VERU INC. (The Female Health Company) - 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2010. The Company, formerly known as The Female Health Company, manufactures, markets, and sells the FC2 Female Condom, the only FDA-approved product under a woman's control for preventing unintended pregnancy and sexually transmitted infections (STIs), including HIV/AIDS. The Company completed its transition from the first-generation product (FC1) to the second-generation product (FC2) in October 2009. FC2 is manufactured in Malaysia and India, whereas FC1 was manufactured in the UK.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Nine Months Ended June 30, 2010 |
|---|---|---|
| Net Revenues | $1,754,211 | $14,422,032 |
| Gross Profit | $939,447 (54% margin) | $8,322,331 (58% margin) |
| Operating Income | $21,050 | $1,287,627 |
| Net Income | $75,159 | $1,221,341 |
| Diluted EPS | $0.00 | $0.04 |
| Cash and Cash Equivalents | $3,815,256 (as of June 30, 2010) | |
| Working Capital | ||
| Total Liabilities | $1,928,374 | |
| Stockholders' Equity | $12,108,142 |
Cash Flow (Nine Months Ended June 30, 2010): Net cash provided by operating activities was $3,397,289. Net cash used in investing activities was $(19,957). Net cash used in financing activities was $(2,372,273), primarily due to dividend payments of $2.7 million and share repurchases.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 75% in the three months and 27% in the nine months compared to the prior year periods. This was driven by a 75% decrease in unit volume for the quarter and a 12% decrease for the nine months, attributed to the timing of large public sector orders and a shift in sales mix to the lower-priced FC2 (97% of sales mix in 2010 vs. 47% in 2009).
- Restructuring Costs: The Company incurred $1,926,444 in restructuring costs during the nine months ended June 30, 2010, related to the cessation of FC1 manufacturing in the UK and lease exit costs. This significantly impacted operating income.
- Foreign Currency: The Company adopted the U.S. dollar as the functional currency for its UK and Malaysia subsidiaries effective October 1, 2009. This resulted in a foreign currency transaction gain of $17,190 for the quarter and a loss of $62,259 for the nine months, compared to a significant loss of $816,148 in the prior year quarter.
- Dividends: The Company initiated quarterly cash dividends in fiscal 2010, paying approximately $2.7 million during the nine-month period.
Guidance, Outlook, and Risks
Outlook and Commentary: Management attributes revenue fluctuations to the timing of large orders from public sector purchasers (e.g., USAID/JSI) rather than a fundamental change in demand. In July 2010, the Company announced that JSI amended its contract to increase FC2 supply from 12 million to 24 million units, indicating continued strong demand. The Company believes its cash position is adequate to fund operations for at least the next twelve months.
Risks and Contingencies:
- Single Product Reliance: The Company derives virtually all revenue from the FC2 Female Condom.
- Regulatory Risk: FC2 is a Class III medical device; failure to comply with FDA regulations could result in withdrawal of approval.
- Customer Concentration: A significant portion of revenue comes from a limited number of large public sector customers. Delays in these orders can cause significant quarter-to-quarter volatility.
- Capital Requirements: The Company may need to secure additional capital to fund working capital and promotional expenditures.
Key Facts for Investor Verification
- Order Timing: Verify the status and expected shipment dates of the delayed multi-million unit orders mentioned in the MD&A, as these drive revenue recognition.
- USAID/JSI Contract: Confirm the delivery schedule and revenue recognition timeline for the expanded 24 million unit order announced in July 2010.
- Dividend Sustainability: Assess whether operating cash flows will remain sufficient to support the declared quarterly dividend of $0.05 per share given the high cash outflows for dividends and restructuring.
- Restructuring Completion: Monitor the remaining restructuring accrual balance of $28,488 to ensure no further significant one-time charges are anticipated.
- Credit Facility: Note that the Company has a $2 million revolving credit facility with Heartland Bank, with no amounts outstanding as of June 30, 2010, but covenants restrict dividends and share repurchases if cash falls below $1 million.