Business Context and Reporting Period
Company: The Female Health Company (VERU INC.)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: The Company manufactures, markets, and sells the FC2 female condom, the only FDA-approved product under a woman's control that provides dual protection against unintended pregnancy and sexually transmitted infections (STIs), including HIV/AIDS. In October 2009, the Company completed the transition from its first-generation product (FC1) to the second-generation product (FC2), ceasing FC1 production. FC2 received FDA approval in March 2009 and became available in the U.S. in August 2009. The Company operates manufacturing facilities in Malaysia and India, while its UK facility ceased manufacturing operations in October 2009.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Revenues | $27,543,341 | $25,634,126 |
| Gross Profit | $13,517,818 | $10,729,801 |
| Gross Margin | 49.1% | 41.9% |
| Operating Income | $4,718,014 | $3,183,725 |
| Net Income | $6,535,379 | $4,966,768 |
| Net Income Attributable to Common Stockholders | $6,455,662 | $4,829,262 |
| Diluted EPS | $0.24 | $0.18 |
| Cash Flow from Operations | $5,747,114 | $4,244,398 |
| Working Capital | $9,208,576 | $9,249,040 |
| Stockholders' Equity | $12,954,391 | $9,709,202 |
| Total Debt (Revolving Notes) | $0 | $0 |
Note: Working Capital calculated as Total Current Assets ($14,603,049) minus Total Current Liabilities ($5,394,473) for 2009.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7.4% to $27.5 million, driven by higher unit sales and a shift in product mix toward the more profitable FC2 (51% of units sold in 2009 vs. 40% in 2008).
- Gross Margin Expansion: Gross profit increased 26% to $13.5 million, and gross margin improved from 41.9% to 49.1%. This was primarily due to the lower production costs of FC2 compared to FC1.
- Restructuring Costs: The Company incurred a one-time charge of $1,496,624 in fiscal 2009 related to the cessation of FC1 manufacturing at its UK facility, including redundancy payments and inventory write-downs. Excluding this charge, operating income increased 95% year-over-year.
- Foreign Currency Gains: Non-operating income decreased from $1.02 million in 2008 to $332,097 in 2009, largely due to a significant foreign currency transaction gain of $966,736 in 2008 compared to $276,113 in 2009.
- Tax Benefit: The Company recorded a tax benefit of $1.49 million in 2009 (vs. $0.76 million in 2008) due to a decrease in the valuation allowance on net operating loss carryforwards.
Guidance, Outlook, and Risks
Outlook and Strategy:
- The Company expects to derive the vast majority of future revenues from the FC2 female condom.
- Manufacturing capacity in Malaysia was expanded by 150% to approximately 75-80 million units annually, self-funded by existing cash and operations.
- The Company intends to provide uniform, volume-based pricing to global agencies rather than entering long-term supply agreements.
- Backlog as of December 10, 2009, totaled $5.8 million for FC2, expected to be filled in fiscal 2010.
Risks and Contingencies:
- Single Product Reliance: The Company is entirely dependent on the success of the FC2 female condom.
- Customer Concentration: Significant customers include John Snow, Inc. (facilitator of USAID I DELIVER project, 34% of unit sales) and UNFPA (25% of unit sales).
- Regulatory Risk: FC2 is a Class III medical device subject to FDA regulation; failure to comply could result in withdrawal of approval.
- Currency Risk: Manufacturing costs are denominated in Malaysian Ringgit and British Pounds, while sales are primarily in U.S. Dollars, exposing the Company to exchange rate fluctuations.
- UK Facility Lease: A subsequent event involved a lease buyout for the UK facility, resulting in a one-time charge of approximately $1.7 million to be recognized in fiscal 2010.
Key Facts for Investor Verification
- Product Transition: Verify the complete cessation of FC1 production and the full ramp-up of FC2 sales, as FC1 was the primary revenue driver in prior years.
- Customer Concentration: Assess the risk associated with the top two customers (John Snow/USAID and UNFPA) accounting for 59% of unit sales.
- UK Restructuring: Confirm the finalization of UK facility closure costs and the impact of the subsequent lease buyout on fiscal 2010 results.
- Backlog Realization: Monitor the conversion of the $5.8 million backlog into recognized revenue in fiscal 2010.
- Preferred Stock: Note that all Class A Convertible Preferred Stock (Series 1 and Series 3) has been redeemed or converted to common stock as of September 30, 2009.