Filing summary
Source/identity note: The supplied filing is for The Female Health Company, not VERU INC. It is an unaudited Form 10-Q for the quarter ended June 30, 2012 (the company’s fiscal third quarter), with year-to-date results for the nine months ended on that date.
Business context
The company manufactures and sells the FC2 female condom, its sole current product, and earns a smaller royalty from its Indian licensee. FC2 was sold or available in 137 countries. Public-sector orders are a major part of the business, and shipment timing can cause substantial quarter-to-quarter variation.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Net revenue | $8.66 million, up 146% | $25.12 million, up 119% |
| Gross profit / margin | $5.29 million / 61% | $14.87 million / 59% |
| Operating income | $2.81 million | $7.75 million |
| Net income | $2.55 million; diluted EPS $0.09 | $7.11 million; diluted EPS $0.25 |
| Operating cash flow | Not separately provided | $9.03 million |
- For the comparable 2011 periods, revenue was $3.52 million for the quarter and $11.46 million year to date; net income was $0.42 million and $0.88 million, respectively. Gross margins were 52% and 49%.
- At June 30, cash was $8.29 million, working capital approximately $10.35 million, and stockholders’ equity $19.99 million. Total liabilities were $5.50 million; no line-of-credit borrowings were outstanding.
- The company had a $2 million revolving credit facility, secured by substantially all assets, and expected renewal for a one-year term on August 1, 2012. Capital expenditures were $0.51 million year to date.
- Cash increased $4.04 million from September 30, 2011. Financing cash use included $4.48 million of dividends; investing cash use was $0.44 million.
Material changes and management commentary
- Quarterly unit sales reached a company record, rising 157% year over year; revenue rose 146% while average unit price fell 4%. Year-to-date units rose 112%, revenue rose 119%, and average unit price increased 3%.
- Management attributed higher gross margins primarily to improved absorption of manufacturing overhead at higher production volumes. Revenue gains included shipments against previously delayed large orders: South Africa orders and a 20-million-unit UNFPA order for Brazil.
- Operating expenses increased 82% in the quarter and 53% year to date, reflecting incentive accruals, promotion, education and training, wages and benefits, share-based compensation, and legal and consulting costs.
- The company was expanding Malaysian manufacturing capacity from approximately 75–80 million units annually to about 100 million. The project was expected to cost approximately $665,000, with completion by calendar year-end 2012; approximately $330,000 of committed costs remained scheduled for payment by September 30.
Outlook, risks and contingencies
- Management said cash was expected to fund operations for the next 12 months, while cautioning that this was not assured. It planned to fund the capacity expansion from cash on hand.
- At the July 2012 London family-planning summit, the company announced plans to invest up to $14 million over six years in education and training, and to provide major purchasers free product equal to 5% of annual units purchased beginning in the quarter ending September 30, 2012. These initiatives may increase expenses; no specific spending timetable was given.
- The board declared a $0.06-per-share dividend after quarter-end, approximately $1.7 million, payable August 8, 2012. Future dividends remain discretionary and depend on cash availability and credit-agreement restrictions.
- Key risks include dependence on one product; concentrated, lumpy public-sector orders and tender delays; reliance on governments, donors and distributors; competition; regulatory and manufacturing risks; foreign-exchange and raw-material exposure; and the possibility that some U.S. tax-loss carryforwards may expire unused. The company reported $29.74 million of federal and $15.01 million of state NOL carryforwards, plus $68.48 million in the U.K.
- Product-liability insurance coverage was $5 million. Management reported effective disclosure controls and no material change in internal control over financial reporting; it stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for The Female Health Company, not VERU INC.
- Assess how much of the revenue surge depended on large South Africa and Brazil-related orders, and whether subsequent orders support sustained demand.
- Track receivables, collections and inventory as sales scale; receivables increased to $4.75 million from $2.31 million at September 30, 2011.
- Monitor gross margins, higher operating costs, and the planned $14 million education program and free-product promotion.
- Verify renewal of the revolving credit facility, capacity-expansion spending, and the company’s ability to sustain dividends alongside these commitments.