<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number: 0-26487
WOMEN FIRST HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 13-3919601
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
12220 EL CAMINO REAL, SUITE 400, SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 509-1171
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1999, 17,253,220 shares of common stock, par value $.001
per share, were outstanding.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Quarterly Report involve, without limitation, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items or any other guidance on future periods, these
statements are forward-looking statements. These risks and uncertainties include
those identified in Item 5 below under the heading "Factors that May Affect
Future Performance" and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update
forward-looking statements.
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WOMEN FIRST HEALTHCARE, INC.
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 -- FINANCIAL STATEMENTS (Unaudited) PAGE
<S> <C> <C>
Consolidated Balance Sheets..................................................... 1
Consolidated Statements of Operations........................................... 2
Consolidated Statements of Cash Flows........................................... 3
Notes to Consolidated Financial Statements...................................... 4
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................... 7
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................. 14
PART II--OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS.................................... 15
ITEM 5 -- OTHER INFORMATION ........................................................... 15
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K............................................. 21
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
WOMEN FIRST HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,141,634 $ 4,438,445
Accounts receivable, net 1,561,241 1,114,283
Inventory 897,673 1,205,597
Receivable from related party 1,167,000 124,570
Prepaid expenses and other current assets 834,390 548,999
------------ ------------
Total current assets 45,601,938 7,431,894
Property and equipment, net 804,985 690,912
Intangible assets, net 3,598,955 3,922,847
Other assets 1,679,012 458,010
------------ ------------
Total assets $ 51,684,890 $ 12,503,663
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,745,891 $ 1,473,674
Payable to related party 550,829 --
Accrued salaries and employee benefits 1,577,882 1,307,167
Deferred business acquisition payment -- 1,059,897
Other accrued liabilities 3,149,210 227,415
Short-term notes payable 250,000 --
------------ ------------
Total current liabilities 7,273,812 4,068,153
Commitments
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 2,200,000 shares
authorized; no shares issued and outstanding at September 30, 1999 and
1,650,000 shares issued and outstanding at December 31, 1998 -- 16,500
Series B convertible preferred stock, $.01 par value; 690,000 shares authorized;
no shares issued and outstanding at September 30, 1999 and 398,540 shares issued
and outstanding and 195,460 shares to be issued at December 31, 1998 -- 5,940
Common stock, $.001 par value at September 30, 1999 and $.01 par value at
December 31, 1998; 40,000,000 shares authorized; 17,592,712 shares issued
and 17,252,395 shares outstanding at September 30, 1999 and 8,026,310
shares issued and 7,685,993 shares outstanding at December 31, 1998 17,252 76,860
Treasury stock (99,660) (96,597)
Additional paid-in capital 80,484,513 18,430,788
Deferred compensation (1,312,884) (615,598)
Accumulated deficit (34,678,143) (9,382,383)
------------ ------------
Total stockholders' equity 44,411,078 8,435,510
------------ ------------
Total liabilities and stockholders' equity $ 51,684,890 $ 12,503,663
============ ============
</TABLE>
See accompanying notes.
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WOMEN FIRST HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenue $ 4,888,032 $ 1,388,987 $ 14,255,586 $ 1,570,162
Net revenue with related party 1,167,000 -- 1,167,000 --
------------ ------------ ------------ -----------
6,055,032 1,388,987 15,422,586 1,570,162
Costs and expenses:
Cost of sales (including purchases from
related party of $2,301,934 and
$6,522,654 for the three and nine
months ended September 30, 1999) 3,332,036 624,577 9,576,807 737,279
Marketing and sales 6,875,105 1,496,805 17,176,086 2,313,237
General and administrative 2,887,816 2,239,132 7,865,957 3,523,180
Research and development 634,685 226,605 1,261,356 289,312
Write-down of assets and other charges 1,638,616 -- 1,638,616 --
------------ ------------ ------------ -----------
Total costs and expenses 15,368,258 4,587,119 37,518,822 6,863,008
------------ ------------ ------------ -----------
Loss from operations (9,313,226) (3,198,132) (22,096,236) (5,292,846)
Interest income, net 312,933 81,768 162,186 318,166
------------ ------------ ------------ -----------
Net loss (9,000,293) (3,116,364) (21,934,050) (4,974,680)
Accretion of beneficial conversion feature
related to convertible preferred stock -- -- (3,361,710) --
------------ ------------ ------------ -----------
Net loss available to common stockholders $ (9,000,293) $ (3,116,364) $(25,295,760) $(4,974,680)
============ ============ ============ ===========
Net loss per share (basic and diluted) $ (0.53) $ (0.41) $ (2.31) $ (0.65)
============ ============ ============ ===========
Weighted average shares used in computing
net loss per share (basic and diluted) 17,112,993 7,685,993 10,960,531 7,685,993
============ ============ ============ ===========
</TABLE>
See accompanying notes.
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WOMEN FIRST HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(21,934,050) $ (4,974,680)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 567,237 59,132
Amortization of intangibles 359,078 --
Amortization of deferred compensation 941,738 57,154
Amortization of warrants issued with debt 274,617 --
Write-down of assets and other charges 1,638,616 --
Changes in operating assets and liabilities 1,159,224 (529,198)
------------ ------------
Net cash used in operating activities (16,993,540) (5,387,592)
INVESTING ACTIVITIES
Purchases of property and equipment (370,667) (628,160)
Deposit on facilities -- (505,957)
Acquisition of subsidiary (1,059,897) --
Acquisition of licenses and other assets, net (1,815,970) --
------------ ------------
Net cash used in investing activities (3,246,534) (1,134,117)
FINANCING ACTIVITIES
Issuance of Series A preferred stock 5,286,218 10,441,907
Issuance of common stock 51,407,045 --
Issuance of short-term notes payable to related parties 2,000,000 --
Issuance of short-term notes payable 5,490,000 --
Repayment of short-term notes payable to related parties (2,000,000) --
Repayment of short-term notes payable (5,240,000) --
------------ ------------
Net cash provided by financing activities 56,943,263 10,441,907
------------ ------------
Net increase (decrease) in cash and cash equivalents 36,703,189 3,920,198
Cash and cash equivalents at beginning of the period 4,438,445 567,300
============ ============
Cash and cash equivalents at end of the period $ 41,141,634 $ 4,487,498
============ ============
</TABLE>
See accompanying notes.
3
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WOMEN FIRST HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements of Women First HealthCare,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q 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. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three- and nine- month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Company's Registration Statement on Form S-1.
Principles of Consolidation and Reporting
The consolidated financial statements presented herein include the
financial statements of Women First HealthCare, Inc. and the actual results of
As We Change, LLC from its purchase acquisition date on October 21, 1998 and the
results of Women First Pharmacy Services, Inc. since its incorporation in
September 1998. All significant intercompany transactions and balances have been
eliminated in consolidation. For the periods presented in the accompanying
financial statements, the Company has no items for which comprehensive loss
would differ from the reported net loss. The Company's management approach is to
review the operating results of the business as one operating segment which is a
specialty health care company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company records sales for its pharmaceutical and self-care products at
time of shipment. Adjustments to its pharmaceutical product sales are made for
estimated sales discounts it offers due to wholesaler chargebacks,
Medicaid-sponsored payor allowance discounts, and early payment discounts.
Adjustments to self-care product sales include an estimate of returns and
allowances. The Company provides for returns at the time of sale based on
estimated merchandise returns.
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Contract and other revenue under the Company's co-promotion agreements are
recognized when realized and earned based upon work performed or upon completion
of certain performance requirements of the contracts.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per share, which would include
additional potential common shares issued related to outstanding options,
warrants and conversion of preferred stock, if dilutive, is unchanged from basic
loss per share due to the Company's net losses making the effect of these common
share equivalents anti-dilutive.
2. INVENTORY
Inventory consists of the following components:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Pharmaceutical products $425,053 $ 415,815
Self-care products 350,106 589,138
Video cassettes 122,514 200,644
-------- ----------
Total inventory $897,673 $1,205,597
======== ==========
</TABLE>
3. WRITE-DOWN OF ASSETS AND OTHER CHARGES
In the third quarter 1999, the Company recognized a write-down of assets
and other charges amounting to $1.6 million consisting primarily of inventory
write-downs and other costs associated with the closure of the Company's
pharmacy operations and the Company's decision to discontinue certain consumer
product activities.
4. INITIAL PUBLIC OFFERING
On July 1, 1999, the Company completed its initial public offering of
4,500,000 shares of the Company's common stock, providing the Company with
proceeds, net of underwriting fees and offering expenses, of approximately $44.5
million. All shares of convertible Preferred Stock outstanding on June 28, 1999
automatically converted into 4,388,329 shares of common stock upon the sale of
common stock in the offering. In July 1999, the underwriters exercised in full
their over-allotment option, and the Company issued an additional 675,000 shares
of common stock providing the Company with net proceeds of approximately $6.9
million.
5. CO-PROMOTION AGREEMENT
In September 1999, in accordance with the Company's co-promotion agreement
with Ortho-McNeil Pharmaceutical, Inc., a related party, pursuant to which the
Company has agreed to co-promote Ortho Tri-Cyclen(R), a leading oral
contraceptive, and Ortho-Prefest(TM), an oral combination hormonal replacement
therapy (HRT) product which recently received approval by the FDA, Ortho-McNeil
and the Company entered into a contract whereby the Company will manage the
development of an educational
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program related to hormonal management. The Company recognized $1.2 million of
revenue for work completed under the contract during the three months ended
September 30, 1999.
6. DISTRIBUTION AND LICENSE AGREEMENT
On July 19, 1999, the Company entered into a distribution and license
agreement with Laboratoires Fournier S.A. under which the Company has the
exclusive right to market, use, distribute and sell the Esclim(TM) estradiol
transdermal system. The agreement requires the Company to pay Fournier a
non-refundable license fee of $1.45 million payable over a two-year period, with
$700,000 of this fee subject to certain sales objectives being reached. The
Company is also required to pay Fournier a royalty, which includes manufacturing
costs, based upon the net sales of the product. The agreement runs seven years
from the later of the date of the first commercial sale of the product or
January 1, 2000.
7. REPAYMENT OF SHORT-TERM NOTES
In August 1999, the Company repaid $7.2 million representing all principal
outstanding plus accrued interest on the short-term notes issued in March 1999,
with the exception of $250,000 in principal, which was repaid in October 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. This discussion may contain forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below in
"Item 5: Other Information--Factors That May Affect Future Performance" as
well as those discussed in "Item 5: Other Information" in our Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999. We undertake no obligation to
release publicly the results of any revisions to these forward-looking
statements or to reflect events or circumstances arising after the date hereof.
OVERVIEW
Women First HealthCare is a specialty health care company dedicated to
improving the health and well-being of midlife women. Our mission is to help
midlife women make informed choices about their physical and emotional health
and to provide pharmaceutical products, self-care products, educational programs
and support systems to help midlife women improve the quality of their lives. We
market these products in the United States through a number of channels
including our dedicated sales force, our direct-to-consumer marketing programs
through our catalog operation and the Internet. On July 1, 1999, we completed
our initial public offering of 4,500,000 shares of our common stock, providing
us with proceeds, net of underwriting fees and offering expenses, of
approximately $44.5 million. Also, in July 1999, the underwriters exercised in
full their over-allotment option, and we issued an additional 675,000 shares of
common stock providing us with net proceeds of approximately $6.9 million.
We were engaged in development stage operations from November 1, 1996 (the
date of our inception) through December 31, 1997 and did not earn any revenue
during this period. Operations during this period consisted primarily of
formulating a marketing plan, conducting market research, developing strategic
relationships, acquiring equipment, performing administrative functions and
raising capital. In January 1998 and May 1998, we entered into agreements to
sell an aggregate of 2,200,000 shares of Series A Preferred Stock for gross
proceeds of $22 million. Upon completing the initial phase of the financing, we
began to implement our plans for growth by actively recruiting management, staff
and sales personnel, consummating distribution agreements, launching products
and developing educational programs and support systems. We began selling and
distributing the Ortho-Est(R) oral estrogen product in July 1998 and acquired As
We Change, LLC on October 21, 1998.
We have incurred significant losses since we were founded in November 1996.
We had an accumulated deficit of $34.7 million as of September 30, 1999, and we
expect to incur losses at least through the end of 2000. We believe that due to
our limited operating history we are unable to accurately predict our future
results of operations. Accordingly, our operating results should not be relied
upon as an indication of future performance. We review the operating results of
our business as a specialty health care company with one operating segment. The
results of operations include the results of our operations since our inception
and the actual results of operations of As We Change, LLC from its acquisition
date on October 21, 1998 in accordance with the purchase method of accounting.
In the third quarter 1999, we took actions designed to enhance our ability
to focus our resources on our core programs: pharmaceutical sales and marketing
to obstetricians and gynecologists (OB/GYNs) and the nurse practitioners and
physician assistants focused on women's health in order to leverage the
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midlife woman's key medical relationships; and direct-to-consumer marketing
through our catalog operation and the Internet. As a result of these actions, we
recognized asset write-downs and other charges amounting to $1.6 million in the
three months ended September 30, 1999.
RESULTS OF OPERATIONS
Net Revenue. For the three and nine months ended September 30, 1999, total
net revenue was $6.1 million and $15.4 million, respectively, as compared to
$1.4 million and $1.6 million for the same periods in 1998. Revenue for the
three and nine months ended September 30, 1999 was derived primarily from sales
of the Ortho-Est(R) oral estrogen pharmaceutical product of $2.9 million and
$8.4 million, respectively, and sales from our subsidiary As We Change, LLC, a
national mail-order catalog and Internet retailer of $1.7 million and $4.8
million, respectively. In addition, in September 1999, in accordance with our
co-promotion agreement with Ortho-McNeil Pharmaceutical, Inc., a related party,
pursuant to which we have agreed to co-promote Ortho Tri-Cyclen(R), a leading
oral contraceptive, and Ortho-Prefest(TM), an oral combination hormonal
replacement therapy (HRT) product which recently received approval by the FDA,
Ortho-McNeil agreed to provide us with up to $5.5 million to be used to manage
the development of an educational program with an independent provider of
continuing medical education programs regarding hormone replacement therapy,
oral contraception and the application of hormonal management to clinical
situations. We recorded related party revenue of $1.2 million in the three and
nine months ended September 30, 1999 for work completed under this contract. We
were in the development stage during 1997 and 1996 and recorded no revenue
through March 31, 1998. For the three and nine months ended September 30, 1998,
revenue was derived primarily from sales of the Ortho-Est(R) oral estrogen
pharmaceutical product of $1.3 million.
Costs and Expenses. Costs and expenses increased $10.8 million to $15.4
million for the three months ended September 30, 1999 from $4.6 million for the
three months ended September 30, 1998. Costs and expenses increased $30.6
million to $37.5 million for the nine months ended September 30, 1999 from $6.9
million for the nine months ended September 30, 1998. The increase in costs and
expenses was due primarily to the growth in commercial operations in the three
and nine months ended September 30, 1999 and the write-down of assets and other
charges recognized in the three months ended September 30, 1999 discussed below.
Cost of sales was $3.3 million, or 55.0% of net revenue, for the three
months ended September 30, 1999 as compared to $625,000, or 45.0% of net
revenue, for the same period in 1998. Cost of sales was $9.6 million, or 62.1%
of net revenue, for the nine months ended September 30, 1999 as compared to
$737,000, or 46.9% of net revenue for the same period in 1998. Cost of sales
consists primarily of the amounts we pay for products under supply agreements.
The increase in costs as a percentage of net revenue was primarily due to
increases in the fixed and contingent payments under our distribution agreement
with Ortho-McNeil Pharmaceutical.
Marketing and sales expense increased $5.4 million to $6.9 million for the
three months ended September 30, 1999 from $1.5 million for the three months
ended September 30, 1998. Marketing and sales expense increased $14.9 million to
$17.2 million for the nine months ended September 30, 1999 from $2.3 million for
the nine months ended September 30, 1998. The increase in these expenditures was
primarily due to increases in the number of employees and the corresponding
increased salary expense and deferred compensation resulting from the
establishment of a direct sales organization, the acquisition of As We Change,
LLC, costs associated with our education programs including the costs of our
programs focused on hormone replacement therapy and cardiovascular health,
increased travel and
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business entertainment expense and increased expenses for market research,
product literature and professional samples.
General and administrative expense increased $649,000 to $2.9 million for
the three months ended September 30, 1999 from $2.2 million for the three months
ended September 30, 1998. General and administrative expense increased $4.4
million to $7.9 million for the nine months ended September 30, 1999 from $3.5
million for the nine months ended September 30, 1998. The increase in these
expenses for the three months ended September 30, 1999 over the prior year was
primarily due to increases in the number of employees and the increased salary
expense, increased recruiting and relocation costs, and increased amortization
expense from the purchase of intangible assets associated with the acquisition
of As We Change, LLC. In addition, in the three months ended September 30, 1999,
we recorded additional rent expense and other costs associated with our decision
to relocate our New Jersey office. The above factors as well as increased
employee benefits and management incentive bonus expenses contributed to the
increase in expenses for the nine months ended September 30, 1999 compared to
the prior year.
Research and development expense was $635,000 for the three months ended
September 30, 1999 compared to $227,000 in the comparable period in 1998.
Research and development expense was $1.3 million for the nine months ended
September 30, 1999 compared to $290,000 in the comparable period in 1998.
Research and development expense consists primarily of salaries and payments for
contracted development programs. In addition, in the three months ended
September 30, 1999, we wrote down to fair market value previously capitalized
software development costs of $275,000.
Write-down of Assets and Other Charges. In the third quarter 1999, we took
actions designed to enhance our ability to focus our resources on our core
programs: pharmaceutical sales and marketing to obstetricians and gynecologists
(OB/GYNs) and the nurse practitioners and physician assistants focused on
women's health in order to leverage the midlife woman's key medical
relationships; and direct-to-consumer marketing through our catalog operation
and the Internet. As a result of these actions, we recognized asset write-downs
and other charges amounting to $1.6 million in the three months ended September
30, 1999. These charges consisted primarily of inventory write-downs and other
costs associated with the closure of the operations of Women First Pharmacy
Services, Inc. and our decision to direct our sales efforts away from certain
consumer activities. Included in the inventory write-downs were charges for the
discontinuation of the SafeStart(TM) umbilical cord clamp/cutter product and our
decision not to actively market the ViAmor(TM) vaginal moisturizer product and
other self-care products through consumer channels.
Loss from Operations. For the reasons discussed above, the loss from
operations increased $6.1 million to $9.3 million for the three months ended
September 30, 1999 from $3.2 million for the three months ended September 30,
1998. Loss from operations increased $16.8 million to $22.1 million for the nine
months ended September 30, 1999 from $5.3 million for the nine months ended
September 30, 1998.
Interest Income (Expense), net. Interest income, net increased $231,000 to
$313,000 for the three months ended September 30, 1999 from $82,000 for the
three months ended September 30, 1998. Interest income, net decreased $156,000
to $162,000 for the nine months ended September 30, 1999 from $318,000 for the
nine months ended September 30, 1998. Interest income, net consists primarily of
earnings on our cash and cash equivalents and interest expense on our short-term
notes issued in March 1999. The increase in interest income, net for the three
months ended September 30, 1999 compared to the prior year was primarily due to
increased average cash balances. The decrease in interest income, net for the
nine months ended September 30, 1999 compared to the prior year was primarily
due to the interest expense the on short-term notes issued in March 1999.
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Accretion of beneficial conversion feature related to convertible preferred
stock. A $3.4 million charge for the nine months ended September 30, 1999 has
been recognized as an increase of the net loss available to common stockholders
equal to the intrinsic value of the beneficial conversion feature of the Series
A Preferred Stock issued in February 1999. The intrinsic value in these shares
of Series A Preferred Stock represents the difference between the conversion
price of the Series A Preferred Stock issued in February 1999 and the fair value
of our common stock at the time of issuance.
FACTORS AFFECTING RESULTS OF OPERATIONS
We incurred operating losses of $9.8 million in the year ended December 31,
1998 and $22.1 million in the nine months ended September 30, 1999. Due to our
short operating history, our revenues have varied and are difficult to forecast
on a quarterly or annual basis. However, many of our expenses are fixed,
especially in the short term. In particular, we are obligated to make
significant minimum payments under some of our agreements, including an annual
minimum purchase ($6.6 million for 1999, decreasing annually for the balance of
the contract) for the Ortho-Est(R) oral estrogen product. In addition, we are an
early stage company and have experienced significant increases in operating
expenses associated with obtaining rights to market and distribute additional
products and the expansion of our sales and marketing and general and
administrative activities, and we expect that these increases will continue in
the future. As a result of this variability in revenues and increased expenses,
our results of operations have varied during our short operating history and we
expect that they will continue to fluctuate significantly in the future. In
addition, other factors may cause fluctuations in our revenues and results of
operations, including the following:
o the success of our sales force in distributing and/or co-promoting our
current product line and changes in market acceptance of those
products,
o our ability to introduce new products through co-promotion or
distribution agreements or otherwise,
o legislative changes that affect our products and the way we market
them and our ability to comply with new or existing regulations,
o the amount and timing of expenditures for the expansion of our
operations,
o changes in the competitive environment that could cause us to change
our pricing or marketing strategy,
o changes in the economic and market environment generally or in the
health care industry.
To the extent our revenues do not increase in line with our expenses, we
may be unable to reduce spending commitments in a timely manner to compensate
for any unexpected revenue shortfall and may experience significant
unanticipated losses. As a result of these factors, our operating results in one
or more future periods may fail to meet the expectations of securities analysts
or investors. Failure to meet these expectations could have a material adverse
effect on our stock price.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our working capital totaled $38.3 million compared
to $3.4 million at December 31, 1998. Cash and cash equivalents were $41.1
million at September 30, 1999 compared to $4.4 million at December 31, 1998.
Our primary source of liquidity has been proceeds from private placements
of our equity securities and the initial public offering of common stock. In
January and May 1998, we issued 1,050,000 shares of Series A Preferred Stock
(equivalent to 1,921,500 shares of common stock) and warrants and 50,000 shares
of Series A Preferred Stock (equivalent to 91,500 shares of common stock) and
warrants for net proceeds of $10.0 million and $453,000, respectively. In
October 1998, we issued 550,000 shares of Series A Preferred Stock (equivalent
to 1,006,500 shares of common stock) and warrants for additional net proceeds of
$5.3 million. In February 1999, we issued an additional 550,000 shares of Series
A Preferred Stock (equivalent to 1,006,500 shares of common stock) and warrants
for additional net proceeds of $5.3 million.
In addition, in March 1999, we issued $7.5 million of short-term notes and
warrants to purchase 60,756 shares of common stock in a private placement for
net proceeds of $7.5 million. In August 1999, the Company repaid $7.2 million
representing all principal outstanding plus accrued interest on the short-term
notes issued in March 1999, with the exception of $250,000 in principal, which
was repaid in October 1999.
On July 1, 1999, we completed our initial public offering of 4,500,000
shares of our common stock, providing us with proceeds, net of underwriting fees
and offering expenses, of approximately $44.5 million. All shares of convertible
preferred stock outstanding on June 28, 1999 automatically converted into
4,388,329 shares of common stock upon the sale of common stock in the offering.
In July 1999, the underwriters exercised in full their over-allotment option,
and we issued an additional 675,000 shares of common stock providing us with net
proceeds of approximately $6.9 million.
In addition to operating expenses, our primary use of funds has been and
will continue to be to fund capital expenditures, to obtain the rights to market
and distribute products and to acquire companies.
Net cash used in operating activities was $17.0 million for the nine months
ended September 30, 1999 and was $5.4 million for the same period in 1998. Net
cash used in investing activities was $3.2 million for the nine months ended
September 30, 1999 and was $1.1 million for the same period in 1998, consisting
of the deferred cash payment for the acquisition of As We Change, LLC in 1999
and net capital expenditures. Net cash provided by financing activities was
$56.9 million for the nine months ended September 30, 1999 and was $10.4 million
for the same period in 1998, primarily consisting of the net proceeds from the
issuance of equity securities.
For the nine-month period ended September 30, 1999, we made net capital
expenditures of $2.2 million for computer equipment, development of our Internet
site and acquisition of licenses and other assets including license fees
associated with the Esclim(TM) estradiol transdermal sysytem and production of
RENEWAL a time for you(TM), a program that we developed in conjunction with Dr.
Deepak Chopra. We made net capital expenditures of $628,000 during the nine
months ended September 30, 1998, primarily for furniture and fixtures and
equipment. While we intend to continue pursuing the potential addition of a
product or the acquisition of a product line, we currently have no firm
commitments. In July 1999, we entered into a distribution and license agreement
with Laboratoires Fournier S.A. under which we have the exclusive right (subject
to exceptions) to market, use, distribute and sell the Esclim(TM)
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estradiol transdermal system in various dosages in the United States and Puerto
Rico. The agreement requires us to pay Fournier a non-refundable license fee of
$1.45 million payable over a two-year period, with $750,000 payable in 1999 and
$700,000 of this fee subject to sales objectives being reached in 2000 and 2001.
We paid $500,000 to Fournier in the nine months ended September 30, 1999 under
this agreement.
Our product co-promotion agreements with Bristol-Myers Squibb and
Ortho-McNeil Pharmaceutical require us to achieve minimum performance levels to
receive compensation or to prevent contract termination. Through September 30,
1999 we did not meet the minimum performance levels required to receive
compensation under the co-promotion agreement with Bristol-Myers Squibb relating
to the Pravachol(R) cholesterol-lowering drug. In addition, Bristol-Myers Squibb
has the right to terminate the agreement upon sixty days' prior written notice
based upon our performance for the first two quarters under the agreement.
Bristol-Myers Squibb has not notified us of its intent to terminate the
agreement. While we are currently negotiating with Bristol Myers-Squibb to
restructure our agreement in order to improve our ability to recognize revenue
from our sales efforts, there can be no assurances that such negotiations will
prove successful. We have only recently begun co-promoting the Ortho
Tri-Cyclen(R) oral contraceptive and have not yet recorded revenue under the
contract with Ortho-McNeil through September 30, 1999. We have not yet begun
promoting Ortho-Prefest(TM), Ortho-McNeil's new oral combination hormonal
replacement therapy product, which received approval by the FDA in October 1999.
We have experienced a substantial increase in our expenditures since our
inception consistent with growth in our operations and staffing, and anticipate
that this growth will continue for the next several years. Our co-promotion
agreement with Ortho-McNeil Pharmaceutical requires us to expand our field sales
force to at least 100 representatives in 1999 and to further significantly
expand our sales force upon initiating promotion of Ortho-Prefest(TM), the new
oral combination hormonal replacement therapy product covered by the agreement
which recently received approval from the FDA. We expect that our operating
expenses will continue to increase as we obtain rights to market and distribute
additional products and we expand our sales and marketing activities and our
educational programs for clinicians and women.
We also are obligated to make significant minimum payments under certain of
our agreements with our collaborative partners. The minimum purchase commitment
for the Ortho-Est(R) oral estrogen product is $6.6 million for 1999 and
decreases annually over the remaining nine-year term of the contract for an
aggregate commitment of $40.1 million. We are also obligated under other
agreements, other than the Fournier agreement which is described above, to make
payments of $1.0 million for 1999 and approximately $380,000 thereafter.
Our pharmacy management agreement with Health Script, a wholly owned
division of Dura Pharmaceuticals, Inc., requires us to pay a minimum monthly
management fee of $22,800 during the two-year term of the agreement. Although we
have decided to discontinue the operation of Women First Pharmacy Services,
Inc., we remain obligated to pay this minimum monthly management fee to Health
Script through the end of the agreement. We have entered into discussions with
Health Script regarding termination of the agreement under terms more favorable
to Women First, but there can be no assurance that such discussions will be
successful.
We believe that based on our current performance and present plans, the
proceeds from our initial public offering, together with existing cash balances,
will be sufficient to fund our operations, make planned capital expenditures and
meet our minimum purchase commitments through the end of fiscal 2000. Our
ability to fund our operations, to make planned capital expenditures and to meet
our minimum
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purchase commitments will depend on our future operating performance, which is
itself dependent on a number of factors, many of which we cannot control,
including prevailing economic conditions, availability of other sources of
liquidity, and financial, business, regulatory and other factors affecting our
business and operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs having been written
using two digits rather than four to define the applicable year. Any of our
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. A system failure on the part of our key suppliers or customers could
result in our failing to receive adequate supplies of products or our being
unable to process sales.
Our plan to resolve the Year 2000 issue involves the following phases:
assessment, remediation, and confirmation through testing. To date, we have
completed our assessment of all internal systems and equipment that could be
significantly affected by the Year 2000. We have completed the remediation phase
and have substantially completed the activities in the testing and readiness
confirmation phases. Our assessment indicated that most of our internal
management information systems and other significant equipment will correctly
utilize dates beyond December 31, 1999 ("Year 2000 ready"). Costs incurred to
upgrade the components of our computing infrastructure have been minimal.
Nature and Level of Importance of Third Parties and Their Exposure to the
Year 2000
Our electronic transactions with suppliers or customers currently are not
significant. Our electronic transactions with financial institutions have been
assessed, and we have confirmed their Year 2000 readiness. We have queried and
will continue to query our significant suppliers that do not share information
systems with us. To date, we have received assurances from our major vendors
that they are or will be Year 2000 ready prior to December 31, 1999 and we are
not aware of suppliers with a Year 2000 issue that would materially impact our
results of operations, liquidity or capital resources. We have begun questioning
customers and payors to assess their Year 2000 readiness. However, we have no
means of ensuring that our vendors, suppliers, customers or payors will be Year
2000 ready. The inability of suppliers, customers and payors to complete their
Year 2000 resolution process in a timely fashion could have a material adverse
effect on us.
Year 2000 Remediation Costs
We will utilize both internal and, if necessary, external resources to
reprogram or replace, test and implement our internal systems and equipment for
Year 2000 modifications. Expenditures required to make us Year 2000 compliant
will be expensed as incurred and are not expected to be material to our
consolidated financial position or results of operations. Actual costs incurred
to date have not been material.
Contingency Plans
We have developed certain contingency plans to address failure of
remediation activities as applied to internal management information systems and
other significant equipment and the failure of our key suppliers to be Year 2000
ready. We have prioritized our critical suppliers and are developing plans to
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provide for the continuance of product availability through accelerated
purchasing if we cannot obtain adequate assurances regarding a specific entity's
ability to become ready for the Year 2000. We also have considered the
implementation of manual order processing and fulfillment systems should the
electronic systems fail.
Risk to Us
We believe we have an effective program in place to test and confirm Year
2000 readiness in a timely manner. Based on our assessment, we do not believe
that our internal operations are subject to material exposure to Year 2000
issues. In the event that our internal systems are not Year 2000 ready, or our
suppliers or customers are not Year 2000 ready, we may be temporarily unable to
sell products in our current distribution channels or use our financial systems
to operate finance and accounting functions. As a result, we may experience a
material loss of revenues that would adversely affect our results of operations.
We consider this sort of interruption to be the most reasonably likely
unfavorable result of any failure by us or the third parties upon whom we rely
to become Year 2000 ready.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect us. We could be subject to
litigation due to computer systems or product failure, including as a result of
equipment shutdown or failure to properly date business records. We cannot
reasonably estimate at this time the amount of potential liability and lost
revenue that could result from Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999, Women First filed a registration statement under the
Securities Act of 1933 to sell up to 4.5 million shares of common stock in its
Initial Public Offering ("IPO"). The effective date of the registration
statement was June 28, 1999, under Commission File No. 333-74367. The offering
was managed by Allen & Company Incorporated and Needham & Company, Inc. and
closed on July 1, 1999 after Women First sold an aggregate of 4.5 million shares
of common stock at an initial public offering price per share of $11.00. On July
21, 1999, Women First sold an additional 675,000 shares of common stock at an
initial public offering price per share of $11.00 upon the underwriters'
exercise in full of their over-allotment option. The IPO, including the
underwriters' exercise of their over-allotment option, resulted in gross
proceeds to us of $56.9 million, $4.0 million of which was applied toward the
underwriting discount. Other expenses related to the offering totaled
approximately $1.5 million. Our net proceeds totaled $51.4 million, all of which
were deposited into our accounts in July 1999. Since the completion of our
offering in July 1999, the net offering proceeds have been applied to
approximately $7.2 million to repay short-term notes issued in March 1999,
$750,000 to develop and acquire rights to additional products, and $6.6 million
for working capital and other general corporate purposes. John Simon, a Director
of Women First, is a managing director with Allen & Company Incorporated.
ITEM 5. OTHER INFORMATION
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The following information sets forth certain factors that could cause our
actual results to differ materially from those contained in the forward looking
statements. For a more detailed discussion of the factors that could cause
actual results to differ, see "Item 5: Other Items -- Factors that May Affect
Future Performance" in our Form 10-Q for the fiscal quarter ended June 30, 1999.
We have incurred significant losses since we were founded in November 1996.
We have an accumulated deficit of $34.7 million through September 30, 1999, and
we expect to incur losses at least through the end of 2000. Through September
30, 1999, we have generated only $20.3 million in net revenues. We may not
successfully complete the transition to successful operations or profitability.
Early stage companies such as ours frequently encounter problems, delays and
expenses including, but not limited to, unanticipated problems and additional
costs related to marketing, competition and product acquisitions and
development. These problems may be beyond our control, and in any event, could
adversely affect our results of operations. See "Item 2: Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We have embarked on an ambitious plan to provide pharmaceutical and
self-care products, educational programs and support systems to women to help
them make better decisions regarding their health care in midlife. There is a
limited market awareness of our company and the products and services we offer.
To be successful, we must continue to develop, coordinate and balance various
elements of our business. If we fail to implement any of the key elements of our
business plan, our business may not succeed.
Many of our product agreements require us to make minimum payments or make
a minimum number of sales calls regardless of our actual sales of product
covered by the agreement. If our sales of these
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products do not exceed the costs of these minimum payments or we do not make the
minimum calls, our marketing and distribution of these products will not be
profitable and our results of operations will be harmed. In addition, many of
our product agreements may be terminated if we fail to make minimum purchases,
make a minimum number of sales calls or for other reasons. This could force us
to discontinue sales of key products and could have a material adverse effect on
our business. Most of our contracts permit termination by the other party if we
breach our obligations, including our minimum payment commitments, under the
contracts, experience a change of control or enter bankruptcy.
Our co-promotion agreement with Bristol-Myers Squibb U.S. Pharmaceuticals
Group relating to the cholesterol-lowering drug Pravachol(R) provides that
Bristol-Myers Squibb may terminate the agreement in the event that Pravachol(R)
prescriptions written in the United States by designated OB/GYNs and the nurse
practitioners and physician assistants in their offices do not exceed specified
minimum prescription amounts which increase quarterly in the first year and
yearly from year to year thereafter. Bristol-Myers Squibb may terminate the
agreement in the event that prescriptions for Pravachol(R) written by the
clinicians covered by the agreement do not exceed these minimum amounts for two
consecutive quarters or the yearly prescription forecasts for one year. These
minimum amounts require us to achieve a significant increase over the number of
prescriptions for this product currently written by the clinicians designated by
the agreement and substantially exceed the baseline amounts used for purposes of
calculating the performance fee under the contract. We have not achieved the
minimum amounts during the first two quarters of the agreement. Accordingly,
Bristol-Myers Squibb has a right to terminate the agreement, but it has not
notified us of its intent to do so.
Our distribution agreement for the Ortho-Est(R) oral estrogen product
requires us to make minimum aggregate payments of $40.1 million to Ortho-McNeil
Pharmaceutical over the remaining nine-year period of the contract, regardless
of the actual sales performance of this product. Under this agreement, we are
required to make minimum payments of $6.6 million during 1999 and $5.4 million
during 2000. The minimum payments in future years decrease annually based on a
ten-year forecast that was determined at the time the contract was executed. In
addition, this agreement allows Ortho-McNeil to terminate the contract (1) upon
one year's notice so long as Ortho-McNeil provides us with a one-year supply of
the Ortho-Est(R) product and uses reasonable commercial efforts to transfer the
manufacturing and distribution rights to the product to us or (2) immediately if
the cost of FDA revalidation, should it become necessary, exceeds $3 million.
Our co-promotion agreement with Ortho-McNeil relating to the Ortho
Tri-Cyclen(R) oral contraceptive product and Ortho-Prefest(TM), a new oral
combination hormonal replacement therapy (HRT) product, requires us to make a
significant number of sales calls each year during the term of the agreement.
The number of sales calls required under this agreement for the year 2000 will
increase significantly upon initiating promotion of the Ortho-Prefest(TM)
product. Ortho-McNeil will not be required to make the minimum payments to us
that are contemplated by the co-promotion agreement with respect to the Ortho
Tri-Cyclen(R) product if we fail to make a specified portion of the required
sales calls for that product or if the growth in Ortho-McNeil's market share for
oral contraceptives among the clinicians we call on does not exceed the growth
in Ortho-McNeil's market share among a control group of clinicians. Ortho-McNeil
also may reduce the payments otherwise required to be paid to us under the
agreement with respect to Ortho-Prefest(TM) if we do not make a specified
portion of the minimum number of sales calls for that product. The co-promotion
agreement also limits the number of products other than Ortho Tri-Cyclen(R) and
Ortho-Prefest(TM) that our sales force may present during the same sales call as
Ortho Tri-Cyclen(R) and Ortho-Prefest(TM). In addition, the agreement allows
Ortho-McNeil to terminate the contract if we fail to make a specified portion of
the required sales calls for three consecutive
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quarters. Ortho-McNeil also may terminate the agreement if there is a change of
control of Women First or if either Edward F. Calesa, the Chairman of the Board,
or David F. Hale, our President and Chief Executive Officer, is no longer
associated with Women First (other than as a result of death or disability). If
Ortho-Prefest(TM) has not been launched prior to October 1, 2000, either party
may terminate the agreement.
In July 1999, we entered into a distribution and license agreement with
Laboratoires Fournier S.A. under which we have been granted the exclusive right
(subject to exceptions) to market, use, distribute and sell the Esclim(TM)
estradiol transdermal system in various dosages in the United States and Puerto
Rico. The agreement requires us to pay Fournier a non-refundable license fee of
$1.45 million payable over a two-year period, with $700,000 of this fee subject
to sales objectives being reached. We have already paid $500,000 of the total
amount owed to Fournier under the agreement. Our failure to generate sales
exceeding the specified minimum payments or the costs of the minimum sales calls
under these agreements could have a material adverse effect on our business and
could give the other parties to these agreements the right to terminate or
modify such agreements.
If midlife women do not use and/or their clinicians do not recommend the
products we offer, we will continue to experience significant losses. The market
acceptance of these products will depend on, among other factors:
o their advantages over existing competing products,
o their perceived efficacy and safety,
o the actual or perceived side effect profile of hormonal replacement
therapies,
o the reimbursement policies of the government and third-party payors,
and
o the ability of our sales specialists to convince OB/GYNs and nurse
practitioners and physician assistants in their offices to recommend
our products.
Our business model assumes that our marketing programs and the growth in
our target market will result in increased demand for the products we offer. If
our marketing programs do not succeed in generating a substantial increase in
demand for our products, we will be unable to realize our operating objectives.
In addition, our model seeks to build on the expanding roles of OB/GYNs and the
nurse practitioners and physician assistants focused on women's health, and our
marketing efforts are concentrated on this group. If the clinicians we target do
not recommend and prescribe the products we offer or if midlife women do not
regularly use these products, we will continue to experience significant losses
and our business will be adversely affected. Moreover, if we fail to develop the
market-wide brand identity for Women First that we are seeking, our business
will be adversely affected.
Any failure by us to obtain rights to additional products or to acquire
companies on acceptable terms and successfully integrate them will limit our
growth and may harm our business. We plan to obtain rights to additional
products through license, co-promotion or acquisition agreements and may acquire
companies that complement our business. We may not be able to identify
appropriate licensing, co-promotion or acquisition candidates in the future.
Even if we identify an appropriate candidate, competition for it may be intense
and we may not be able to successfully negotiate the terms of a license,
co-promotion or acquisition agreement on commercially acceptable terms. The
negotiation of agreements to obtain rights to additional products or to acquire
companies could divert our management's time and resources from our existing
business. Moreover, we may be unable to finance an acquisition or integrate a
new product or company into our existing business. If we use shares of our
common stock as consideration for one or more significant acquisitions, our
stockholders could suffer significant dilution of their ownership interests.
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Our quarterly financial results are likely to fluctuate significantly and
may fail to meet or exceed the expectations of securities analysts or investors,
which could cause the price of our stock to decline significantly. Quarterly
operating results may fluctuate significantly based on factors such as:
o changes in the acceptance or availability of the products we offer,
o the timing of new product offerings, acquisitions or other significant
events by us or our competitors,
o regulatory approvals and legislative changes affecting the products we
offer or those of our competitors,
o the productivity of our sales force,
o the timing of expenditures for the expansion of our operations, and
o general economic and market conditions and conditions specific to the
health care industry.
Due to our short operating history and the difficulty of predicting demand for
the products we offer, we are unable to accurately forecast our revenues. For
example, we only recently began co-promoting the cholesterol-lowering drug
Pravachol(R) and the Ortho Tri-Cyclen(R) oral contraceptive and will not begin
promoting Ortho-Prefest(TM), a new oral combination hormonal replacement therapy
product, until the product is available from Ortho-McNeil. Accordingly, we have
little basis to estimate our revenues from co-promoting these products. In
addition, we plan to obtain rights to additional products and fund additional
sales and marketing and general and administrative activities, all of which
would increase our operating expenses. As a result, we may experience
significant, unanticipated quarterly losses. Because of these factors, our
operating results in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which could have a material
adverse effect on our stock price.
The health care industry and the markets for the products we offer are very
competitive. We may not be able to compete effectively, especially against
established industry competitors with significantly greater financial, sales,
marketing and technical resources. Additionally, these competitors have research
and development capabilities that may allow them to develop new or improved
products that may compete with product lines we market and distribute.
Competitors may elect to devote substantial resources to marketing their
products to midlife women and may choose to develop educational and information
programs like those we have developed to support their marketing efforts.
The pharmaceutical products we offer face significant competition. The
Ortho-Est(R) oral estrogen product, which has experienced declining sales and
market share and currently represents less than 1% of the market share of
estrogen replacement products sold in the United States, also competes with
several other estrogen products, including branded and generic products, taken
orally and through transdermal patches and creams, as well as non-hormonal
replacement therapy products. The Ortho Tri-Cyclen(R) product competes with
other oral contraceptive products and also with other forms of contraception
including contraceptive implants, progestin injections, intrauterine devices,
spermicides, diaphragms, cervical caps, female condoms, emergency contraception
and sterilization. The Ortho-Prefest(TM) product, if launched, will compete
primarily with combination oral estrogen and progestin products and a
combination estrogen and progestin patch, as well as with oral estrogen,
transdermal estrogen and oral progestin products. The Pravachol(R)
cholesterol-lowering drug competes with other cholesterol-lowering products.
As We Change, LLC competes with a number of catalog companies and Internet
retailers focusing on self-care products. Our educational products will compete
with products that have been developed by medical professionals and
non-professionals alike. Our Internet site, WOMENFIRST.COM, competes with other
Internet sites focused on women's health as well as sites focused on health in
general. Our failure
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to adequately respond to the competitive challenges faced by the products we
offer could have a material adverse effect on our business, financial condition
and results of operations.
If we do not successfully manage any growth we experience, we may
experience increased expenses without corresponding revenue increases. Our
business plan will, if implemented, result in rapid expansion of our operations.
This expansion may place a significant strain on our management, financial and
other resources. Our ability to manage future growth, should it occur, will
depend upon our ability to identify, attract, motivate, train and retain highly
skilled managerial, financial, business development, sales and marketing and
other personnel. Competition for these employees is intense. Moreover, the
addition of products or businesses will require our management to integrate and
manage new operations and an increasing number of employees. We may not be able
to implement successfully and maintain our operational and financial systems or
otherwise adapt to growth. Any failure to manage growth, if attained, would have
a material adverse effect on our business.
Our ability to market new and existing pharmaceutical products depends in
part on whether health care payors, including government authorities, private
health insurers, health maintenance organizations and managed care
organizations, will provide sufficient reimbursement for the products we offer.
Any failure to obtain reimbursement could require us to discontinue sales of a
particular product and could harm our results of operations. In particular,
sales of the Ortho-Est(R) oral estrogen product may be adversely affected by
formularies that require substitution of generics on prescriptions written for
the Ortho-Est(R) product unless the physician indicates "dispense as written" on
the prescription.
The pharmaceutical products that we market and distribute could be rendered
obsolete or uneconomical by the development of new drugs or devices to treat the
conditions that they address. Technological advances affecting costs of
production or marketing also could adversely affect our ability to sell
products. In addition, our own licensing, acquisition, co-promotion or
development of additional products could adversely affect the demand for the
products we currently offer if the new product has the same or similar
indications as one or more of the products we currently offer.
We are dependent on single sources of supply for all of the products we
offer. If one of our suppliers fails to supply adequate amounts of a product we
offer in a timely fashion, our sales may suffer and we could be required to
abandon a product line. We also face the risk that one of our suppliers could
become insolvent, declare bankruptcy, lose its production facilities in a
disaster, be unable to comply with applicable government regulations or lose the
governmental permits necessary to manufacture the products it supplies to us. If
we are unable to renew or extend an agreement with a third-party supplier, if an
existing agreement is terminated or if a third-party supplier otherwise cannot
meet our needs for a product, we may not be able to obtain an alternative source
of supply in a timely manner or at all. In these circumstances, we may be unable
to continue to market products as planned and could be required to abandon or
divest ourselves of a product line on terms which would materially adversely
affect us.
We may be exposed to product and professional liability claims not covered
by insurance that would harm our business. Although we believe that we currently
carry and intend to maintain appropriate product and professional liability
insurance, we cannot guarantee that this insurance will be sufficient to cover
all possible liabilities. A successful suit against us could have an adverse
effect on our business and financial condition if the amounts involved are
material.
We are uncertain of our ability to obtain additional financing for our
future capital needs. If we are unable to obtain additional financing, we may
not be able to continue to operate our business. We believe that the net
proceeds from the offering, together with existing cash balances, will be
sufficient to
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meet our working capital, capital expenditure requirements and minimum purchase
commitments through the end of the year 2000. Additional funding may not be
available on acceptable terms, if at all. If adequate funds are not available,
we may be required to curtail significantly or defer one or more of our
marketing or educational programs or to limit or postpone obtaining new products
through license, acquisition or co-promotion agreements. If we raise additional
funds through the issuance of equity securities, the percentage ownership of our
then-current stockholders may be reduced and such equity securities may have
rights, preferences or privileges senior to those of the holders of our common
stock. If we raise additional funds through the issuance of debt securities,
these new securities would have certain rights, preferences and privileges
senior to those of the holders of our common stock, and the terms of these debt
securities could impose restrictions on our operations.
Our inability to obtain new proprietary rights or to protect and retain our
existing rights could impair our competitive position and adversely affect our
sales. We intend to take the actions that we believe are necessary to protect
our proprietary rights, but we may not be successful in doing so on commercially
reasonable terms, if at all. In addition, parties that license their proprietary
rights to us may face challenges to their patents and other proprietary rights
and may not prevail in any litigation regarding those rights. Moreover, our
trademarks and the products we offer may conflict with or infringe upon the
proprietary rights of third parties. If any such conflicts or infringements
should arise, we would have to defend ourselves against such challenges. We also
may have to obtain a license to use those proprietary rights or possibly cease
using those rights altogether. Any of these events could harm our business.
Much of our business is subject to regulation by one or more federal, state
or local agencies. These regulatory bodies have the power to restrict or
eliminate many of our business activities, and to seek civil and criminal
penalties for noncompliance with applicable laws and regulations. Changes in
existing laws and regulations could adversely affect our business.
Our failure to retain the principal members of our management team,
particularly Edward F. Calesa, the Chairman of the Board, and David F. Hale, our
President and Chief Executive Officer, or to hire additional qualified employees
would adversely affect our ability to implement our business plan. We are the
beneficiary of life insurance policies on the lives of Mr. Calesa and Mr. Hale
in the amount of $2.0 million each. We do not have life insurance policies on
the lives of any other members of our management team.
Our management and existing stockholders will retain substantial control
over our voting stock and can make decisions that could adversely affect our
business and our stock price. As of October 31, 1999, Edward F. Calesa and his
family members jointly own approximately 41.2% of our common stock. Johnson &
Johnson Development Corporation, a subsidiary of Johnson & Johnson, owns
approximately 12.2% of our common stock. Our present directors, executive
officers and principal stockholders as a group beneficially own approximately
52.8% of the outstanding common stock. Accordingly, if all or certain of such
stockholders were to act together, they would be able to exercise significant
influence over or control the election of our Board of Directors, the management
and policies of Women First and the outcome of certain corporate transactions or
other matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets.
Our business may be interrupted by Year 2000 problems if our vendors,
customers or payors are unable to convert their systems or if any of our
internal systems are not compliant. For more information concerning Year 2000
issues that could affect our business, see "Item 2: Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Year 2000
Compliance."
20
<PAGE> 24
The market prices and trading volumes for securities of emerging companies,
like Women First, historically have been highly volatile and have experienced
significant fluctuations both related and unrelated to the operating performance
of those companies. The price of our common stock may fluctuate widely,
depending on many factors, including factors that may cause our quarterly
operating results to fluctuate as well as market expectations and other factors
beyond our control. In the past, following periods of volatility in the market
price of a company's securities, class action litigation has often been
instituted against that company by some of its stockholders. This type of
litigation, if instituted against us, could result in substantial costs and a
diversion of our management's attention and resources, which could materially
and adversely affect our results of operations and financial condition.
Sales of substantial numbers of shares of our common stock, or the
perception that such sales could occur, could adversely affect the market price
of our common stock and make it more difficult for us to raise funds through
equity offerings in the future. A substantial number of outstanding shares of
common stock and shares of common stock issuable upon exercise of outstanding
stock options will become available for resale in the public market at
prescribed times. As of October 31, 1999, we had 17,253,220 shares of common
stock outstanding. The 5,175,000 shares sold in our recent initial public
offering are freely tradable under the Securities Act of 1933, as amended,
unless held by our "affiliates" as defined in Rule 144 under the Securities Act.
Of the remaining 12,078,220 shares of common stock outstanding as of October 31,
1999, 11,071,720 will be eligible for sale under Rule 144 under the Securities
Act, subject to volume and other limitations, upon the expiration of 180-day
lock-up agreements.
We have implemented anti-takeover provisions that could prevent an
acquisition of our company at a premium price. Provisions of our Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws may make
it difficult for a third party to acquire us and could discourage a third party
from attempting to acquire us at a premium price. These include provisions
classifying our board of directors, prohibiting stockholder action by written
consent and requiring advance notice for nomination of directors and
stockholders' proposals. In addition, Section 203 of the Delaware General
Corporation Law also imposes restrictions on mergers and other business
combinations between us and any holders of 15% or more of our common stock.
Moreover, our certificate of incorporation allows our board of directors to
issue, without further stockholder approval, preferred stock that could have the
effect of delaying, deferring or preventing a change in control. The issuance of
preferred stock also could adversely affect the voting power of the holders of
our common stock, including the loss of voting control to others.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed in the 3 month period ended
September 30, 1999.
21
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly causes this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Women First HealthCare, Inc.
Date: November 15, 1999 By: /s/ DAVID F. HALE
------------------------------------
David F. Hale
President and Chief Executive
Officer (Principal Executive
Officer)
Date: November 15, 1999 By: /s/ DEBRA P. CRAWFORD
------------------------------------
Debra P. Crawford
Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
22
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