VERU INC. (then The Female Health Company) — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; financial statements are unaudited. The filing identifies the registrant as The Female Health Company and describes a single-product business centered on the FC2 Female Condom.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $6.66 million | $6.69 million | Down 0.5% |
| Gross profit / margin | $3.82 million / 57% | $3.68 million / 55% | Profit up 4% |
| Operating income | $1.45 million | $1.58 million | Down 8% |
| Net income | $0.80 million | $1.46 million | Down 45% |
| Diluted EPS | $0.03 | $0.05 | Down $0.02 |
| Operating cash flow | $(1.22) million | $1.18 million | Declined $2.40 million |
Unit sales rose 3% to 12.15 million, while average selling price per unit fell 3.1%, primarily due to sales mix. Lower cost of sales and favorable currency effects on material purchases lifted gross margin. Operating expenses increased 13% to $2.37 million, mainly from sales, marketing, training and education spending, including Brazil-related program and tender fees.
Net income fell principally because income tax expense rose to $670,430 from $98,875. The company said it no longer expected significant income-statement tax benefits from reducing the deferred-tax-asset valuation allowance after that allowance was fully reversed in the prior-year period. It reported $16.83 million of deferred tax assets on the balance sheet and said NOL carryforwards would reduce cash taxes as used.
Cash was $4.57 million at December 31, 2014, versus $5.80 million at September 30, 2014. Working capital was approximately $11.0 million. Operating cash use included a $2.93 million adverse effect from changes in operating assets and liabilities, including increases in accounts receivable of about $2.9 million and inventory of about $0.5 million associated with Brazil tender orders. Capital expenditures were minimal. No borrowings were outstanding; the company had a revolving credit facility of up to $2 million, subject to a borrowing base, extended through August 1, 2015. The filing reports no material debt balance.
Material changes and management commentary
- The Brazil distributor had received orders for 25 million units under a public tender valid through August 20, 2015; more than 5 million units were shipped in the quarter. The Ministry of Health could place additional orders at its discretion.
- Management attributed quarter-to-quarter sales volatility mainly to timing and shipment of large orders, rather than a fundamental change in demand.
- The company’s July 2014 growth strategy emphasized strengthening customer relationships and sales and marketing, while evaluating complementary product, technology or business acquisitions. It also was examining FC2’s potential in the U.S. consumer market.
- The board suspended quarterly cash dividends in July 2014 to direct operating cash toward strategic growth initiatives. No dividend was declared for the quarter, versus $0.14 per share in the prior-year quarter.
Outlook, risks and contingencies
Management said existing cash was expected to fund operations for the next 12 months, while cautioning that adequacy was not assured. The filing provided no specific earnings or revenue guidance. It noted possible recourse to equity issuance or the bank facility if additional capital were needed.
Key risks include dependence on FC2 as the sole revenue-producing product; reliance on a relatively small number of large public-sector and global-agency customers; uncertain tender timing, funding and order volumes; increasing competition and potential pricing pressure; reliance on distribution partners and sustained public-health programs; international, currency and manufacturing risks; and regulatory requirements. Product-liability insurance coverage was $5 million. The company reported no material changes to the risk factors in its FY2014 Form 10-K. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Brazil tender orders continue to convert into shipments and cash collections, given the rise in receivables and inventory.
- Whether the $4.57 million cash balance and operating cash generation support the stated 12-month liquidity outlook, and whether the credit facility is renewed before its August 2015 expiry.
- Whether increased sales and marketing spending produces demand growth without further price or margin pressure.
- The assumptions supporting recognition and realization of the $16.83 million deferred tax asset and the use of tax-loss carryforwards.
- The filing’s single-product and customer-concentration risks, and the potential effect of competitors on future tenders and pricing.