VERU INC. (filing registrant: The Female Health Company) — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2015; comparative periods ended March 31, 2014. The filing identifies the registrant as The Female Health Company, not VERU Inc.; verify the company and filing match the requested issuer.
Business context
The company manufactured, marketed and sold FC2, a female condom, its sole revenue-producing product. Sales were primarily to public-health organizations and government-related customers, often through distributors and tender processes. FC2 had been distributed in 144 countries. The company was pursuing increased marketing, U.S. direct-to-consumer sales and product diversification; an online store launched in March 2015.
Financial performance
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $10.98 million | $4.35 million | $17.64 million | $11.04 million |
| Gross profit / margin | $6.39 million / 58% | $2.39 million / 55% | $10.21 million / 58% | $6.06 million / 55% |
| Operating income | $2.95 million | $0.80 million | $4.40 million | $2.38 million |
| Net income | $1.67 million | $0.38 million | $2.47 million | $1.84 million |
| Diluted EPS | $0.06 | $0.01 | $0.09 | $0.06 |
- Quarterly revenue rose 152% and six-month revenue rose 60% year over year; unit sales rose 184% and 72%, respectively. Average selling price per unit fell 11.2% for the quarter and 7.1% for the six-month period, reflecting sales mix and lower public-sector pricing.
- Gross margin improved by 3 percentage points in both comparisons, which management attributed mainly to favorable currency movements, partly offset by higher costs from increased volume. Operating expenses rose 117% in the quarter and 58% for six months, including Brazilian distributor program and tender costs, incentive compensation, product development and diversification consulting.
- Income tax expense was $1.31 million for the quarter and $1.98 million for six months. Effective tax rates were 43.9% and 44.4%, respectively. Management said the deferred-tax valuation allowance had been fully reversed by December 2013, so it did not expect significant further income-statement tax benefits from allowance reductions; tax-loss carryforwards may still reduce cash taxes.
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $2.83 million, versus positive $1.17 million in the prior-year period. The main working-capital pressure was a $9.5 million rise in accounts receivable; changes in current assets and liabilities used $7.68 million of cash.
- Cash declined to $2.93 million at March 31, 2015, from $5.80 million at September 30, 2014. Working capital was approximately $14.7 million; total assets were $35.9 million and stockholders’ equity $31.1 million.
- No borrowings were outstanding. The company had a secured revolving credit facility of up to $2 million, subject to a borrowing base, with a 3.25% prime rate at quarter-end. Its term was extended only through August 1, 2015. Management said cash was adequate for the next 12 months, while noting there was no assurance.
- The company generated $27,000 of investing cash outflow for capital expenditures. Financing cash outflow was $6,000; quarterly dividends had been suspended in July 2014 to direct cash toward growth initiatives.
Material changes, outlook and risks
- Brazil tender shipments drove the sharp increase in receivables: approximately 19 million of 25 million ordered units had shipped during the six months. The distributor generally pays after receiving payment from Brazil’s government, whose payments were slower amid economic issues. At quarter-end, two customers represented 50% and 10% of current assets in accounts receivable, respectively.
- Brazil’s condom tariff exemption ended April 1, 2015. The company agreed to share half the tariff with its distributor; its estimated share was approximately $618,000 for the affected portion of the tender order, to be expensed in fiscal Q3.
- Management gave no specific revenue or earnings guidance. It cautioned that results can vary substantially with large-order timing, tender awards and shipments. The company’s growth strategy includes stronger sales and marketing, exploration of U.S. consumer sales and potential complementary acquisitions.
- Key risks include reliance on one product, a small and concentrated customer base, tender and government funding delays, distributor execution, increasing female-condom competition and pricing pressure, regulatory requirements, and foreign-exchange and raw-material costs. Management cited no material changes to the risk factors in its 2014 Form 10-K.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Product liability coverage was $10 million.
Investor verification priorities
- Confirm the issuer identity and whether this Female Health Company filing is the intended filing for VERU Inc.
- Track collection of the Brazil-related receivables, customer concentration and subsequent operating cash flow.
- Verify the actual tariff expense and impact on fiscal Q3 margins and distributor economics.
- Check renewal or replacement of the credit facility ahead of its August 1, 2015 expiration.
- Assess whether higher FC2 unit volumes, lower selling prices and increased growth spending can sustain profitability and cash generation; verify progress and costs for direct-to-consumer and diversification initiatives.