VERU INC. annual report, FY2015

Business context and reporting period

The filing is The Female Health Company’s Form 10-K for the fiscal year ended September 30, 2015; it is an annual report, not a standalone quarterly filing. The company manufactured and sold FC2, its sole product, a female condom marketed for pregnancy and STI prevention. Public-health agencies and government-related buyers were its primary market. FC2 had been distributed in 144 countries.

Financial performance and position

FY2015 revenue increased 33% and unit sales increased 43% year over year, primarily reflecting shipments of 28 million units under the 2014 Brazil tender. Average selling price decreased 7.2%, partly because of a revised volume-purchasing arrangement and sales mix. Gross margin improved, with management citing favorable currency movements, partly offset by higher unit-related costs. SG&A rose 33% to $12.13 million, including Brazilian distributor program and tariff costs, incentive compensation, and business-development consulting. R&D expense was $0.22 million, up from $0.006 million.

FY2015 fourth-quarter revenue was $7.15 million and net income was $0.70 million, versus revenue of $5.55 million and a net loss of $0.57 million in the fourth quarter of FY2014.

At September 30, 2015, cash was $4.11 million, working capital was $17.36 million, total assets were $37.47 million, and stockholders’ equity was $33.13 million. Total liabilities were $4.34 million. There were no borrowings on the $2 million revolving credit facility; the filing reports no required debt service obligations. Operating lease commitments totaled $0.84 million.

Operating cash use was driven principally by an $11.14 million increase in accounts receivable, largely related to Brazil tender shipments. Semina represented 70% of year-end accounts receivable and 47% of FY2015 unit sales. The Brazilian government was slower to pay vendors; the company offered up to 360-day terms on the latest Brazil tender order. Cash tax payments were $0.29 million despite income tax expense of $2.34 million, reflecting use of tax-loss carryforwards.

Material changes versus the prior comparable period

• Revenue rebounded from FY2014’s 22% decline, with the Brazil tender the principal driver; shipments were concentrated in the second fiscal quarter.
• Operating cash flow reversed from $3.67 million provided in FY2014 to $1.55 million used in FY2015, while year-end cash fell from $5.80 million to $4.11 million.
• Semina rose to 47% of unit sales, while UNFPA’s share declined to 18% from 40% in FY2014. The three largest customers together represented 81% of unit sales.
• The board suspended quarterly dividends in July 2014 to prioritize strategic growth; no FY2015 dividend was declared.

Outlook, commentary, risks and unusual items

Management said current cash was expected to fund operations for the next 12 months, while cautioning that this was not assured. It expected current unfilled orders of $7.39 million at November 27, 2015 to be filled during FY2016; tender awards do not guarantee minimum purchases or shipment timing. No quantified revenue or earnings guidance was provided.

The company’s growth plan emphasized increased FC2 sales and marketing, consumer-market development, and product diversification through potential acquisitions. It had announced plans to invest up to $14 million during 2013–2018 in reproductive-health marketing, education, and training, but provided no specific spending timetable. The filing does not report a completed acquisition.

• Brazil eliminated its condom tariff exemption effective April 1, 2015. The company agreed to share half of the tariff with Semina; its FY2015 expense for the initial affected shipments was approximately $398,000.
• Key risks include dependence on FC2, tender and public-sector funding variability, concentrated customers and receivables, competition and price pressure, and reliance on a single Malaysian manufacturing facility and a principal raw-material supplier.
• Management reported no pending legal proceedings. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Important facts for investors to verify

• Collection timing and credit exposure for Semina and the Brazilian government, including the 360-day terms and the subsequent receivable balance.
• Whether Brazil tender demand recurs and whether the company converts awarded tenders into timely orders and shipments.
• Actual FY2016 order fulfillment, revenue mix, unit pricing, and margin after tariff sharing and revised public-sector pricing.
• Cash needs and returns from planned marketing investment and any product-diversification or acquisition activity.
• Customer concentration, competitive tender outcomes, and production continuity at the sole Malaysian facility.