximately $1.4 million in February 2012.
Material changes and notable developments
Revenue, operating income, and net income increased substantially year over year, primarily due to higher sales volume. The increase followed large orders delayed from fiscal 2011: a 5 million-unit South Africa order was received in November 2011 and shipments began immediately; a 20 million-unit UNFPA order for Brazil was received in December, with shipments expected to begin late in fiscal Q2 2012 and continue through the balance of fiscal 2012. SG&A rose 41% to $2.23 million, mainly because of accrued fiscal-year incentive payments tied to expected sales and operating-income targets. Foreign-currency transaction losses increased to $52,306 from $30,906.
Outlook, risks, and contingencies
- Management said current cash should be adequate to fund operations for the next 12 months, but gave no assurance. The filing provides no specific revenue or earnings guidance.
- Management cautioned that quarterly results can fluctuate materially with the timing of large orders, tenders, and public-health procurement. The Brazil order’s expected shipment schedule is a key near-term factor.
- The company relies overwhelmingly on one product, FC2, and depends on a relatively small number of large customers, governments, donors, and distribution partners. Changes or delays in prevention programs, tender processes, or partner performance could affect results.
- Other disclosed risks include competition, product and regulatory compliance, manufacturing disruption, raw-material and foreign-exchange exposure, intellectual-property matters, and the company’s ability to fund working capital and dividends. The filing reports no material change in risk factors from its prior Form 10-K.
- The company maintained $5 million of product-liability insurance. It reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for The Female Health Company, not VERU INC.
- Track fulfillment and collection of the South Africa and Brazil orders, including the expected Brazil shipment timing and the resulting receivables and cash flow.
- Assess whether the sharp increase in volume and improved gross margin are sustainable given order timing, pricing mix, and production costs.
- Review the revolving facility’s August 2012 expiry, borrowing-base availability, and dividend restrictions; the filing reports no current borrowings.
- Evaluate the sustainability of quarterly dividends against operating cash generation and the company’s reliance on FC2 and public-sector demand.