U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
THE FEMALE HEALTH COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
Wisconsin 39-1144397
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
875 N. Michigan Avenue, Suite 3660, Chicago, IL 60611
(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
(Issuer's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, If
Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 Par Value - 11,049,191 shares outstanding as of May 12, 1999
Transitional Small Business Disclosure Format (check one):
Yes _________ No X
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FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Cautionary Statement Regarding Forward Looking
Statements . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
March 31, 1999 . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated
Statements of Operations -
Six Months Ended March 31, 1999
and March 31, 1998 . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Six Months Ended March 31, 1999
and March 31, 1998 . . . . . . . . . . . . . . . 6
Notes to Unaudited Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . 13
Part II. Other Information
Exhibits and Reports on Form 8-K . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-QSB which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to
secure adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations; factors related to increased competition from existing and
new competitors including new product introduction, price reduction and
increased spending on marketing; limitations on the Company's opportunities to
enter into and/or renew agreements with international partners; the failure of
the Company or its partners to successfully market, sell, and deliver its
product in international markets; and risks inherent in doing business on an
international level, such as laws governing medical devices that differ from
those in the U.S., unexpected changes in the regulatory requirements, political
risks, export restrictions, tariffs, and other trade barriers, and fluctuations
in currency exchange rates; the disruption of production at the Company's
manufacturing facility due to raw material shortages, labor shortages, and/or
physical damage to the Company's facilities, the Company's inability to manage
its growth and to adapt its administrative, operational and financial control
systems to the needs of the expanded entity; and the failure of management to
anticipate, respond to and manage changing business conditions, the loss of the
services of executive officers and other key employees and the Company's
continued ability to attract and retain highly-skilled and qualified personnel;
the costs and other effects of litigation, governmental investigations, legal
and administrative cases and proceedings, settlements and investigations, and
developments or assertions by or against the Company relating to intellectual
property rights.
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1999
------------
ASSETS
Current Assets:
Cash and equivalents $ 432,912
Accounts receivable, net 832,649
Inventories, net 1,235,238
Prepaid expenses and other current assets 242,255
-----------
TOTAL CURRENT ASSETS 2,743,054
Intellectual property rights, net 825,065
Other assets 158,730
Property, Plant and Equipment 3,966,674
Less accumulated depreciation and amortization (1,792,225)
-----------
Net property, plant, and equipment 2,174,449
-----------
TOTAL ASSETS $ 5,901,298
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, related party, net of unamortized discount $ 1,049,740
Debt due within one year 675,086
Accounts payable 522,530
Accrued expenses and other current liabilities 359,691
Preferred dividends payable 68,377
-----------
TOTAL CURRENT LIABILITIES 2,675,424
Deferred gain on lease of facility (see Note 4) 1,645,929
Other long-term liabilities 117,391
-----------
TOTAL LIABILITIES 4,438,744
===========
STOCKHOLDERS' EQUITY:
Convertible preferred stock 6,700
Common stock 108,532
Additional Paid-in-capital 44,641,314
Unearned consulting compensation (88,873)
Accumulated deficit (43,296,150)
Foreign currency translation gain 123,107
Treasury Stock, at cost (32,076)
-----------
Total Stockholders' Equity 1,462,554
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,901,298
===========
See notes to unaudited condensed consolidated financial statements.
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
------------------------
1999 1998
---------- -----------
Net revenues $1,093,722 $1,619,949
Cost of products sold 1,340,781 1,511,138
----------- -----------
Gross profit (loss) (247,059) (108,811)
Advertising & Promotion 82,380 110,307
Selling, general and administrative 710,401 686,914
----------- -----------
Total Operating Expenses 792,781 797,221
----------- -----------
Operating loss (1,039,840) (688,410)
Interest, net and other expense 59,881 39,974
----------- -----------
Pretax loss (1,099,721) (728,384)
Provision for income taxes ---- ----
----------- -----------
Net loss (1,099,721) (728,384)
Preferred dividends accreted, Series 2
(see Note 8) ---- 817,000
Preferred dividends, Series 1 33,195 33,534
----------- -----------
Net loss attributable to Common stockholders (1,132,916) (1,578,918)
========== ===========
Basic and diluted net loss per common
share outstanding $(0.11) $(0.17)
Weighted average number of common shares
outstanding 10,624,937 9,549,419
See notes to unaudited condensed consolidated financial statements.
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
March 31,
------------------------
1999 1998
---------- -----------
Net revenues $1,797,720 $2,925,753
Cost of products sold 2,202,232 3,091,792
----------- -----------
Gross profit (loss) (404,512) (166,039)
Advertising & Promotion 174,843 279,228
Selling, general and administrative 1,316,043 1,256,668
----------- -----------
Total Operating Expenses 1,490,877 1,535,896
----------- -----------
Operating loss (1,895,389) (1,701,935)
Interest, net and other expense 130,817 85,606
----------- -----------
Pretax loss (2,026,206) (1,787,541)
Provision for income taxes ---- ----
----------- -----------
Net loss (2,026,206) (1,787,541)
Preferred dividends accreted, Series 2
(see Note 8) ---- 817,000
Preferred dividends, Series 1 68,750 67,813
----------- -----------
Net loss attributable to Common stockholders (2,094,956) (2,672,354)
========== ===========
Basic and diluted net loss per common
share outstanding $(0.20) $(0.28)
Weighted average number of common shares
outstanding 10,532,073 9,546,883
See notes to unaudited condensed consolidated financial statements.
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
----------------------
1999 1998
----------- -----------
OPERATIONS:
Net (loss) $(2,026,206) $(1,787,541)
Adjusted for noncash items:
Depreciation and amortization 275,918 296,733
Amortization of discounts on notes payable
and convertible debentures 136,873 166,640
Reduction in inventory reserves (8,130) (589,388)
Reduction in accounts receivable reserves 482 (101,580)
Amortization of other assets -- 5,567
Changes in operating assets and liabilities (181,213) (904,193)
----------- -----------
Net cash (used in) operating activities (1,802,276) (1,105,376)
INVESTING ACTIVITIES:
Capital expenditures (22,933) (15,955)
Proceeds from repayment of note receivable -- 750,000
----------- -----------
Net cash provided by (used in) investing activities (22,933) 734,045
FINANCING ACTIVITIES:
Proceeds from related-party notes issued 1,300,000 1,000,000
Payments on notes payable, related party (1,000,000) (1,033,270)
Proceeds from the issuance of preferred stock -- 1,851,034
Purchase of Common Stock held in Treasury (12,746) --
Proceeds from the issuance of common stock 291,000 --
Proceeds from the issuance of common stock
upon exercise of options and warrants 202,925 108,902
----------- -----------
Net cash provided by financing activities 781,179 1,926,666
Effect of exchange rate change on cash and
equivalents (3,345) 13,311
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,047,375) 1,568,646
Cash and equivalents at beginning of period 1,480,287 1,633,467
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $432,912 $3,202,113
========== ==========
See notes to unaudited condensed consolidated financial statements.
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 1999
NOTE 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three and six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1998.
NOTE 2 - Earnings Per Share
Basic and diluted net (loss) per Common share outstanding is based on the
weighted average of shares of Common Stock outstanding during the period.
As of March 31, 1999 the Company has 1,165,828 options and 1,648,534 warrants
outstanding including 0 "in the money" options and warrants. As of March 31,
1998 the Company had 1,351,754 options and 1,133,534 warrants outstanding
including 1,136,196 "in the money" options and warrants. As of March 31, 1999
and 1998 the Company also has 670,000 and 680,000 shares, respectively, of
preferred stock outstanding which is convertible into an equal number of shares
of common stock (see Note 6).
The inclusion of the options, warrants and convertible preferred stock in the
computation of diluted earnings per share would have resulted in a reduction of
the loss per share (antidilutive) and therefore both basic and diluted earnings
per share amounts were the same for each of the periods presented in the
accompanying financial statements.
NOTE 3 _ Comprehensive Income (Loss)
Total Comprehensive Loss was $(1,263,840) and $(2,276,829) for the 3 and 6
month ended March 31, 1999 and $(1,561,384) and $(2,595,700) for the 3 month
and 6 month ended March 31, 1998.
NOTE 4. - Lease of Manufacturing Facility
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (British
pounds sterling 1,950,000) for leasing the facility to a third party for a
nominal annual rental charge and for providing the third party with an option
to purchase the facility for one pound during the period December 2006 to
December 2027. Concurrent with this transaction, the Company repaid the
mortgage loan on this property of $1,834,000 (British pounds sterling
1,062,500).
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents of $336,000 (British
pounds sterling 195,000) per year payable quarterly until 2016. The lease is
renewable through 2027. The Company was also required to make a security
deposit of $336,000 (British pounds sterling 195,000) to be reduced in
subsequent years. The facility had a net book value of $1,398,819 (British
pounds sterling 810,845) on the date of the transaction. The $1,966,181
(British pounds sterling 1,139,155) gain which resulted from this transaction
will be recognized ratably over the initial term of the lease. Unamortized
deferred gain as of March 31, 1999 was $1,645,929 (British pounds sterling
1,011,013).
NOTE 5 - Inventories
The components of inventory consist of the following:
March 31, 1999
------------
Raw Material and work in process $ 492,927
Finished Goods 773,200
-----------
Inventory, Gross 1,266,127
Less: Inventory reserves (30,889)
-----------
Inventory, net $ 1,235,238
===========
NOTE 5 - Sale of Convertible Preferred Stock
In September 1997, the Company raised approximately $1.6 million net proceeds,
after issuance costs of $96,252, in a private placement of 680,000 shares of 8%
cumulative convertible Preferred Stock _ Series 1. In addition, warrants to
purchase 52,000 shares of Common Stock were issued to the placement agents.
Each share of Preferred Stock is convertible into one share of the Company's
Common Stock on or after August 1, 1998. Annual Preferred Stock dividends will
be paid if and as declared by the Company's Board of Directors. No dividends
or other distributions will be payable on the Company's Common Stock unless
dividends are paid in full on the Preferred Stock. The shares may be redeemed
at the option of the Company, in whole or in part, on or after August 1, 2000,
subject to certain conditions, at $2.50 per share plus accrued and unpaid
dividends. In the event of a liquidation or dissolution of the Company, the
Preferred Stock _ Series 1 would have priority over the Company's Common Stock.
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converted into Common Stock on a
one-for-one basis, on April 3, 1998, the date in which the registration
statement registering the resale of the Common Stock was declared effective by
the SEC. The investors received four-year Warrants to purchase 240,000 shares
of Common Stock exercisable at a price per share equal to the lesser of $3.425
or the average of the three closing bid prices per share of Common Stock for
any three consecutive trading days chosen by the investor during the 30 trading
day period ending on the trading day immediately prior to the exercise of the
Warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received Warrants to purchase 4,000
shares of Common Stock exercisable at any time prior to December 31, 2001, at
$4.11 per share.
NOTE 7 - Financial Condition
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a net loss of $3.4 million for the year ended September 30, 1998, a
net loss of $2.0 million for the six months ended March 31, 1999 and as of
March 31, 1999 had an accumulated deficit of $43.3 million.
At March 31, 1999, the Company had working capital of $0.1 million and
stockholders' equity of $1.5 million. In the near term, the Company expects
operating and capital costs to continue to exceed funds generated from
operations due principally to the Company's fixed manufacturing costs relative
to current production volumes and the ongoing need to commercialize the Female
Condom around the world. As a result, operations in the near future are
expected to continue to use working capital. Management recognizes that the
Company's continued operations depend on its ability to raise additional
capital through a combination of equity or debt financing, strategic alliances
and increased sales volumes.
At various points during the developmental stage of the product, the Company
was able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom. Management believes
that recent developments, including the Company's agreement with the UNAIDS, a
joint United Nations program on HIV/AIDS, provide an indication of the
Company's early success in broadening awareness and distribution of the Female
Condom and may benefit from efforts to raise additional capital and to secure
additional agreement to promote and distribute the Female Condom throughout
other parts of the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to healthcare and
life-science companies. Pursuant to this agreement, for a one-year period,
Vector will act as the Company's exclusive financial advisor for the purposes
of identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. This
agreement had been extended for an additional six months through March 29,
1999. Management is currently determining if there is further need to extend
this arrangement. There can be no assurance that any such opportunities will be
available to the Company or, if so available, that the Company will ultimately
elect or be able to consummate any such transaction.
To provide a potential ready source of capital for the Company, which the
Company would use for general working capital purposes, effective November 19,
1998, the Company entered into a private Equity Line of Credit Agreement (the
"Equity Line Agreement") with Kingsbridge Capital Limited, a private investor
(the "Selling Stockholder"). Under the Equity Line Agreement, the Company has
the right, subject to various conditions, to issue and sell to the Selling
Stockholder, from time to time, shares of its Common Stock for cash
consideration up to an aggregate of $6 million.
The Equity Line Agreement gives the Company, in its sole discretion and subject
to certain restrictions, the right to sell ("put") to the Selling Stockholder
up to $6.0 million of the Company's Common Stock, subject to a minimum put of
$1.0 million over the duration of the agreement. The Equity Line Agreement
expires 24 months after the effective date of the registration statement filed
to register the Selling Stockholder's public resale of any stock it purchases
under the agreement. The Equity Line Agreement provides for, among other
things, minimum and maximum puts ranging from $100,000 to $1,000,000 depending
on the Company's stock price and trading volume. The timing and amount of puts
under the Equity Line Agreement are totally at the Company's discretion,
subject to certain conditions. The Company is required to put a minimum of $1
million during the two-year period. If the Company does not put the minimum,
the Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not put at the end of the two-year period. As of March 31,
1999, the Company had placed two puts for the combined cash proceeds of
$291,000 providing Kingsbridge with a total of 286,862 shares of the Company's
Common Stock. Each put was executed while the Company's stock price was below
$2.00 per share.
While the Company believes that its existing capital resources (including
expected proceeds from sales of Common Stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not, the Company may need to raise additional capital until its sales
increase sufficiently to cover operating expenses. In addition, there can be no
assurance that the Company will satisfy the conditions required for it to
exercise puts under the Equity Line Agreement. Accordingly, the Company may not
be able to realize all of the funds available to it under the Equity Line
Agreement.
Further, there can be no assurances, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that
the Company will achieve profitability or positive cash flow. If the Company
is unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to commercialize the Female Condom and to curtail
certain other of its operations or, ultimately, cease operations.
Note 8 _ Preferred Dividends, Series 2
The Company's $2.0 million private placement of convertible Preferred Stock _
Series 2 on December 31, 1997 included a beneficial conversion feature valued
at $500,000 and four-year warrants to purchase additional shares of common
stock valued at $317,000. In accordance with SEC reporting requirements for
such transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital. The
corresponding discount of $817,000, associated with the issuance of the
convertible preferred stock is a one-time, nonrecurring charge that has been
fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the quarter and six months ended
March 31, 1998. The dividend accretion had no impact on the Company's cash
flow from operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
GENERAL
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells The Female Condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
Safety and Efficacy
Based on use of the product in clinical trials and five years of worldwide
marketing, the Female Condom has been proven as safe and effective. The
following information reflects the results of various trials:
Reduction in STDs(1) 34% (Results when
female condom was
available as an
option vs. when
only the male
condom was
available.)
Reduction in Acts of Unprotected Sex(1) 25%
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used
properly with
every sex act)
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID)
and conducted by Family Health International (FHI)
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of
the product, showed the female condom to be approximately 98%
effective when used consistently and correctly.
Cost Effectiveness
Results of the UNAIDS supported evaluation of the cost-effectiveness of
providing the Female Condom in developing countries has been published and also
presented at various professional meetings. The results indicate that making
the Female Condom available is highly effective in reducing public health costs
in developing countries.
Endorsements
Currently, the Female Condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS), the
U.S. Agency for International Development (USAID), many NGO's (non-government
organizations) around the world, and a number of city and state public health
departments in the United States.
At the June 1998 World AIDS Conference in Geneva, Switzerland the Female Condom
appeared in over 50 studies, speeches and exhibition booths.
Global Market
The pandemic of STDs, including HIV/AIDS continues to be a major public health
issue worldwide. The need for prevention methods, male and female
condoms is escalating. The World Health Organization (WHO) estimates the new
cases of STDs worldwide to be approximately 300 million annually, excluding
HIV/AIDS. UNAIDS estimates that there are currently approximately 33 million
people worldwide who are infected with HIV/AIDS, of which 86% are in developing
countries. In the United States, the center for Disease Control and Prevention
noted that in 1995, five of the ten most frequently reported diseases were
STD's. The Center also has noted that one in five Americans over the age of 12
has Herpes and 1 in every 3 sexually active people will get an STD by age 24.
Women are currently the fastest growing group infected with HIV and are
expected to comprise the majority of the new cases by the year 2000. The
following information highlights the substantial and growing market for
protection against STDs.
Worldwide:
Number of people with HIV/AIDS(*) 34 million
Number of new cases of HIV/AIDS daily(*) 16,000
Number of children expected to be orphaned by AIDS
by 2010 (at current rate)(*) 40 million
Examples of decreases in life expectancy due to HIV/AIDS(*)
Zimbabwe 22 years
Cote d'Ivoire 11 years
Number of Sub-Saharan African countries where more
than 10% of population is HIV positive(*) 13
Most people infected with HIV/AIDS 10-24 years old
(*) Source: UNAIDS
United States:
Number of top ten most frequently reported diseases
in the United States in 1995 that were STDs(1) 5
Ratio of individuals over 12 years of age with Herpes(1) 1 in 5
Annual expenditures to treat STDs(2) $17 billion
Dollars spent on STD treatment for every $1.00 spent
on prevention(2) $43
The United States has one of the highest rates of teenage pregnancy in Western
nations--Each year one in nine teenage women (ages 15-19) becomes pregnant(3)
(1) Source: Center for Disease Control and Prevention
(2) Source: National Academy of Sciences
(3) Source: Alan Guttmacher Institute
At the 1998 World AIDS Conference in Geneva, Switzerland, the following points
were emphasized:
- - New drugs help some AIDS patients in Western nations. However, they are
of little value in developing countries due to their cost and the
complexity of their administration.
- - Simple, inexpensive treatments for HIV/AIDS --or a vaccine to prevent
infection from HIV --are unlikely in the near term.
- - Prevention is essential.
Currently, there are only two products that prevent the transmission of
HIV/AIDS through sexual intercourse _ the latex male condom and the Female
Condom.
Male Condom Market: It is estimated the global annual market for male condoms
is 4.7 billion units. However, the majority of all acts of sexual intercourse,
excluding those intended to result in pregnancy, are completed without
protection. As a result, it is estimated the potential market for barrier
contraceptives is much larger than the identified male condom market.
The market potential for the Female Condom is larger and growing as highlighted
by the following:
- - New cases of STDs each year: 333 million
- - Estimated Annual Male Condom Market: 4.7 billion units
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from unintended pregnancy and
STDs, including HIV/AIDS. This is an important advantage as many men do not
like to wear male condoms and may refuse to do so.
The polyurethane material that is used for the Female Condom, offers a number
of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability
that the Female Condom sheath will tear during use. Clinical studies and
everyday use have shown that latex male condoms can tear as much as 8% of the
times they are used. Unlike latex, polyurethane quickly transfers heat, so the
Female Condom immediately warms to body temperature when it is inserted, which
may result in increased pleasure and sensation during use. The product offers
an additional benefit to the 7% to 20% of the population that is allergic to
latex and who, as a result, may be irritated by latex male condoms. To the
Company's knowledge, there is no reported allergy to polyurethane. The Female
Condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sex than the male
condom which requires sexual arousal for application.
Strategy/Goals
The Company's strategy is to act as a manufacturer selling the Female Condom to
the global public sector, the U.S. public sector and commercial partners for
country specific marketing. The public sector customers and partners assume
the cost of shipping and marketing. As a result, as volume increases, expenses
other than manufacturing costs will not increase appreciably.
Commercial Markets
The Company markets the product directly in the United States and the United
Kingdom. The Company has commercial partners which have recently launched the
product in Canada, Holland, Brazil, Venezuela, South Korea and Taiwan. The
Company has signed distribution agreements in Japan and Bangladesh, where
launches are expected during the coming year.
Japanese Market
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have not been approved in Japan and, as a result, 96% of
Japanese couples use male condoms. The Company's partner in Japan, is Taiho
Pharmaceuticals, a $1 billion Japanese health care company. The agreement
between the Company and Taiho requires Taiho to perform clinical testing of the
product in Japan and obtain necessary regulatory approvals to market the
product. After approval, expected during the Company's 1999 fiscal year, the
Company will manufacture the product and supply it to Taiho, which will have
the responsibility for marketing and distributing the Female Condom in Japan.
Taiho plans to market the Female Condom under the name "Mylura Femy."
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated that worldwide more than 1.7 billion male condoms
per year are distributed by the public sector. The Female Condom is seen as an
important addition to prevention strategies by the public sector because
studies show that the availability of the Female Condom decreases the amount of
unprotected sex by as much as 25% over the rate when only male condoms are
available.
The Company has a multi-year agreement with UNAIDS to supply the Female Condom
to developing countries at a reduced price which is negotiated each year based
on volume. The current price per unit is approximately $0.64 or British pounds
sterling O.38. During the last year, the Female Condom has been launched in the
countries of Kenya, Zimbabwe, Tanzania, Bolivia, Haiti, South Africa and
Zambia. It is anticipated that multiple product launches will occur in several
countries during the next two years, including in the countries of Nigeria,
Uganda, Ghana, Cambodia, Bangladesh, Columbia, and Central American countries.
In a meeting on January 15, 1999, UNAIDS advised the Company that based on
results to date in countries where the Female Condom has been launched they
plan to include it in all male condom distribution programs. It is estimated
that approximately 1.7 billion male condoms are used in such programs.
In the United State, the product is marketed to city and state public health
clinics as well as not-for-profit organizations such as Planned Parenthood.
Currently, 10 major city and 15 state governments, including the states of New
York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina, Illinois, and Washington and the cities of Chicago,
Philadelphia, New York City, and Houston have purchased the product for
distribution with a number of others expressing interest. All major cities and
states have reordered product after initial shipments.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market The Female Condom throughout the European Union. In addition to the
United States and the European Union, several other countries have approved the
Female Condom for sale, including Canada, Russia, Australia, South Korea and
Taiwan. The Company expects the Female Condom to receive approval in Japan in
1999.
The Company believes that the Female Condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six years
to implement, execute, and receive FDA approval of a PMA to market another type
of Female Condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the
manufacture and distribution of the Female Condom.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
The Female Health Company had revenues of $1,093,722 and a net loss of
$1,099,721 for the three months ended March 31, 1999 compared to revenues of
$1,619,949 and a net loss of $728,384 for the three months ended March 31,
1998. As discussed more fully below, the increase in the Company's net loss
was principally related to decreased sales volume, which was not coupled with a
proportional decrease in cost of good sold.
For the current quarter, sales decreased $526,227, or 32%, compared with the
same period last year. Net sales for the prior year were significantly higher
because of product launches by new country specific partners associated with
UNAIDS. The Company expects significant quarter to quarter variation due to the
timing of receipt of large orders, subsequent production scheduling, and
shipping of products as various countries launch the product. It believes
this variation between quarters will continue for several quarters to come
until reorders form an increasing portion of total sales. Net sales for the
current quarter included the product shipped for the Kenya launch.
Cost of goods sold decreased $170,357, or 11%, to $1,340,781 in the current
quarter from $1,511,138 for the same period last year. Cost of goods sold for
the prior year included a $300,000 reduction resulting from an adjustment of
the Company's reserve for inventory obsolescence. Because no material inventory
reserve adjustment occurred in the current quarter, the percentage decline in
cost of goods sold between the comparative quarters is not proportionate with
the sales decline.
Advertising and promotional expenditures decreased $27,927 to $82,380 in the
current quarter from $110,307 for the same period in the prior year.
Advertising and promotion relates almost exclusively to the U.S. consumer
market, and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs. Through expenditures to
date, the Company has established that the Female Condom is responsive to
promotion; but due to the Company's size, it doesn't possess the resources to
conduct a significant U.S. consumer program and is in discussions with
potential U.S. partners that have the resources to penetrate the consumer
market.
Selling, general and administrative expenses increased $23,487, or 3%, to
$710,401 in the current quarter from $686,914 for the same period last year.
The small increase reflected higher legal and professional fees related to the
Company's efforts to raise capital and communicate with the investor community.
Net interest and nonoperating expenses increased $19,907 to $59,881 for the
current period from $39,974 for the same period the prior year. The increase
is due to higher interest expense attributable to a increased level of debt
outstanding during the quarter. Additionally, interest income, an offset to
interest expense, declined in the current quarter as a result of significantly
lower average cash balances invested in interest bearing accounts during the
current period compared with the same period in the prior year.
Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998
The Female Health Company had net revenues of $1,797,720 and a net loss of
$2,026,206 for the six months ended March 31, 1999 compared to revenues of
$2,925,753 and a net loss of $1,787,541 for the six months ended March 31,
1998. As discussed in more detail in the following paragraphs, the increase in
the Company's net loss was principally related to decreased sales volume,
offset by a less than proportionate decline in cost of goods and a reduction in
advertising and promotional expenses.
For the six months ended March 31, 1999, sales decreased $1,128,033, or 39%,
compared with the same period last year. The lower sales resulted from
decreased unit sales shipped to domestic public sector agencies and to the
global public sector.
Cost of goods sold decreased $889,560, or 29%, to $2,202,232 for the six months
ended March 31, 1999 from $3,091,792 for the same period last year. Decreases
in the costs of goods sold were a result of lower sales volume, offset, in
part, by a change between years in the Company's reserve for inventory
obsolescence. During the six months ended March 31, 1998 a $589,388 reduction
in the Company's reserve for inventory obsolescence occurred. The FDA's
decision to extend the useful life of the Female Condom to five years from
three years and the reduction of finished goods inventories resulting from the
increased level of sales were the factors leading to the inventory reserve
adjustment in the prior year. The Company did not materially adjust inventory
reserves during the same period this year.
Advertising and promotional expenditures decreased $104,385, or 37%, to
$174,843 for the six months ended March 31, 1999 from $279,228 for the same
period in the prior year. Advertising and promotion relates almost exclusively
to the U.S. consumer market, and includes the costs of print advertising, trade
and consumer promotions, product samples and other marketing costs. Through
expenditures to date, the Company has established that the Female Condom is
responsive to promotion; but due to the Company's size, it doesn't possess the
resources to conduct a significant marketing program. Accordingly, the Company
is in discussions with potential partners for the U.S. that have the resources
to conduct such a marketing program.
Selling, general and administrative expenses increased $59,366, or 5%, to
$1,316,034 in the current period from $1,256,668 for the same period last year.
The increase reflected higher legal and professional fees related to the
Company's effort to raise capital and communicate with the investor community
Net interest and nonoperating expenses increased $45,211 to $130,817 for the
current period from $85,606 for the same period the prior year. During the
prior year the Company had a higher level of debt outstanding during the
current fiscal year. Additionally, interest income, an offset to interest
expense, was less in the current year as a result of significantly lower
average cash balances invested in interest bearing accounts during the current
fiscal year compared to the same period in the prior year.
LIQUIDITY AND SOURCES OF CAPITAL
Historically, the Company has incurred cash operating losses relating to
expenses incurred to develop and promote the Female Condom. During the first
six months of fiscal 1999, cash used in operations totaled $1.8 million. The
Company used existing cash balances in order to fund cash used in operations;
thereby reducing its cash position by $1.1 million. To provide a potential
ready source of capital for the Company, which the Company would use for
general working purposes, effective November 19, 1998, the Company entered into
a private equity line of credit agreement (the "Equity Line Agreement") with
Kingsbridge Capital Limited., a private investor (the "Selling Stockholder").
Under the Equity Line Agreement, the Company has the right, subject to various
conditions, to issue and sell ("put") to the Selling Stockholder shares of the
Company's Common Stock for cash consideration up to an aggregate of $6,000,000.
Any stock sold by the Company to the Selling Shareholder under the Equity Line
Agreement will be sold at a discount to the stock's market price as determined
pursuant to the agreement. The discount is 12% if the market price of a share
of the Company's Common Stock at the time of the sale is $2.00 or more and 18%
if the price is less than $2.00. The Equity Line Agreement gives the Company
the right to determine, in its sole discretion, the degree to which it desires
to utilize the Equity Line, subject to a minimum Put of $1,000,000 over the
life of the Agreement.
The Equity Line Agreement expires 24 months after the effective date of the
registration statement filed to register the Selling Shareholder's public
resale of any stock purchases under the Agreement. The Equity Line Agreement
provides for, among other things, minimum and maximum Puts ranging from
$100,000 to $1,000,000 depending on the Company's stock price and trading
volume. The timing and amount of the stock sales under this line of credit are
totally at the Company's discretion, subject to certain conditions. The Company
is required to draw down a minimum of $1,000,000 during the two-year period. If
the Company does not draw down the minimum, the Company is required to pay the
Selling Stockholder a 12% fee on the portion of the $1,000,000 minimum, not
drawn down at the end of the two-year period. As of March 31, 1999, the Company
had placed two puts for the combined cash proceeds of $291,000 providing
Kingsbridge with a total of 286,862 shares of the Company's Common Stock. Each
put was executed while the Company's stock price was below $2.00 per share.
While the Company believes that its existing capital resources (including
expected proceeds from sales of Common Stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not, the Company will need to raise additional capital until its sales
increase sufficiently to cover operating expenses. Until internally generated
funds are sufficient to meet cash requirements, the Company will remain
dependent upon its ability to generate sufficient capital from outside sources.
At March 31, 1999, the Company had current liabilities of $2.7 million
including a $1.0 million note payable due March 25, 2000 and a $250,000 note
payable due February 12, 2000 both to Mr. Dearholt, a Director of the Company.
As of March 31, 1999, Mr. Dearholt beneficially owns 1,514,784 shares of the
Company's Common Stock.
The Company also secured a $50,000 note payable due February 18, 2000 from Mr.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
As of March 31, 1999, Mr. Parrish beneficially owns 494,001 shares of the
Company's Common Stock.
As of April 6, 1999 the Company restructured the $602,360 (British pounds
sterling 370,000) Auge V. Jensen Charity Foundation loan note payable. The
terms included immediate payment of $177,000 (British pounds sterling 110,000)
as of the date of the restructuring agreement and requires nine installment
payments beginning April 15, 1999 and concluding on December 10, 1999. The
first eight monthly installment payments are for $49,500 (British pounds
sterling 30,000) each while the last monthly installment is for $33,000
(British pounds sterling 20,000).
In the near term, the Company's management expects operating and capital costs
to continue to exceed funds generated from operations, due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the Female Condom around the world. It is
estimated that the Company's cash burn rate, without revenues, is approximately
$0.6 million per month.
While management believes that revenue from sales of the Female Condom will
eventually exceed operating costs, and that, ultimately, operations will
generate sufficient funds to meet capital requirements, there can be no
assurance that such level of operations ultimately will be achieved, or be
achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the Female Condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to
the Company and/or dilutive to stockholders.
If the Company is not able to source the required funds or any future capital
which becomes required, the Company may be forced to sell certain of its assets
or rights or cease operations. Further, if the Company is not able to source
additional capital, the lack of funds to promote the Female Condom may
significantly limit the Company's ability to realize value from the sale of
such assets or rights or otherwise capitalize on the investments made in the
Female Condom.
DELISTING ON THE AMERICAN STOCK EXCHANGE
On February 5, 1999, the Company's Common Stock was delisted from the American
Stock Exchange since it did not meet all of the criteria for continued listing.
Commencing on or before February 9, 1999, the Common Stock has been quoted on
the OTC Bulletin Board under the symbol "FHCO". Although the Company believes
the OTC Bulletin Board will provide an efficient market for the purchase and
sale of the Company's Common Stock, investors may find it more difficult to
obtain accurate quotations of the price of the Company's Common Stock and to
sell the Common Stock on the open market than was the case when the stock was
listed on the American Stock Exchange. In addition, companies whose stock is
listed on the American Stock Exchange must adhere to the rules of such
exchange. These rules include various corporate governance procedures which,
among other items, require the company to obtain shareholder approval prior to
completing certain transactions such as, among others, issuances of common
stock equal to 20% or more of the company's then outstanding common stock for
less than the greater of book or market value or the issuance of certain stock
options. Companies whose stock is quoted on the OTC Bulletin Board are not
subject to these or any comparable rules.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased selling, general and administrative
expenses. Historically, the Company has absorbed increased costs and expenses
without increasing selling prices.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such factors
may adversely affect the Company's results of operations and financial
condition.
YEAR 2000 COMPLIANCE
The Company's State of Readiness. The Company's main financial and
manufacturing hardware and software systems have been tested and are Year 2000
compliant. This was accomplished primarily through system upgrades and
maintenance done over the last few years. The Company is in the process of
surveying major customers and suppliers regarding their Year 2000 readiness
and, to date, the Company is not aware of any significant Year 2000 issue at
these entities that would materially affect the Company's business. The Company
believes that if a Year 2000 problem develops at any of the Company's vendors
whereby the vendor becomes unable to address the Company's needs, alternative
vendors are readily available that could furnish the Company with the same or
similar supplies without material undue delay or expense.
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
Year 2000 issues were corrected either through system upgrades or normal
maintenance contracts. The cost of these improvements to date has been
approximately $38,200.
Risks to the Company for Year 2000 Issues. With regard to systems under the
Company's control, the Company knows of no significant exposure that the
Company has to the Year 2000 issue since, if necessary, the Company's systems
are capable of accepting manually entered data. The Company believes the worst
case scenario is that the Company would have to revert back to certain manual
systems. The Company believes that its customers and vendors are at various
stages of compliance but the Company has not been made aware of any significant
Year 2000 issues that would materially affect its business with them. The
Company will continue to monitor Year 2000 compliance with its customers and
vendors throughout 1999 but it will not be able to achieve the same degree of
certainty that it can with its own internal systems.
The Company's Contingency Plan. To the extent that the Company discovers minor
internal systems that are not Year 2000 compliant by Mid-1999, it will have
time to implement manual systems by year-end 1999 which the Company believes
will significantly reduce the financial risk to the Company.
Part II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.2). (2)
10.1 Agreement between Kingsbridge Capital Limited and the Company dated
February 12, 1999.
10.2 Consulting Agreement between the Company and Kingsbridge Capital
Limited dated February 12, 1999.
10.3 Registration Rights Agreement between Kingsbridge Capital Limited and
the Company dated February 12, 1999.
10.4 Warrant for 100,000 shares of the Company's Common Stock issued to
Kingsbridge Capital Limited as of February 12, 1999.
10.5 Change of Control Agreement dated January 27, 1999, between The
Female Health Company and Michael Pope.
10.6 Company Promissory Note to Stephen M. Dearholt for $250,000 dated
February 12, 1999, and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement.
10.7 Company Promissory Note to O.B. Parrish for $50,000 dated February
18, 1999 and related Note Purchase and Warrant Agreement, Warrants
and Stock Issuance Agreement.
10.8 Company Promissory Note to Stephen M. Dearholt for $1 million dated
March 25, 1999, and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement.
27 Financial Data Schedule
_____________________________
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-3, filed with the Securities and Exchange
Commission on February 13, 1998.
(2) Incorporated herein by reference to the Company's 1995 Form
10-KSB.
(3) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 initially filed December 8, 1998.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FEMALE HEALTH COMPANY
DATE: May 10, 1999 /s/O.B. Parrish _
---------------------------
O. B. Parrish, Chairman and
Chief Executive Officer and
Acting Principal Accounting Officer
/s/ Robert R. Zic
---------------------------
Robert R. Zic, Chief Financial Officer