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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
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THE FEMALE HEALTH COMPANY
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(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
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(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
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(Issuer's Telephone Number, Including Area Code)
Not applicable
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(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 - 14,650,697 shares outstanding as of May 8, 2001
Transitional Small Business Disclosure Format (check one):
Yes No X
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FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
PAGE
----
PART I.. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND
ANALYSIS:
Cautionary Statement Regarding Forward Looking
Statements. . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
March 31, 2001. . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended March 31, 2001
and March 31, 2000. . . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated
Statements of Operations -
Six Months Ended March 31, 2001
and March 31, 2000. . . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated
Statements of Cash Flows -
Six Months Ended March 31, 2001
and March 31, 2000. . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Condensed Consolidated
Financial Statements. . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis. . . . . . . . . . 13
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K. . . . . . . . . . . . 24
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . 25
2
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.
3
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31,
2001
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ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 693,378
Accounts receivable, net. . . . . . . . . . . . . . . . 788,959
Inventories . . . . . . . . . . . . . . . . . . . . . . 537,800
Prepaid expenses and other current assets . . . . . . . 157,053
-------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . 2,177,190
Intellectual property rights, net . . . . . . . . . . . . 547,399
Other assets. . . . . . . . . . . . . . . . . . . . . . . 142,254
PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . 3,620,720
Less accumulated depreciation and amortization. . . . . . (2,457,966)
-------------
Net property, plant, and equipment. . . . . . . . . 1,162,754
-------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $ 4,029,597
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Notes payable, related party, net of unamortized discount 1,274,829
Convertible debentures, net of unamortized discount . . . 1,727,186
Accounts payable. . . . . . . . . . . . . . . . . . . . . 515,311
Accrued expenses and other current liabilities. . . . . . 558,014
Preferred dividends payable . . . . . . . . . . . . . . . 67,633
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TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . 4,142,973
Deferred gain on lease of facility. . . . . . . . . . . . 1,308,898
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TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 5,451,871
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock . . . . . . . . . . . . . . . 6,600
Common stock. . . . . . . . . . . . . . . . . . . . . . . 146,459
Additional paid-in-capital. . . . . . . . . . . . . . . . 48,676,289
Unearned consulting compensation. . . . . . . . . . . . . (142,781)
Accumulated deficit . . . . . . . . . . . . . . . . . . . (50,090,349)
Accumulated other comprehensive income. . . . . . . . . . 13,584
Treasury stock, at cost . . . . . . . . . . . . . . . . . (32,076)
-------------
Total Stockholders' Equity (Deficiency) . . . . . . . . . (1,422,274)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) . $ 4,029,597
=============
See notes to unaudited condensed consolidated financial statements.
4
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
Net revenues. . . . . . . . . . . . . . . . . . $ 1,449,297 $ 1,349,718
Cost of products sold . . . . . . . . . . . . . 1,231,059 1,126,073
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . 218,238 223,645
------------ ------------
Advertising & promotion . . . . . . . . . . . . 21,085 75,832
Selling, general and administrative . . . . . . 481,172 732,389
------------ ------------
Total operating expenses. . . . . . . . . . . . 502,257 808,221
------------ ------------
Operating (loss). . . . . . . . . . . . . . . . (284,019) (584,576)
Amortization of debt issuance costs . . . . . . - 88,099
Interest, net and other expense . . . . . . . . 117,702 313,734
------------ ------------
(Loss) before income taxes. . . . . . . . . . . (401,721) (986,409)
Provision for income taxes. . . . . . . . . . . - -
------------ ------------
Net (loss). . . . . . . . . . . . . . . . . . . (401,721) (986,409)
Preferred dividends, Series 1 . . . . . . . . . 33,548 32,740
------------ ------------
Net (loss) attributable to common stockholders. $ (435,269) $(1,019,149)
============ ============
Net (loss) per common share outstanding . . . . $ (0.03) $ (0.08)
Weighted average common shares outstanding. . . 14,449,174 12,452,115
See notes to unaudited condensed consolidated financial statements.
5
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
March 31,
--------------------------
2001 2000
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Net revenues. . . . . . . . . . . . . . . . . . $ 2,662,922 $ 2,197,013
Cost of products sold . . . . . . . . . . . . . 2,360,933 2,042,966
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . 301,989 154,047
------------ ------------
Advertising & promotion . . . . . . . . . . . . 107,166 114,642
Selling, general and administrative . . . . . . 981,422 1,480,096
------------ ------------
Total operating expenses. . . . . . . . . . . . 1,088,588 1,594,738
------------ ------------
Operating (loss). . . . . . . . . . . . . . . . (786,599) (1,440,691)
Amortization of debt issuance costs . . . . . . - 183,673
Interest, net and other expense . . . . . . . . 234,471 668,872
------------ ------------
(Loss) before income taxes. . . . . . . . . . . (1,021,070) (2,293,236)
Provision for income taxes. . . . . . . . . . . - -
------------ ------------
Net(loss) . . . . . . . . . . . . . . . . . . . (1,021,070) (2,293,236)
Preferred dividends, Series 1 . . . . . . . . . 66,819 66,181
------------ ------------
Net (loss) attributable to common stockholders. $(1,087,889) $(2,359,417)
============ ============
Net (loss) per common share outstanding . . . . $ (0.07) $ (0.19)
Weighted average common shares outstanding. . . 14,260,150 12,371,846
See notes to unaudited condensed consolidated financial statements.
6
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
March 31,
--------------------------
2001 2000
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OPERATIONS:
Net (loss). . . . . . . . . . . . . . . . . . . . $(1,021,070) $(2,293,236)
Adjusted for noncash items:
Depreciation and amortization. . . . . . . . . . 236,844 419,152
Amortization of discounts on notes payable and
convertible debentures . . . . . . . . . . . . 138,685 634,350
Changes in operating assets and liabilities. . . 455,002 815,499
------------ ------------
Net cash (used in) operating activities . . . . . (190,539) (424,235)
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures, Net cash (used in)
investing activities. . . . . . . . . . . . . . (595) (12,113)
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FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures. 250,000 -
Dividend paid on preferred stock. . . . . . . . . (107,186) (39,002)
Proceeds from issuance of common stock. . . . . . 300,000 372,500
------------ ------------
Net cash provided by financing activities . . . . 442,814 333,498
------------ ------------
Effect of exchange rate changes on cash . . . . . (15,424) (6,113)
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INCREASE (DECREASE) IN CASH . . . . . . . . . . . 236,256 (108,963)
Cash at beginning of period . . . . . . . . . . . 457,122 570,709
------------ ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . $ 693,378 $ 461,746
============ ============
Schedule of noncash financing and investing
activities:
Issuance of warrants on notes payable . . . . . . $ 30,932 $ 193,289
Renewal of notes payable with related parties . . 300,000 1,300,000
Common stock issued for payment of preferred
stock dividends and convertible debenture
interest. . . . . . . . . . . . . . . . . . . . 28,033 43,723
Preferred dividends declared, Series 1. . . . . . 66,819 66,181
See notes to unaudited condensed consolidated financial statements.
7
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2001. 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, 2000.
Principles of consolidation and nature of operations:
- - ----------------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, The Female Health Company - UK and The Female
Health Company - UK, plc. All significant intercompany transactions and accounts
have been eliminated in consolidation. The Female Health Company ("FHC" or the
"Company") is currently engaged in the marketing, manufacture and distribution
of a consumer health care product known as the Reality Female Condom, "Reality,"
in the U.S. and "femidom" or "femy" outside the U.S. The Female Health Company -
UK, is the holding company of The Female Health Company - UK, plc, which
operates a 40,000 sq. ft. leased manufacturing facility located in London,
England.
Reclassification:
- - -----------------
Certain expenses on the statements of income for the three and six months ended
March 31, 2000 have been reclassified to be consistent with the presentation
shown for the three and six months ended March 31, 2001.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (EPS): Basic EPS is computed by dividing income available to
- - -------------------------
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
shares consist of the incremental common shares issuable upon conversion of
convertible preferred stock or convertible debt and the exercise of stock
options and warrants for all periods. Fully diluted (loss) per share is not
presented since the effect would be anti-dilutive.
8
NOTE 3 - Comprehensive Income (Loss)
-----------------------------
Total Comprehensive Loss was $(403,488) and $(1,063,147) for the three and six
months ended March 31, 2001 and $(1,023,047) and $(2,368,562) for the three and
six months ended March 31, 2000.
NOTE 4 - Inventories
-----------
The components of inventory consist of the following:
MARCH 31, 2001
----------------
Raw material and work in process $ 313,377
Finished goods . . . . . . . . . 278,729
----------------
Inventory, gross . . . . . . . . 592,106
Less: Inventory reserves . . . . (54,306)
----------------
Inventory, net . . . . . . . . . $ 537,800
================
NOTE 5 - 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 $1.1 million for the six months ended March 31, 2001 and
as of March 31, 2001 had an accumulated deficit of $50.1 million. At March 31,
2001, the Company had working capital of $(2.0) million and stockholders' equity
of $(1.4) 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 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 future efforts to raise
additional capital and to secure additional agreements to promote and distribute
the Female Condom throughout other parts of the world.
9
NOTE 5- Financial Condition - (Continued)
------------------------------------
On May 19, 1999 and June 3, 1999 the Company issued an aggregate $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. $1,000,000 of the
convertible debentures is due on May 19, 2001 and the remaining $500,000 of the
convertible debentures is due on June 3, 2001. The Company is currently
negotiating a financing arrangement to raise capital to repay the convertible
debentures. However, no assurance can be given that the Company will be
successful in raising the necessary capital and the Company will remain
dependent upon its ability to generate sufficient capital from outside sources
to cover all of its operating needs.
Between September and November 1999 the Company completed a private placement
where 983,333 shares of the Company's common stock were sold for $737,500, of
which $500,000 was received through September 30, 1999. The stock sales were
directly with accredited investors and included one current director of the
Company. The Company sold the shares to these investors at a price of $.75 per
share.
During the year ended September 30, 2000, the Company completed private
placements where 1,305,000 shares of the Company's common stock were sold for
$697,500 of which $597,500 was received through September 30, 2000. The stock
sales were directly with accredited investors and included two current directors
of the Company. The Company sold the shares to these investors at prices which
ranged from $.50 and $.75 per share.
During the six months ended March 31, 2001, the Company completed private
placements where 600,000 shares of the Company's common stock were sold for
$300,000. The stock sales were directly with accredited investors and included
one director of the Company. The Company sold the shares to these investors at
price of $.50 per share.
On March 30, 2001 the Company issued $250,000 of convertible debentures to one
accredited investor. The debentures are due March 30, 2002, bear interest
payable at a rate of 12% per annum, and are convertible into the Company's
common stock based on a price per share equal to 70% of the market price of the
common stock the day immediately prior to the date a conversion notice is
provided to the FHCO but in no event shall the stock price be below $.50 per
share or more than $1.00 per share. The Company did not issue warrants in
connection with the issuance of the convertible debentures.
On November 19, 1998, the Company executed an agreement with a private investor
(the "Equity Line Agreement"). The agreement provided for the Company, at its
sole discretion, subject to certain restrictions, to sell
10
NOTE 5- Financial Condition - (Continued)
------------------------------------
("put") to the investor 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 expired on February 12, 2001.
Under this agreement, the investor purchased Common Stock at a discount of
(a) 12% from the then current average market price of the Company's Common
Stock, as determined under the Equity Line Agreement, if such average market
price is at least $2 or (b) 18% from the then current average market price if
such average market price is less than $2.
In addition, the Company was required to pay its placement agent sales
commissions in Common Stock or cash, at the placement agent's discretion, equal
to 7% of the funds raised under the Equity Line Agreement and issue warrants to
the placement agent to purchase shares of Common Stock, at an exercise price of
$2.17 per share, equal to 10% of the Shares sold by the Company under the Equity
Line Agreement. Pursuant to the Equity Line Agreement, the Company issued the
investor a Warrant to purchase 200,000 shares of Common Stock at $2.17 per
share.
The Company was required to draw down a minimum of $1 million during the term of
the Equity Line Agreement. Since the Company did not draw down the minimum, the
Company was required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the two-year period. As of the
expiration date, the Company had placed four puts for the combined net cash
proceeds of $582,000 and issued a total of 680,057 shares of the Company's
Common Stock to the investor.
Until internally generated funds are sufficient to meet cash requirements, FHC
will remain dependent upon its ability to generate sufficient capital from
outside sources. 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 will ultimately 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.
11
NOTE 6 - Industry Segments And Financial Information About Foreign and Domestic
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Operations
- - ----------
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows:
Six Months Ended
March 31,
(Amounts in Thousands) 2001 2000
---------- ----------
Net revenues:
United States. . . . $ 7 $ 1,034
International. . . . 2,656 1,163
Operating (loss):
United States. . . . (351) (2,414)
International. . . . (436) 55
Identifiable assets:
United States. . . . 392 1,823
International. . . . 3,638 4,054
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transaction reported by geographic destination of
the sale rather than the geographic location of the unit, U.S. revenues would be
decreased and international revenues increased by $0 and $22,000 as of March 31,
2001 and 2000, respectively. Beginning October 1, 2000 primarily all revenues
derived from sales to the U.S. public and trade sectors were accounted for as
international revenues. In the first six months of fiscal 2001 U.S. sales
comprised $1,244,300 of the international total.
12
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. It is the only HIV/AIDS product specifically
developed and approved by regulatory agencies in the U.S., the European Union,
Japan and The People's Republic of China, among others, since the epidemic began
about 20 years ago for the prevention of the transmission of HIV/AIDS through
sexual contact.
The Female Condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 50 additional
countries. Certain of these studies show that having the Female Condom available
increases protected sex acts and decreases the incidence of STDs.
The product is currently sold or available in various venues including
commercial (private sector) outlets, public sector clinics and research programs
in over 75 countries. It is commercially marketed in 14 countries including the
U.S., UK, Canada, France and Japan.
In the U.S., the product is marketed to city and state public health clinics as
well as not-for-profit organizations. Under an agreement with the Joint United
Nations Programme on Aids ("UNAIDS"), UNAIDS facilitates the availability and
distribution of the Female Condom in the developing world and the Company will
sell the product to developing countries at a reduced price based on the total
number of units purchased. The current price per unit is approximately 0.38
(Pounds), or $0.55. Pursuant to this agreement, the product is currently
available in over 70 countries with major programs in about 10 countries
including Zimbabwe, Tanzania, Brazil, Uganda, South Africa, Namibia, Ghana, and
Haiti.
Product
The Female Condom is made of polyurethane, a thin but strong material that is
resistant to rips and tears during use. The Female Condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains outside
the vagina after insertion and lines the vagina, preventing skin from touching
skin during intercourse. The Female Condom is prelubricated and disposable and
is intended for use during one sex act.
Global Market Potential
Male condom market: It is estimated the global annual market for male condoms is
5.4 billion units. The major segments are in the Global Public sector, the U.S.,
Japan, India and The People's Republic of China. 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.
13
HIV/AIDS is an epidemic far more extensive than what was predicted. UNAIDS and
the World Health Organization ("WHO") now estimate that the number of people
living with HIV/AIDS stands at about 36 million, more than 50% higher than WHO's
original projection in 1991 for year end 2000. Further, African countries with
over 80% of the reported cases are experiencing devastating effects to their
economic growth. Gross domestic product in hard-hit countries such as South
Africa is projected to decrease 13% - 22% by 2010. Under the leadership of
Secretary Kofi Annan, the United Nations and UNAIDS have initiated a new strong
campaign to initiate broad education out-reach prevention programs as well as
treatment programs to fight the HIV/AIDS plague, estimated to cost a total of $7
billion to $15 billion annually, and to be supported by multinational donor
organizations and private foundations.
The focus is extending to Eastern Europe and Asia as the estimated number of
cases of HIV/AIDS has, according to UNAIDS, exponentially jumped in the last
year. Major prevention and education out-reach programs are being planned and
implemented in these countries.
In the United States, the Center for Disease Control and Prevention
reports that one in four Americans has an STD, one in five adults 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 coming year.
Currently, combined with education, there are only two products that prevent the
sexual transmission of HIV/AIDS and other STDs -- the latex male condom and the
Female Condom.
Female Condom vs Male Condoms
The Female Condom is currently the only available barrier contraceptive method
controlled by women which allows them to protect themselves from unintended
pregnancy and STDs, including HIV/AIDS. The most important advantage is that a
women can control whether or not she is protected 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 4% to 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 date 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 sexual intimacy than
the male condom which requires sexual arousal for application.
14
Cost Effectiveness
Over the past two years several studies have been completed which show that
providing the Female Condom in public clinics in both the United States and
countries in the developing world is, at a minimum, cost effective and usually
cost saving. This is important information for governments to have in
determining where their public health dollars are allocated. These studies have
been or are about to be published and also have been presented at various
scientific meetings around the world.
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 ("EU"). In addition to the United
States and the EU, several other countries have approved the Female Condom for
sale, including Brazil, Mexico, Canada, The People's Republic of China, Japan,
Russia, and Australia.
The Company believes that the Female Condom's PMA approval and FDA
classification as a Class III Medical Device and other regulatory approvals
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.
Strategy
The Company's strategy is to act as a manufacturer, selling the Female Condom to
the global public sector, United States public sector and commercial partners
for country-specific marketing. The public sector and commercial partners
assume the cost of shipping and marketing the product. As a result, as volume
increases, the Company's operating expenses will not increase significantly.
Markets
The Company has commercial partners which have launched the product in 14
countries including the U.S., the UK, Canada, Japan and France.
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations. The Female Condom is
available in all 50 states with major programs in the states of New York,
Florida, California, Louisiana, Maryland, New Jersey, South Carolina and
Illinois and the cities of Chicago, Philadelphia, New York and Houston. All
major cities and states have reordered product after their initial shipments.
15
State-of-the-Art Manufacturing Facility
The Company manufactures the Female Condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing 60
million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the Female Condom is regulated by the U.S. Food and Drug
Administration ("FDA"). Pursuant to section 515(a)(3) of the Safe Medical
Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend approval
and initiate withdrawal of the Pre-Market Approval ("PMA") if the FDA finds that
the Female Condom is unsafe or ineffective, or on the basis of new information
with respect to the device, which, when evaluated together with information
available at the time of approval, indicates a lack of reasonable assurance that
the device is safe or effective under the conditions of use prescribed,
recommended, or suggested in the labeling. Failure to comply with the
conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
Competition
The Company's Female Condom participates in the same market as male condoms but
is not seen as competing - rather additive in terms of prevention and choice.
However, it should be noted that latex male condoms cost less and have brand
names that are more widely recognized than the Female Condom. In addition, male
condoms are generally manufactured and marketed by companies with significantly
greater financial resources than the Company. It is also possible that other
parties may develop a Female Condom. These competing products could be
manufactured, marketed and sold by companies with significantly greater
financial resources than those of the Company.
Patents and Trademarks
The Company currently holds product and technology patents in the United States,
Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent
Convention, Canada, The People's Republic of China, New Zealand, Singapore, Hong
Kong and Australia. These patents expire between 2005 and 2013. Due to a change
in patent regulations, The U.S. product patent, which formerly expired on April
14, 2005, has had its expiration extended until April 14, 2007 providing the
Company with two additional years of protection. Additional product and
technology patents are pending in Brazil, South Korea, Germany, Japan and
several other countries. The patents cover the key aspects of the Female
Condom, including its overall design and manufacturing process. The Company
licenses the trademark "Reality" in the United States and has trademarks on the
names "femidom" and "femy" in certain foreign countries. The Company has also
secured, or applied for, 27 trademarks in 14 countries to protect the various
names and symbols used in marketing the product around the world. In addition,
the experience that has been gained through years of manufacturing the Female
Condom has allowed the Company to develop trade secrets and know-how, including
certain proprietary production technologies, which further secure its
competitive position.
16
RESULTS OF OPERATIONS
- - -----------------------
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
The Company had net revenues of $1,449,297 and a net loss of $435,269 for the
three months ended March 31, 2001 compared to net revenues of $1,349,718 and a
net loss of $1,019,149 for the three months ended March 31, 2000. As discussed
more fully below, the 57% decrease in the net loss resulted from the reduction
in the operating loss and a decrease in amortization of debt issuance costs and
non-operating interest expenses.
The Company's operating loss for the three months ended March 31, 2001 was
$284,019 compared to $584,576 for the same period last year for a decrease of
51%. The decrease in the Company's operating loss was result of a decrease in
the Company's operating expenses.
Net revenues increased $99,579 in the current quarter, or 7%, compared with the
same period last year. The higher net revenues occurred because of higher unit
sales shipped to domestic customers.
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. The Company believes this
variation between quarters will continue for several quarters to come until
reorders form an increasing portion of total sales.
Cost of goods sold increased $104,986 to $1,231,059 in the current quarter from
$1,126,073 for the same period last year. The cost of goods sold increase of 9%
resulted primarily from a 7% net revenues increase in the current quarter
compared with the same period in the prior year.
Advertising and promotional expenditures decreased $54,747 to $21,085 in the
current quarter from $75,832 for the same period in the prior year. The decrease
primarily resulted from a reduction of in-store promotion expenses between the
current and prior fiscal year's second quarter. This reflects the Company's
strategy to act as a manufacturer selling to public and private sector customers
who pay virtually all marketing expenses.
Selling, general and administrative expenses decreased $251,217, or 34%, to
$481,172 in the current quarter from $732,389 for the same period last year.
The change reflects the impact of a reduction of finance, sales and
administrative staff and thereby related labor costs, and reduced costs in the
areas of investor relations, computer, consulting and research and development
in the current quarter compared to that incurred in the prior fiscal year's
second quarter.
17
The Company did not incur non-cash amortization of debt issuance costs during
the second quarter compared to $88,099 for the second quarter of the prior year.
The elimination of the aforementioned costs is due to the completion of the
amortization period in the third quarter of the 2000 fiscal year. The
amortization of debt issuance costs related to the issuance of convertible
debentures which began in May and June 1999. The Company has not issued new
convertible debentures with a discount feature in any subsequent period.
Net interest and non-operating expenses decreased $196,032 to $117,702 for the
current period from $313,734 for the same period last year. The decrease exists
because the Company had a smaller amount of non-cash expenses incurred from the
amortization of discounts on notes payable and convertible debentures during the
current quarter than the second quarter of the prior year.
SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000
The Company had net revenues of $2,662,922 and a net loss of $1,087,889 for the
six months ended March 31, 2001 compared to net revenues of $2,197,013 and a net
loss of $2,359,417 for the six months ended March 31, 2000.
The Company's operating loss for the six months ended March 31, 2001 was
$786,599 compared to $1,440,691 for the same period last year for a decrease of
45%. As discussed more fully below, the decrease in the Company's net operating
loss was result of an increase in gross profit coupled with a decrease in
selling, general and administrative expenses. The decrease in the net loss
resulted from the reduction in the operating loss and a decrease in amortization
of debt issuance costs and non-operating interest expenses.
Net revenues increased $465,909 for the six months ended March 31, 2001, or 21%,
compared with the same period last year. The higher net revenues occurred
because of higher unit sales shipped to domestic customers.
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. The Company believes this
variation between quarters will continue for several quarters to come until
reorders form an increasing portion of total sales.
Cost of goods sold increased $317,967 to $2,360,933 for the six months ended
March 31, 2001 from $2,042,966 for the same period last year. The cost of goods
sold increase of 16% on a 21% increase in net revenues resulted because cost of
goods sold as a percentage of sales decreased from 89% in the six months ended
March 31, 2001 compared to 93% during the same period in the prior year. The
decline in the cost of good sold percentage as a percentage of sales is
primarily a result of a change resulting from the Company's U.S. sales being
almost exclusively comprised of a new less expensive (1000 pack) bulk sized
product which was not available during the same period in the prior year.
18
Advertising and promotional expenditures decreased $7,476 to $107,166 in the six
months ended March 31, 2001 from $114,642 for the same period in the prior year.
The decrease primarily resulted from a reduction of in-store promotion expenses
between the current and prior fiscal year's second quarter.
Selling, general and administrative expenses decreased $498,674, or 34%, to
$981,422 in the six months ended March 31, 2001 from $1,480,096 for the same
period last year. The decline reflects the impact of a reduction of finance,
sales and administrative staff and thereby related labor costs, and reduced
costs in the areas of investor relations, consulting and research and
development in the first half of the current fiscal year compared to that
incurred during the first half of the prior fiscal year.
The Company did not incur non-cash amortization of debt issuance costs during
the six months ended March 31, 2001 compared to $183,673 for the prior year. The
elimination of the aforementioned costs is due to the completion of the
amortization period in the third quarter of the 2000 fiscal year. The
amortization of debt issuance costs related to the issuance of convertible
debentures which began in May and June 1999. The Company has not issued new
convertible debentures with a discount feature in any subsequent period.
Net interest and non-operating expenses decreased $434,401 to $234,471 for the
six months ended March 31, 2001 from $668,872 for the same period last year. The
decrease exists because the Company had a smaller amount of non-cash expenses
incurred from the amortization of discounts on notes payable and convertible
debentures between the current quarter and the second quarter of the prior year.
Factors That May Affect Operating Results and Financial Condition
The Company's future operating results and financial condition are dependent on
the Company's ability to increase demand for and to cost-effectively manufacture
sufficient quantities of the Female Condom. Inherent in this process is a
number of factors that the Company must successfully manage in order to achieve
favorable future results and improve its financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the Female Condom, its sole current product. While management
believes the global potential for the Female Condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
Female Condom have not been sufficient to cover the Company's operating costs.
19
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector, particularly in Africa and Latin America.
Several partnership agreements have been completed for the commercialization of
the Female Condom in private sector markets around the world. However, the
Company is dependent on country governments as well as city and state public
health departments within the United States to continue their commitment to
prevention of STDs, including AIDS, by including Female Condoms in their
programs. The Company is also dependent on finding appropriate partners for the
private sector markets around the world. Once an agreement is completed, the
Company is reliant on the effectiveness of its partners to market and distribute
the product. Failure by the Company's partners to successfully market and
distribute the Female Condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
AIDS crisis, or an inability of the Company to secure additional agreements for
new markets either in the public or private sectors could adversely affect the
Company's financial condition and results of operations.
Inventory and Supply
All of the key components for the manufacture of the Female Condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's sales are 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. To date, the Company's
management has not deemed it necessary to utilize currency hedging strategies to
manage its currency risks. On an ongoing basis, management continues to
evaluate its commercial transactions and is prepared to employ currency hedging
strategies when it believes such strategies are appropriate. 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.
20
Government Regulation
The Female Condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
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 2001, cash used in operations totaled less than $0.2
million. The Company used net proceeds from the issuance of the Company's
common stock and convertible debentures in order to fund cash used in
operations; thereby avoiding a reduction of its cash position.
The Company's currently anticipated needs include financing an aggregate payment
on convertible debentures in the principal amount of $1,500,000 originally
issued to five accredited investors in May and June 1999. $1,000,000 of the
convertible debentures is due on May 19, 2001 and the remaining $500,000 of the
convertible debentures is due on June 3, 2001. The Company is currently
negotiating a financing arrangement to raise capital to repay the convertible
debentures. However, no assurance can be given that the Company will be
successful in raising the necessary capital and the Company will remain
dependent upon its ability to generate sufficient capital from outside sources
to cover all of its operating needs.
The convertible debentures in the principal amount of $1,500,000 are secured by
a first security interest in all of the Company's assets. The holder of
convertible debentures in the principal amount of $1 million has alleged that
the Company is in default with respect to the perfection of the investors'
security interest in the Company's assets, and has made a demand pursuant to the
default provisions of the convertible debentures for the immediate repayment of
all amounts outstanding under the convertible debentures and for the issuance of
1,500,000 shares of common stock to the investors. The Company disputes this
claim and intends to vigorously defend its position, although no assurance can
be given as to the outcome of this matter.
At March 31, 2001, the Company had current liabilities of $4.1 million including
a $1.0 million note payable due March 25, 2001 and a $250,000 note payable due
February 12, 2002 both to Mr. Dearholt, a Director of the Company. Mr. Dearholt
and the Company are currently discussing the details of a one-year extension of
the $1.0 million note payable due March 25, 2001. As of March 31, 2001, Mr.
Dearholt beneficially owns 2,775,583 shares of the Company's Common Stock.
21
The Company also secured a $50,000 note payable due February 18, 2002 from Mr.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
As of March 31, 2001, Mr. Parrish beneficially owns 520,501 shares of the
Company's Common Stock.
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, with revenues, is less than
$100,000 per quarter.
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.
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.
22
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-5. NOT APPLICABLE
- - ----------------------------
ITEM 2 (C)
- - ------------
On February 18, 2001, the Company issued warrants to purchase 14,000 shares of
common stock to O.B. Parrish, the Company's Chairman and Chief Executive
Officer, in connection with the extension of the due date of a $50,000 loan from
Mr. Parrish to February 18, 2002. The warrants have an exercise price of $0.40
per share. The warrants expire upon the earlier of their exercise or ten years
after the date of their issuance. The Company believes that it has satisfied
the exemption from the securities registration requirement provided by section
4(2) of the Securities Act in connection with this issuance.
On February 12, 2001, the Company issued warrants to purchase 70,000 shares of
common stock to Stephen M. Dearholt in connection with the extension of the due
date of a $250,000 loan from Mr. Dearholt to February 12, 2002. The warrants
have an exercise price of $0.40 per share. The warrants expire upon the earlier
of their exercise or ten years after the date of their issuance. The Company
believes that it has satisfied the exemption from the securities registration
requirement provided by section 4(2) of the Securities Act in connection with
this issuance.
The Company issued $250,000 principal amount of convertible debentures to
one accredited investor on March 30, 2001. The Company believes it has satisfied
the exemption from the securities registration requirement provided by section
4(2) of the Securities Act and Regulation D promulgated thereunder in this
offering since the securities were sold in a private placement to a
sophisticated, accredited investor, who provided representations which the
Company deemed necessary to satisfy itself that he was an accredited investor
and was purchasing for investment and not with a view to resale in connection
with a public offering.
23
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 Articles of Amendment to Amended and Restated Articles
of Incorporation. (2)
3.3 Amended and Restated By-Laws. (3)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles of Amendment to Amended and Restated Articles
of Incorporation. (2)
4.3 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.3). (3)
10.1 $250,000 convertible debenture issued by the Company to
Richard E. Wenninger dated March 30, 2001.
10.2 Amended and Restated Promissory Note to Stephen M. Dearholt
for $250,000 dated February 12, 2001 and related warrants.
10.3 Amended and Restated Promissory Note to O.B. Parrish for
$50,000 dated February 18, 2001 and related warrants.
_____________________________
(1) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, filed with the Securities and Exchange
Commission on October 19, 1999.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, filed with the Securities and Exchange
Commission on September 21, 2000.
(3) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
24
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 15, 2001 /s/O.B. Parrish
----------------------------
O. B. Parrish, Chairman and
Chief Executive Officer
/s/o/Robert R. Zic
--------------------
Robert R. Zic, Director of
Finance (Principal Accounting
Officer)
25