SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
THE FEMALE HEALTH COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
Wisconsin 39-1144397
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
919 N. Michigan Avenue, Suite 2208, Chicago, IL 60611
(Address of Principal Executive Offices) (Zip Code)
(312) 280-2281
(Issuer's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 Par Value -- 9,556,163 shares outstanding as of February 9,
1998
Transitional Small Business Disclosure Format (check one):
Yes _________ No X <PAGE>
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Unaudited Condensed Consolidated Balance Sheet -
December 31, 1997 ................................ 3
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended December 31, 1997
and December 31, 1996............................ 4
Unaudited Condensed Consolidated
Statements of Cash Flows -
Three Months Ended December 31, 1997
and December 31, 1996........................... 5
Notes to Unaudited Condensed Consolidated
Financial Statements............................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 10
Part II. Other Information
Recent Sales of Unregistered Securities .......... 16
Exhibits and Reports on form 8-K.................. 17
SIGNATURES....................................................... 18<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Current Assets:
Cash and equivalents $2,675,992
Accounts receivable, net 722,938
Inventories, net 637,499
Prepaid expenses and other current assets 502,768
-----------
TOTAL CURRENT ASSETS 4,539,197
Note receivable, net of unamortized discount 750,000
Intellectual property rights and other
assets, net 1,167,812
PROPERTY, PLANT AND EQUIPMENT 3,979,765
Less accumulated depreciation and amortization (1,163,645)
-----------
Net Property, plant, and equipment 2,816,120
-----------
TOTAL ASSETS $9,273,129
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, net of unamortized discount $933,798
Trade accounts payable 643,139
Accrued expenses and other current liabilities 477,323
Debt due within one year 34,218
Preferred dividends payable 49,245
-----------
TOTAL CURRENT LIABILITIES 2,137,723
Long-term debt and capital lease obligations 565,874
Deferred gain on sale of facility (see Note 3) 1,800,785
Other long-term liabilities 288,640
-----------
TOTAL LIABILITIES 4,793,022
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock 14,099
Common Stock 95,470
Additional Paid-in-capital 41,410,547
Translation gain (loss) 262,315
Accumulated deficit (37,302,324)
-------------
Total Stockholders' Equity 4,480,107
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,273,129
============
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
1997 1996
Net revenues $1,305,804 $ 605,818
Cost of products sold 1,580,653 977,700
----------- -----------
Gross margin (loss) (274,849) (371,882)
Advertising & Promotion 168,921 479,366
Selling, general and administrative 569,755 624,751
----------- -----------
Total Operating Expenses 738,676 1,104,117
----------- -----------
Operating loss (1,013,525) (1,475,999)
Interest, net and other (income)/expense 45,631 130,663
----------- ----------
Pretax loss (1,059,156) (1,606,662)
Provision for income taxes --- ---
----------- -----------
Net loss (1,059,156) (1,606,662)
Preferred dividends 34,279 ---
----------- -----------
Net loss attributable to Common stockholders (1,093,435) (1,606,662)
Basic and diluted net loss per common
share outstanding $ (0.11) $ (0.22)
Weighted average number of common shares
outstanding 9,544,403 7,392,821
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter ended
December 31,
1997 1996
OPERATIONS:
Net (loss) $(1,093,435) $ (1,606,662)
Adjusted for noncash and nonoperating items:
Depreciation and amortization 146,921 161,738
Noncash interest 93,525 163,771
Changes in operating assets and liabilities (59,629) 158,462
---------- ----------
Net cash provided (used) in operating activities (912,618) (1,122,691)
INVESTING ACTIVITIES:
Capital expenditures (2,112) (78,427)
Lease of facility (see Note 3) ---- 3,281,923
---------- ----------
Net cash provided (used) in investing activities (2,112) 3,203,496
FINANCING ACTIVITIES:
Debt repayments (10,374) (2,833,875)
Proceeds from the issuance of stock 1,959,784 222,494
----------- -----------
Net cash provided by financing activities 1,949,410 (2,611,381)
Effect of exchange rate change on cash and
equivalents 7,845 (5,365)
---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,042,525 (535,940)
Cash and equivalents at beginning of period 1,633,467 2,914,080
------------ -----------
CASH AND EQUIVALENTS AT END OF PERIOD $2,675,992 $2,378,140
=========== ==========
Schedule of noncash financing and
investing activities:
Conversion of Convertible Debentures
into Common Stock ---- $1,134,001
See notes to unaudited condensed consolidated financial statements.<PAGE>
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 operation 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. Certain reclassifications have been made to the prior period
financial statements to conform to the current period presentation.
Operating results for the three months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 1998. 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, 1997.
NOTE 2 - Earnings Per Share
Basic and diluted net (loss) per Common share outstanding is based on the
weighted average number of shares of Common Stock outstanding during the
period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements.
The Company has "in the money" options and warrants outstanding of 762,885 and
428,919 as of December 31, 1997 and 1996, respectively. The Company also has
preferred stock outstanding as of December 31, 1997, which is convertible into
1,409,927 shares of common stock (see Note 5). The inclusion of the options,
warrants and convertible preferred stock in the computation of diluted earnings
per share would have resulted in a reduction of the loss per share
(antidilutive) and therefore both basic and diluted earnings per share amounts
were the same for each of the periods presented in the accompanying financial
statements.
NOTE 3 - Lease of Manufacturing Facility
On December 10, 1996, the Company entered into what is in essence a sale and
lease-back agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received 1,950,000 (Pounds)
representing approximately $3,365,000 for leasing the facility to a third party
for a nominal annual rental charge and for providing the third party an option
to purchase the facility for one pound during the period December 2006 to
December 2027.
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents per year payable
quarterly until 2016 of 195,000 (Pounds) representing approximately $336,000.<PAGE>
The lease is renewable through 2027. The Company was also required to make a
security deposit of 195,000 (Pounds) representing approximately $336,000 to be
reduced in subsequent years. The facility had a net book value of 810,845
(Pounds) representing approximately $1,398,819 on the date of the transaction.
The 1,139,155 (Pounds) representing approximately $1,966,181 gain which
resulted from this transaction will be recognized ratably over the initial term
of the lease.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of 1,062,500 (Pounds) representing approximately $1,834,000.
NOTE 4 - Inventories
The components of inventory consist of the following:
December 31,
1997
-------------
Raw Material and work in process $ 511,865
Finished Goods 762,787
Less: Inventory reserves (637,153)
------------
Inventory, net $ 637,499
============
NOTE 5 - Sale of Convertible Preferred Stock
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converts into Common Stock on a
one-for-one basis, five days after the registration statement registering the
resale of the Common Stock is declared effective by the SEC. This Registration
Statement was filed with the SEC on February 13, 1998. The investors received
four-year Warrants to purchase 240,000 shares of Common Stock exercisable at a
price per share equal to the lesser of $3.425 or the average of the three
closing bid prices per share of Common Stock for any three consecutive trading
days chosen by the investor during the 30 trading day period ending on the
trading day immediately prior to the exercise of the Warrants.
In September 1997, the Company raised approximately $1.6 million proceeds, net
of issuance costs of $96,252, in a private placement of 680,000 shares of 8%
cumulative convertible Preferred Stock. In addition, 52,000 Common Stock
purchase warrants were issued to the placement agents. Each share of Preferred
Stock is convertible into one share of the Company's Common Stock on or after
August 1, 1998. Annual Preferred Stock dividends will be paid if and as
declared by the Company's Board of Directors. No dividends or other
distributions will be payable on the Company's Common Stock unless dividends
are paid in full on the Preferred Stock. The shares may be redeemed at the
option of the Company, in whole or in part, on or after August 1, 2000, subject
to certain conditions, at $2.50 per share plus accrued and unpaid dividends.
In the event of a liquidation or dissolution of the Company, the Preferred
Stock would have priority over the Company's Common Stock.<PAGE>
NOTE 6 - 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 loss of $5.6 million for the year ended September 30, 1997, a loss
of $1.1 million for the three months ended December 31, 1997 and as of December
31, 1997 had an accumulated deficit of $37.3 million. At December 31, 1997,
the Company had working capital of $2.4 million and stockholders' equity of
$4.5 million. In the future, the Company expects to continue to broaden
distribution of the Female Condom through expanding partnerships in the major
markets including the United States, the European market and the Developing
World and to support its manufacturing operations to meet the increased demand.
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 efforts to raise additional capital and to secure
additional agreements to promote and distribute the Female Condom throughout
other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated
requirements. Specifically, the Company entered into an agreement with Vector
Securities, International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to healthcare and
life-science companies. Pursuant to this agreement, for a one-year period,
Vector will act as the Company's exclusive financial advisor for the purpose of
identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. However, no
specific opportunity has yet been identified and there can be no assurance that
any such opportunities will be available to the Company or, if so available,
that the Company will ultimately elect to consummate any such transaction.
Further, there can be no assurance, assuming the Company raises additional
funds or enters into business agreements with third parties, that the Company
will achieve profitability or positive cashflow. If the Company is unable to
obtain adequate financing, management will be required to curtail certain of
The Company's operations or ultimately cease operations.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Female Health Company ("FHC" or the "Company") markets, manufactures 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.
The Female Condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 25 additional
countries. Certain of these studies show that having the Female Condom
available allows women to have more options, resulting in an approximately 30%
increase in protected sex acts. Furthermore, the studies showed that when the
Female Condom is available as a choice, there is an approximately 35% decrease
in STDs, including HIV/AIDS.
The Product is currently sold to both commercial (private sector) and public
sector markets in ten countries. It is commercially marketed directly by the
Company in the United States and the United Kingdom and through marketing
partners in Canada, Holland, Brazil, Venezuela, South Korea and Taiwan. The
Company has signed distribution agreements in Japan and Bangladesh, and the
Company anticipates that the product will be marketed in these countries in the
coming months. The Company's partner in Japan, Taiho Pharmaceutical Co., Ltd.
("Taiho"), submitted a formal application for regulatory approval with
Koseisho, the Japanese regulatory agency in October, 1997; and expects to
receive approval to begin marketing the Female Condom during 1998. The Company
is currently in discussions with potential distributors for India and The
People's Republic of China and other countries.
In addition to the commercial market, the Female Condom is sold to the global
public sector. In particular, the Product is marketed to city and state public
health clinics as well as not-for-profit organizations such as Planned
Parenthood in the United States. Following several years of testing the
efficacy and acceptability of the Female Condom, the Product received a formal
endorsement by The World Health Organization (WHO) and the Joint United Nations
Programme on AIDS (UNAIDS). In 1996, the Company entered into a three-year
agreement with UNAIDS, whereby UNAIDS will facilitate 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. Pursuant to this agreement, the Product is
currently being marketed in Zambia and Zimbabwe with plans for 1998 market
introductions in South Africa, Uganda, Tanzania, Cote d' Ivoire and other
countries. As part of the UNAIDS agreement, the South African government
recently ordered one and one-half million Female Condoms which were shipped by
the Company after December 31, 1997.
Global Market
WHO estimates there are more than 300 million new cases of STDs worldwide each
year, excluding HIV, and most of those diseases are more easily transmitted to
women than to men. Women are currently the fastest growing group infected with
HIV and are expected to comprise the majority of new cases by the year 2000.
Although it is estimated the annual global male condom market now exceeds four
and one-half billion units, the majority of all sex acts are still completed
without protection, resulting in the rapidly increasing incidence of STDs. A<PAGE>
study conducted by UNAIDS showed that having the Female Condom available, as
compared to only having male condoms available, increased the incidence of
protected sex by 25% and, correspondingly, caused a 34% decrease in STDs. A
study conducted by the Philadelphia Department of Public Health showed similar
results with a 30% decrease in unprotected sex. The Company believes that the
Product is positioned to gain market share from the male condom as well as to
achieve substantial sales volume from people who, because there is now an
alternative to the male condom, will use the Product instead of having
unprotected sex.
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from STDs, including HIV/AIDS and
unintended pregnancy. Although latex male condoms also offer protection
against STDs, the Female Condom possesses a certain number of advantages. The
most important advantage is that a woman can control whether or not she is
protected. Many men do not like to wear male condoms and may refuse to do so.
The material that is used for the Female Condom, polyurethane, 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 between 4% to 8% of
the times they are used, while studies show that the Female Condom tears in
less than 1% of uses. 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.
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 sex than the male condom which
requires sexual arousal for application.
Safety and Efficacy
Based on use of the Product in clinical trials and four years of worldwide
marketing, the Female Condom has been proven to be safe and effective. There
have been no safety issues or side effects noted with the Female Condom.
Current studies show that the Female Condom is 95% efficacious in protecting
against pregnancy when used correctly and consistently, comparable to male
condoms and other barrier methods like diaphragms and cervical caps. Studies
that were conducted in Japan as part of the regulatory approval process
indicate that the efficacy of the Product may be even higher. As a preventive
measure against STDs, the Female Condom has also proven to be highly effective,
as has been documented by several studies, including the UNAIDS study.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market the Female Condom throughout the European Union. In addition to the
United States and the European Union, several other countries have approved the
Female Condom for sale, including Canada, Russia, Australia, South Korea and<PAGE>
Taiwan. The Company expects the Female Condom to receive approval in Japan in
1998.
The Company believes that the Female Condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six years
to implement, execute and receive FDA approval of a PMA to market another type
of Female Condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the
manufacture and distribution of the Female Condom.
Japanese Market Opportunity
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. The Female Health Company's
partner in Japan is Taiho Pharmaceuticals, a $1 billion subsidiary of Otsuka
Pharmaceutical Co., Ltd., which is a $5 billion Japanese health care company.
The agreement between the Company and Taiho provides that Taiho perform
clinical testing of the Product in Japan and obtain necessary regulatory
approvals. After approval, expected in 1998, the Company will manufacture the
Product and supply it to Taiho, which will have responsibility for marketing
and distributing the Female Condom in Japan. Results of the clinical tests in
Japan show that the Female Condom may be more effective in preventing pregnancy
than the male condom and has a high acceptance rate of 70% among Japanese
women. Taiho plans to market the Female Condom under the name "Mylura Femy."
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than one billion male condoms are distributed
worldwide by the public sector each year. The Female Condom is seen as an
important addition to prevention strategies by the public sector because
studies show that the availability of the Female Condom decreases the amount of
unprotected sex by as much as a third over male condoms alone.
In the U.S. currently, city and state governments in New York, Pennsylvania,
Washington, Illinois, Chicago, Philadelphia, New York, San Francisco and
Florida, have purchased Female Condoms for distribution, with a number of
others expressing interest.
In November 1996, FHC signed an agreement with UNAIDS regarding the sale of
Female Condoms to developing countries. UNAIDS solicited interest levels from
approximately 180 countries in order to gauge their potential demand for Female
Condoms. To date, more than 80 countries have expressed interest, indicating a
near-term demand for approximately eight million Female Condoms. As part of
this near-term demand, the South African government has ordered and the Company
has shipped 1.5 million Female Condoms. Several countries have commenced, or
are about to commence, introduction of the Product under the UNAIDS agreement,
including Zambia, Zimbabwe, Uganda, Tanzania and Cote d' Ivoire.
Endorsements
Currently the Female Condom is endorsed for use by the World Health
Organization, the United Nations Joint Programme on AIDS, the U.S. Agency for<PAGE>
International Development and a number of states and cities in the United
States.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 Compared to Three Months Ended December
31, 1996
The Female Health Company had revenues of $1,305,804 and a net loss of
$1,093,435 ($0.11 per common share) for the three months ended December 31,
1997 compared to revenues of $605,818 and a net loss of $1,606,662 ($0.22 per
common share) for the three months ended December 31, 1996. As discussed more
fully below, the decrease in the Company's net loss was principally related to
sales volume increases and reductions in operating expenses and an adjustment
in the Company's reserves for inventory obsolescence.
For the current quarter, net sales increased $699,986, or 116%, to $1,305,804
from $605,818 for the same period last year. The increased sales volume is
attributable to additional global public sector sales associated with the
United Nations Joint Programme on AIDS (UNAIDS), launches by new country
specific partners and increased public sector sales in the U.S.
Cost of goods sold increased $602,953, or 62%, to $1,580,653 in the current
quarter from $977,700 for the same period last year. Increases in costs of
goods sold, related to the higher sales volume, were offset, in part, by a
$250,000 reduction in the Company's reserve for inventory obsolescence. The
Company adjusted the inventory reserves based upon the FDA's decision to extend
the useful life of the Female Condom to five years from three years and the
expectation that remaining inventories will be sold before they expire.
Advertising and promotional expenditures decreased $310,445 to $168,921 in the
current quarter from $479,366 for the same period in the prior year.
Advertising and promotion relates almost exclusively to the U.S. consumer
market, and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs. Through expenditures to
date, the Company has established that the Female Condom is responsive to
promotion; but as a small company, it doesn't possess the resources to conduct
a U.S. consumer program and is in discussions with potential partners for the
U.S. that have the resources to penetrate the consumer market.
Selling, general and administrative expenses ("SG&A") decreased $54,996 to
$569,755 in the current quarter from $624,751 for the same period last year.
The decrease reflected lower spending across a variety of expenses including
selling, research and development and general and administrative.
Net interest and non-operating expenses decreased $85,032 to $45,631 for the
current period compared with $130,663 for the same period the prior year. The
decrease is due to reduced interest expense attributable to decreased
borrowings.
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
quarter, cash used in operations totaled $0.9 million. The Company funded cash
used in operations with the $1.8 million net proceeds received from the private
placement offering of convertible Preferred Stock. During 1998, management<PAGE>
will continue pursuing other avenues to obtain financing including strategies
to secure additional capital from a debt or equity securities offering. Until
internally generated funds are sufficient to meet cash requirements, the
Company will remain dependent upon its ability to generate sufficient capital
from outside sources.
At December 31, 1997, the Company had current liabilities of $2.1 million
including a $1.0 million note payable due March 25, 1998, to Mr. Dearholt, a
Director of the Company. Mr. Dearholt beneficially owns 909,777 shares of the
Company's Common Stock as of January 30, 1998. The Company will need to raise
additional capital to fund expected operating losses and short-term debt
repayment requirements. Mr. Dearholt and the Company are currently discussing
extension or conversion of this note payable. If the Company defaults on its
obligation under the note payable due March 25, 1998, the Company is required
to issue an additional 200,000 shares of its Common Stock to Mr. Dearholt, in
addition to all other remedies to which Mr. Dearholt may be entitled.
In the near term, the Company's management expects operating and capital costs
to continue to exceed funds generated from operations, due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the Female Condom around the world. It is
estimated that the Company's cash burn rate, without revenues, is approximately
$0.4 million per month.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to healthcare and
life-science companies. Pursuant to this agreement, for a one-year period,
Vector will act as the Company's exclusive financial advisor for the purposes
of identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. However, no
specific opportunity has yet been identified, and there can be no assurance
that any such opportunities will be available to the Company or, if so
available, that the Company will ultimately elect or be able to consummate any
such transaction.
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. <PAGE>
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE
The Company's common stock is listed for trading on the American Stock Exchange
(the "Exchange"). The Constitution of the Exchange provides that its Board of
Governors may, in its discretion, at any time, remove any security from
listing. Although the determination as to whether a security warrants
delisting is not based on any precise mathematical formula, the Exchange has
adopted a number of guidelines which it will consider when deciding whether to
delist an Exchange-traded security. Certain of these guidelines address the
issuer's financial condition. For example, the Exchange will consider
delisting the securities of an issuer which has stockholders' equity of less
than $2 million if the Company has sustained losses from continuing operations
and/or net losses in two of its three most recent fiscal years (which the
Company has) or which has stockholders' equity of less than $4 million if the
Company has sustained losses from continuing operations and/or net losses in
three of its four most recent fiscal years (which the Company has). The
Exchange will also consider delisting the stock of a company which has incurred
net losses in its five most recent fiscal years (which the Company has). As of
December 31, 1997, the Company had stockholders' equity of approximately $4.5
million. On February 5, 1998, the Company received a letter from the Exchange
noting that the Company has fallen below certain of the Exchange's continued
listing guidelines and indicating that the Exchange will review the Company's
listing eligibility. The letter specifically noted that the Company has fallen
below the Exchange's continued listing guidelines triggered by both (a) five
years of losses and (b) equity below $4 million since the Company had losses in
three of its four most recent fiscal years. There can be no assurance that the
Exchange will permit the continued listing of the Company's common stock on the
Exchange. If the Exchange delists trading of the Company's common stock,
investors would likely find it more difficult to obtain accurate quotations of
the price of the Company's common stock and to sell the common stock on the
open market.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased selling, general and administrative
expenses. Historically, the Company has absorbed increased costs and expenses
without increasing selling prices.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such factors
may adversely affect the Company's results of operations and financial
condition.<PAGE>
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converts into Common Stock on a
one-for-one basis, five days after the registration statement registering the
resale of the Common Stock is declared effective by the SEC. This Registration
Statement was filed with the SEC on February 13, 1998. The investors received
four-year Warrants to purchase 240,000 shares of Common Stock exercisable at a
price per share equal to the lesser of $3.425 or the average of the three
closing bid prices per share of Common Stock for any three consecutive trading
days chosen by the investor during the 30 trading day period ending on the
trading day immediately prior to the exercise of the Warrants.
The Series 2 Preferred Stock and warrants were sold to three institutional
investors. The Company's placement agent in this offering received a
commission of $140,000 and certain of its affiliated received four-year
warrants to purchase an aggregate of 4,000 shares of the Company's common stock
at an exercise price of $4.11 per share.
The Series 2 Preferred Stock and warrants were offered and sold by the Company
in a private transactions without registration in reliance on Section 4(2) of
the Securities Act of 1933, as amended and Regulation D promulgated thereunder.
Each of the purchases in the private placement made various representations to
the Company, including that the investor is an "accredited investor" under
Registration D, which enabled the Company to conclude that Section 4(2) and
Regulation D was satisfied.<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.2). (1)
27 Financial Data Schedule
99.1 Investor relations and development services Consulting Agreement
dated March 13, 1995, between C.C.R.I. Corporation and
Company.(1)
99.2 Consultant Warrant Agreement dated March 13, 1995, issued by the
Company to C.C.R.I. Corporation. (1)
99.3 Amendment to Consulting Agreement dated as of July 1, 1997,
between C.C.R.I. Corporation and the Company. (1)
99.4 Letter from the Company to C.C.R.I. Corporation regarding the
C.C.R.I. Warrant. (1)
99.5 Form of Securities Purchase Agreement dated December 31, 1997,
between the Company and the purchasers set forth on an exhibit
thereto. (1)
99.6 Form of Registration Rights Agreement dated December 31, 1997,
between the Company and the investors in the Company's December
31, 1997, private placement.(1)
99.7 Form of Common Stock Purchase Warrant dated December 31, 1997,
issued by the Company to the investors listed on the exhibit
thereto. (1)
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-3, filed with the Securities and Exchange Commission on February 13,
1998.
(2) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the quarter
ended December 31, 1997.<PAGE>
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
/s/ O. B. Parrish
DATE: February 14, 1998 --------------------------
O. B. Parrish, Chairman
and Chief Executive Officer
and Principal Accounting
Officer<PAGE>
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