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Note 1 - Nature of Business and Significant Accounting Policies
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Sep. 30, 2011
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| Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block] |
Note
1. Nature of
Business and Significant Accounting Policies
Principles
of consolidation and nature of
operations: The consolidated financial
statements include the accounts of the Company and its
wholly owned subsidiary, The Female Health Company –
UK, and its wholly owned subsidiaries, The Female Health
Company - UK, plc and The Female Health Company (M)
SDN.BHD. 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, the FC2 female condom
("FC2"). The Female Health Company - UK, is the
holding company of The Female Health Company - UK, plc,
which is located in a 6,400 sq. ft. leased office facility
located in London, England. The Female Health Company (M)
SDN.BHD leases a 16,000 sq. ft. manufacturing facility
located in Selangor D.E., Malaysia.
The
FC2 female condom is currently sold or available in either
or both commercial (private sector) and public health
sector markets in 120 countries. The product is marketed
directly to consumers in 14 countries by various
country-specific commercial partners.
The
Company also derives revenue from licensing its
intellectual property under an agreement with its exclusive
distributor in India, Hindustan Lifecare Limited
(“HLL”). HLL is authorized to manufacture FC2
at HLL's facility in Kochi, India for sale in
India. HLL is the Company's exclusive
distributor in India and the Company receives a royalty
based on the number of units sold by HLL in
India. Such revenue appears as royalty income on
the Consolidated Statements of Income for the years ended
September 30, 2011, 2010 and 2009, and is recognized in the
period in which the sale is made by HLL.
The
Company's standard credit terms vary from 30 to 90 days,
depending on the class of trade and customary terms within
a territory, so accounts receivable is affected by the mix
of purchasers within the quarter. As is typical
in the Company's business, extended credit terms may
occasionally be offered as a sales
promotion. For the past twelve months, the
Company's average days sales outstanding has averaged
approximately 45 days. Over the past five years,
the Company’s bad debt expense has been less than
.04% of sales.
Use of
estimates: The preparation of financial
statements requires management to make estimates and use
assumptions that affect certain reported amounts and
disclosures. Significant accounting estimates include the
allowance for doubtful accounts, reserve for inventory
obsolescence, deferred income tax valuation allowance and
value of equity-based compensation. Actual results may
differ from those estimates.
Cash
concentration: The Company’s cash is
maintained primarily in three financial institutions, one
located in Clayton, Missouri, one located in London,
England and the other in Kuala Lumpur, Malaysia.
Accounts
receivable and concentration of credit
risk: Accounts receivable are carried at
original invoice amount less an estimate made for doubtful
receivables based on a review of all outstanding amounts on
a periodic basis. As of September 30, 2011, the $2,305,473
accounts receivable balance was comprised of $2,287,172
trade receivables and $18,301 other receivables, compared
to an accounts receivable balance of $4,460,517 as of
September 30, 2010, which was comprised of $4,450,598 trade
receivables and $9,919 in other receivables. The Company
maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to
make required payments on accounts
receivable. Management determines the allowance
for doubtful accounts by identifying troubled accounts and
by using historical experience applied to an aging of
accounts. Management also periodically evaluates
individual customer receivables and considers a
customer’s financial condition, credit history, and
the current economic conditions. Accounts
receivable are written off when deemed
uncollectible. The table below sets forth the
components of the allowance for doubtful accounts for the
years ended September 30:
Recoveries
of accounts receivable previously written off are recorded
when received. The Company’s customers are primarily
large global agencies, non-government organizations,
ministries of health and other governmental agencies which
purchase and distribute the female condom for use in
HIV/AIDS prevention programs. In fiscal year 2011, 2010 and
2009 significant customers were John Snow, Inc.,
facilitator of USAID I DELIVER project, and UNFPA. No other
single customer accounted for more than 10% of unit sales
during that period.
Inventories: Inventories
are valued at the lower of cost or market. The
cost is determined using the first-in, first-out (FIFO)
method. Inventories are also written down for
management’s estimates of product which will not sell
prior to its expiration date. Write-downs of
inventories establish a new cost basis which is not
increased for future increases in the market value of
inventories or changes in estimated obsolescence.
Foreign
currency translation and operations: In accordance
with Accounting Standards Codification (ASC) Topic 830,
Foreign Currency Matters, the Company considered various
economic factors (i.e., cash flow, sales price, sales
market, expenses, financing, intercompany transactions and
arrangements), both individually and collectively, in
determining the functional currency of its
subsidiaries. The Company’s first generation
product, the FC1 female condom, was produced by its U.K.
subsidiary in its London manufacturing
facility. FC1’s sales were denominated in
both U.S. dollars and British pounds
sterling. The Company’s second generation
product, the FC2 female condom, is manufactured by the U.K.
subsidiary’s Malaysia subsidiary in Kuala
Lumpur. Unlike the first generation product, FC2
sales have been denominated only in U.S. dollars. Prior to
October 1, 2009, each subsidiary’s functional
currency was its respective local currency (British pound
sterling and Malaysian ringgit). Effective October 1,
2009, the Company determined that there were significant
changes in facts and circumstances, triggering an
evaluation of the subsidiaries’ functional
currency. The evaluation indicated that the U.S.
dollar is the currency with the most significant influence
upon the subsidiaries. Because all of the
Company's U.K. subsidiary's future sales and cash flows
would be denominated in U.S. dollars following the October
2009 cessation of FC1 production, the U.K. subsidiary
adopted the U.S. dollar as its functional currency
effective October 1, 2009. As the Malaysia subsidiary is a
direct and integral component of the U.K. parent’s
operations, it, too, adopted the U.S. dollar as its
functional currency as of October 1, 2009. The consistent
use of the U.S. dollar as functional currency across the
Company reduces its foreign currency risk and stabilizes
its operating results. The Company recognized foreign
currency transaction income (loss) of $(61,258),
$(154,196), $276,113 for the years ended September 30,
2011, 2010 and 2009, respectively. The cumulative foreign
currency translation loss included in accumulated other
comprehensive loss was $581,519 as of September 30, 2011,
2010 and 2009. Assets located outside of the United States
totaled approximately $7,700,000, $7,100,000 and $8,700,000
at September 30, 2011, 2010 and 2009, respectively.
Equipment,
furniture and fixtures: Depreciation and
amortization are computed using primarily the straight-line
method. Depreciation and amortization are
computed over the estimated useful lives of the respective
assets which range as follows:
Depreciation
on leased assets is computed over the lesser of the
remaining lease term or the estimated useful lives of the
assets. Depreciation on leased assets is
included with depreciation on owned assets.
Patents
and trademarks: FC2 patents have been
issued by the United States, the European Union, Canada,
Australia, South Africa, Japan, The People’s Republic
of China, Greece, Turkey and Spain. Patent
applications for FC2 are pending in various
other countries around the world through the Patent
Cooperation Treaty. The patents cover the key aspects of
the second generation female condom, FC2, including its
overall design and manufacturing process. There
can be no assurance that these patents provide the Company
with protection against copycat products entering markets
during the pendency of the patents.
The
Company has the registered trademark “FC2 Female
Condom” in the United States. The Company has
also secured, or applied for, 12 trademarks in 22 countries
to protect the various names and symbols used in marketing
the product around the world. These include "femidom" and
"femy," “Reality” and others. In addition, the
experience that has been gained through years of
manufacturing the FC female condoms (FC1 and FC2) has
allowed the Company to develop trade secrets and know-how,
including certain proprietary production technologies that
further protects its competitive position. The FC2 patents
were expensed when incurred.
Financial
instruments: The Company follows ASC Topic 820,
Fair
Value Measurements and Disclosures, which defines
fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value
measurements. The fair value framework requires the
categorization of assets and liabilities into three levels
based upon the assumptions (inputs) used to price the
assets or liabilities. Level 1 provides the most reliable
measure of fair value, whereas Level 3 generally requires
significant management judgment.
The
Company currently does not have any assets or liabilities
measured at fair value on a recurring or non-recurring
basis. Substantially all of the Company’s cash and
cash equivalents, as well as restricted cash, are held in
demand deposits with its bank. The Company has no financial
instruments for which the carrying value is materially
different than fair value.
Research
and development costs: Research and
development costs are expensed as incurred. The amount of
costs expensed for the years ended September 30, 2011, 2010
and 2009 were approximately $11,000, $400 and $106,000,
respectively.
Restricted
cash: Restricted cash relates to security
provided to one of the Company’s U.K. banks for
performance bonds issued in favor of customers. Such
security has been extended infrequently and only on
occasions where it has been a contract term expressly
stipulated as an absolute requirement by the funds’
provider. The expiration of the bond is defined by the
completion of the event such as, but not limited to,
delivery of goods or at a period of time after product has
been distributed.
Revenue
recognition: The Company recognizes
revenue from product sales when each of the following
conditions has been met: an arrangement exists, delivery
has occurred, there is a fixed price, and collectability is
reasonably assured. The Company also derives
revenue from licensing its intellectual property under an
agreement with its exclusive distributor in India,
HLL. Such revenue appears as royalty income on
the Consolidated Statements of Income for the years ended
September 30, 2011, 2010 and 2009, and is recognized in the
period in which the sale is made by HLL.
Deferred
grant income: The Company received grant
monies from the British Linkage Challenge Fund to help the
Company defray certain expenses and the cost of capital
expenditures related to a project. The
underlying project related to the development of a linkage
between the U.K. subsidiary and HLL, in India, to do
end-stage manufacturing of the female condom and develop
the market for the product in that country. The
grant received was split between the Company and HLL
pro-rata to their respective expenditure on the project.
The Company utilized the general precepts of U.S. GAAP and
the principles of matching and conservatism to determine
how to account for the grant monies
received. The Company also utilized the guidance
of International Accounting Standard No. 20 –
Accounting for Government Grants and Disclosure of
Government Assistance to further support the Company's
accounting treatment of the grant received. The
Company allocated its share of the grant monies to capital
and expense pro-rata to the respective cost allocated to
the project. Grant proceeds for expenses were
credited to income in the quarter incurred. Grant
proceeds for capital expenditure were deferred and released
to income in line with the depreciation of the relevant
assets.
Share-based
compensation: The Company accounts for stock-based
compensation expense for equity awards exchanged for
employee services over the vesting period based on the
grant-date fair value.
Advertising: The
Company's policy is to expense advertising and promotion
costs as incurred. Advertising and promotion costs were
$332,764, $220,181 and $191,153 for the years ended
September 30, 2011, 2010 and 2009, respectively.
Income
taxes: The Company files separate income
tax returns for its foreign subsidiaries. ASC
Topic 740 requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been included in the financial statements
or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the
differences between the financial statements and tax bases
of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to
reverse. Deferred tax assets are also provided for
carryforwards for income tax purposes. In addition, the
amount of any future tax benefits is reduced by a valuation
allowance to the extent such benefits are not expected to
be realized.
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 the exercise of stock options and
warrants and upon restrictions lapsing on restricted
shares, for all periods.
Other
comprehensive income: Accounting
principles generally require that recognized revenue,
expenses, gains and losses be included in net
income. Although certain changes in assets and
liabilities, such as foreign currency translation
adjustments, are reported as a separate component of the
equity section of the balance sheet, these items, along
with net income, are components of comprehensive
income.
The
U.S. parent company and its U.K. subsidiary routinely
purchase inventory produced by its Malaysia subsidiary
for sale to their respective customers. These
intercompany trade accounts are eliminated in
consolidation. The Company’s policy and
intent is to settle the intercompany trade account on a
current basis. Prior to October 1, 2009,
translation gains and losses on the intercompany trade
accounts were recognized in the consolidated statement of
income. Included in foreign currency transaction gains
for the year ended September 30, 2009, is approximately
$302,000 of translation gains on the intercompany trade
account, based on the timing of inventory purchases as
well as the variability in exchange
rates. Since the U.K. and Malaysia
subsidiaries adopted the U.S. dollar as their functional
currencies effective October 1, 2009, no foreign currency
gains or losses from intercompany trade are
recognized. In fiscal 2011 and 2010,
comprehensive income is equivalent to the reported net
income.
Reclassifications:
Certain items in the 2010 and 2009 consolidated financial
statements have been reclassified to conform to the 2011
presentation.
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