THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
December
31, 2007
|
|
September
30, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,604,306
|
|
|
$
|
799,421
|
|
|
Restricted
cash
|
|
|
236,138
|
|
|
|
86,435
|
|
|
Accounts
receivable, net
|
|
|
6,007,114
|
|
|
|
6,080,153
|
|
|
Inventories,
net
|
|
|
1,785,430
|
|
|
|
1,372,582
|
|
|
Prepaid
expenses and other current assets
|
|
|
328,516
|
|
|
|
399,536
|
|
|
Deferred
income taxes
|
|
|
825,000
|
|
|
|
825,000
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
10,786,504
|
|
|
|
9,563,127
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
246,853
|
|
|
|
251,536
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
FURNITURE AND FIXTURES
|
|
|
|
|
|
|
|
|
|
Equipment
not yet in service
|
|
|
178,491
|
|
|
|
444,275
|
|
|
Equipment,
furniture and fixtures
|
|
|
6,250,288
|
|
|
|
5,967,082
|
|
|
Total
equipment, furniture and fixtures
|
|
|
6,428,779
|
|
|
|
6,411,357
|
|
|
Less
accumulated depreciation and amortization
|
|
|
4,951,112
|
|
|
|
5,032,472
|
|
|
|
|
|
1,477,667
|
|
|
|
1,378,885
|
|
|
TOTAL
ASSETS
|
|
$
|
12,511,024
|
|
|
$
|
11,193,548
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,129,725
|
|
|
$
|
806,134
|
|
|
Accrued
expenses and other current liabilities
|
|
|
1,877,679
|
|
|
|
1,555,346
|
|
|
Preferred
dividends payable
|
|
|
48,643
|
|
|
|
53,025
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,056,047
|
|
|
|
2,414,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of facility
|
|
|
1,017,317
|
|
|
|
1,074,339
|
|
|
Deferred
grant income
|
|
|
247,567
|
|
|
|
257,245
|
|
|
TOTAL
LIABILITIES
|
|
|
4,320,931
|
|
|
|
3,746,089
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, Class A Series 1
|
|
|
560
|
|
|
|
560
|
|
|
Convertible
preferred stock, Class A Series 3
|
|
|
4,734
|
|
|
|
4,734
|
|
|
Convertible
preferred stock, Class B
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock
|
|
|
267,079
|
|
|
|
264,379
|
|
|
Additional
paid-in-capital
|
|
|
65,453,935
|
|
|
|
64,954,610
|
|
|
Accumulated
other comprehensive income
|
|
|
832,923
|
|
|
|
1,051,156
|
|
|
Accumulated
deficit
|
|
|
(57,614,264
|
)
|
|
|
(58,428,233
|
)
|
|
Treasury
stock, at cost
|
|
|
(754,874
|
)
|
|
|
(399,747
|
)
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
8,190,093
|
|
|
|
7,447,459
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
12,511,024
|
|
|
$
|
11,193,548
|
|
See
notes
to unaudited condensed consolidated financial statements.
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
Three
Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
5,734,751
|
|
|
$
|
4,198,879
|
|
|
Cost
of products sold
|
|
|
3,368,635
|
|
|
|
2,920,481
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,366,116
|
|
|
|
1,278,398
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
and promotion
|
|
|
41,518
|
|
|
|
59,038
|
|
|
Selling,
general and administrative
|
|
|
1,493,824
|
|
|
|
1,373,062
|
|
|
Research
and development
|
|
|
101,129
|
|
|
|
64,704
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,636,471
|
|
|
|
1,496,804
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
729,645
|
|
|
|
(218,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
net and other income
|
|
|
(9,608
|
)
|
|
|
(13,553
|
)
|
|
Foreign
currency transaction gain
|
|
|
(115,358
|
)
|
|
|
(18,572
|
)
|
|
Income
(loss) before income taxes
|
|
|
854,611
|
|
|
|
(186,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
854,611
|
|
|
|
(186,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends, Class A, Series 1
|
|
|
2,823
|
|
|
|
2,823
|
|
|
Preferred
dividends, Class A, Series 3
|
|
|
37,820
|
|
|
|
37,820
|
|
|
Net income
(loss) attributable to common stockholders
|
|
$
|
813,968
|
|
|
$
|
(226,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per basic common share outstanding
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common share outstanding
|
|
|
26,121,460
|
|
|
|
23,952,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per diluted common share outstanding
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
28,688,345
|
|
|
|
26,444,924
|
|
See
notes
to unaudited condensed consolidated financial statements.
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Three
Months Ended
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
854,611
|
|
|
$
|
(186,281
|
)
|
|
Adjustment
for noncash items:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
36,432
|
|
|
|
30,120
|
|
|
Amortization
of deferred gain on sale/leaseback
|
|
|
(29,211
|
)
|
|
|
(27,553
|
)
|
|
Amortization
of deferred income from grant - BLCF
|
|
|
(2,885
|
)
|
|
|
-
|
|
|
Interest
added to certificate of deposit
|
|
|
(640
|
)
|
|
|
(609
|
)
|
|
Amortization
of unearned consulting fees
|
|
|
57,000
|
|
|
|
61,000
|
|
|
Employee
stock compensation
|
|
|
88,752
|
|
|
|
162,007
|
|
|
Changes
in operating assets and liabilities
|
|
|
280,917
|
|
|
|
(151,592
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,284,976
|
|
|
|
(112,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in restricted cash
|
|
|
(149,703
|
)
|
|
|
11,866
|
|
|
Capital
expenditures
|
|
|
(180,921
|
)
|
|
|
(549,742
|
)
|
|
Net
cash used in investing activities
|
|
|
(330,624
|
)
|
|
|
(537,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of warrants
|
|
|
360,000
|
|
|
|
-
|
|
|
Purchases
of common stock for treasury shares
|
|
|
(355,126
|
)
|
|
|
-
|
|
|
Dividend
paid on preferred stock
|
|
|
(45,036
|
)
|
|
|
(7,200
|
)
|
|
Net
cash used in financing activities
|
|
|
(40,162
|
)
|
|
|
(7,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(109,306
|
)
|
|
|
28,230
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
804,885
|
|
|
|
(629,754
|
)
|
|
Cash
at beginning of period
|
|
|
799,421
|
|
|
|
1,827,393
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
1,604,306
|
|
|
$
|
1,197,639
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
of noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Common
stock issued for payment of preferred stock dividends
|
|
|
-
|
|
|
$
|
37,819
|
|
|
Reduction
of accrued expense upon issuance of shares
|
|
|
29,295
|
|
|
|
73,065
|
|
|
Preferred
dividends declared
|
|
|
40,643
|
|
|
|
2,823
|
|
See
notes
to unaudited condensed consolidated financial statements.
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES
TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 -
Basis of
Presentation
The
accompanying financial statements are unaudited but in the opinion of management
contain all the adjustments (consisting of those of a normal recurring nature)
considered necessary to present fairly the financial position and the results
of
operations and cash flow for the periods presented in conformity with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by United
States generally accepted accounting principles for complete financial
statements.
Operating
results for the three months ended December 31, 2007 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2008. 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, 2007.
Principles
of consolidation
and nature of operations
:
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, The Female Health Company - UK, The Female Health
Company - UK, plc and The Female Health Company (M) SDN. BHD., a wholly owned
subsidiary of The Female Health Company-UK. All significant intercompany
transactions and accounts have been eliminated in consolidation. The Female
Health Company ("FHC" or the "Company") is currently engaged in the marketing,
manufacture and distribution of a consumer health care product known as the
“FC
Female Condom” in the U.S., and "femidom" or "femy" outside the U.S. The Female
Health Company - UK, is the holding company of The Female Health Company -
UK,
plc, which operates a 40,000 sq. ft. leased manufacturing facility located
in
London, England and leases a 16,000 sq. ft. manufacturing facility
located in Selangor D.E., Malaysia.
The
product is currently sold or available in either or both commercial (private
sector) and public sector markets in 116 countries. The product is marketed
in
15 countries by various country-specific commercial partners. The Company has
a
range of credit terms. For the past twelve months, the average days'
sales outstanding has been approximately 60 days.
Restricted
cash:
Restricted
cash relates to security provided to one of the Company’s U.K. banks for
performance bonds issued in favor of customers. Such security has been extended
infrequently and only on occasions where it has been a contract term expressly
stipulated as an absolute requirement by the funds provider. The expiration
of
the bond is defined by the completion of the event such as, but not limited
to,
delivery of goods or at a period of time after product has been
distributed.
NOTE
2 -
Earnings per
Share
Basic
EPS
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. In the diluted
earnings per share calculation, the numerator is the sum of net income
attributable to common shareholders and preferred dividends. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon conversion of convertible
preferred shares and the exercise of stock options and warrants and unvested
shares granted to employees.
|
|
|
Three
Months
Ended
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted
average common
shares
outstanding
–
basic
|
|
|
26,121,460
|
|
|
|
23,952,040
|
|
|
Net
effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
922,971
|
|
|
|
114,007
|
|
|
Warrants
|
|
|
847,037
|
|
|
|
1,466,500
|
|
|
Convertible
preferred stock
|
|
|
529,377
|
|
|
|
529,377
|
|
|
Unvested
restricted shares
|
|
|
267,500
|
|
|
|
383,000
|
|
|
Total
net effect of dilutive securities
|
|
|
2,566,885
|
|
|
|
2,492,884
|
|
Weighted
average common
shares
outstanding
–
diluted
|
|
|
28,688,345
|
|
|
|
26,444,924
|
|
|
Income
(loss) per common share – basic
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
Income
(loss) per common share – diluted
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
Warrants
to purchase approximately
200
,000
shares of common stock at an
exercise price of $3.10 that were outstanding during the three months ended
December 31, 2007, were not included in the computation of diluted net income
per share because they were
out of the money
.
These warrants expire in March 2008.
Options to purchase approximately
1
90,000
shares of common stock at
exercise prices ranging from $1.66 to $2.70 per share and warrants to purchase
approximately 290,000 shares of common stock at exercise prices ranging from
$1.50 to $
3.10
per
share that were outstanding during
of the three month period ended December 31, 2006, were not included in the
computation of diluted net income per share because they were anti-dilutive.
These options expire from 2013 to 2014. The
se
warrants
expire
in fiscal years
200
8
-2009.
NOTE
3 -
Comprehensive
Income
Total
comprehensive income was $636,378 for the three months ended December 31, 2007
and $4,494 for the three months ended December 31, 2006.
NOTE
4 -
Inventories
The
components of inventory consist of the following:
|
|
|
December
31,
2007
|
|
|
September
30,
2007
|
|
|
Raw
material and work in process
|
|
$
|
1,490,924
|
|
|
$
|
1,082,083
|
|
|
Finished
goods
|
|
|
340,362
|
|
|
|
358,499
|
|
|
Inventory,
gross
|
|
|
1,831,286
|
|
|
|
1,440,582
|
|
|
Less:
inventory reserves
|
|
|
(45,856
|
)
|
|
|
(68,000
|
)
|
|
Inventory,
net
|
|
$
|
1,785,430
|
|
|
$
|
1,372,582
|
|
NOTE
5 –
Share-Based
Compensation
Stock
Option
Plans
Under
the
Company’s share based long-term incentive compensation plans, the Company grants
non-qualified stock options to employees. The Company’s 1997 Stock
Option Plan expired December 31, 2006, and the Company no longer has shares
available for issuance under any of its plans. The Company’s stock options
expire in 10 years and generally vested 1/36 per month, with full vesting after
three years.
The
Company recognized share-based compensation expense for stock options of
approximately $19,000 in selling, general and administrative expenses in the
statement of operations for the three months ended December 31,
2007.
The
Company granted 180,000 stock options during the first quarter of fiscal 2007.
The Company did not grant any options during the first quarter of fiscal 2008.
The table below outlines the weighted average assumptions for options granted
during the three months ended December 31, 2006:
|
|
|
Three
Months Ended
December
31, 2006
|
|
|
Weighted
Average
|
|
|
|
|
Assumptions:
|
|
|
|
|
Expected
volatility
|
|
|
61.2
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
Risk-free
interest rate
|
|
|
5.10
|
%
|
|
Expected
term (in years)
|
|
|
10.0
|
|
|
Fair
value of options granted
|
|
$
|
0.95
|
|
The
following table summarizes the Company’s option activity during the three months
ended December 31, 2007:
Option
Activity:
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
at September 30, 2007
|
|
|
2,745,980
|
|
|
$
|
1.37
|
|
|
Granted
|
|
|
0
|
|
|
|
-
|
|
|
Exercised
|
|
|
0
|
|
|
|
-
|
|
|
Expired
or forfeited
|
|
|
0
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,745,980
|
|
|
$
|
1.37
|
|
The
following table summarizes the stock options outstanding and exerciserable
at
December 31, 2007:
|
|
|
Number
Outstanding
At
12/31/07
|
|
|
Wghted.
Avg.
Remaining
Life
|
|
|
Wghted.
Avg.
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exerciserable
At
12/31/07
|
|
|
Wghted,
Avg.
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Total
|
|
|
2,745,980
|
|
|
|
5.57
|
|
|
$
|
1.37
|
|
|
$
|
3,410,236
|
|
|
|
2,638,480
|
|
|
$
|
1.37
|
|
|
$
|
3,266,186
|
|
The
aggregate intrinsic value in the table above is before income taxes, based
on
the Company’s closing stock price of $2.61 as of the last business day of the
period ended December 31, 2007. As of December 31, 2007, the Company
had unrecognized compensation expenses of $101,738 related to unvested stock
options. These expenses will be recognized over approximately 1.75
years.
Restricted
Stock
The
Company issues restricted stock to employees and consultants. Such issuances
may
have vesting periods that range from one to two years or the issuances may
be
contingent on continued employment for periods that range from one to two years.
In addition, the Company has issued restricted stock awards to certain employees
that contain vesting provisions or provide for future issuance contingent upon
the achievement of pre-established performance targets.
As
of
December 31, 2007, there was approximately $135,000 of unrecognized
compensation cost related to non-vested restricted stock compensation
arrangements granted under the incentive plans. The expense will be recognized
over approximately 0.75 years.
The
Company granted 38,000 shares of restricted stock during the first quarter
of
fiscal 2008. The fair value of the awards granted was approximately $88,000.
All
such shares of restricted stock vest between September 30 and November 1,
2008, provided the grantee has not terminated service prior to the vesting
date.
The Company granted 32,000 shares of restricted stock during the first quarter
of fiscal 2007. The fair value of the awards granted was approximately $40,000.
All of these shares vested on September 30, 2007. An additional 150,000 shares
of restricted stock vested on December 31, 2007.
The
Company recognized share-based compensation expense for restricted stock of
approximately $127,000 and $193,000 in selling, general and administrative
expenses in the statement of operations for the three months ended December
31,
2007 and December 31, 2006, respectively.
No
shares
of restricted stock were forfeited during the three months ended December 31,
2007 or December 31, 2006.
NOTE
6 -
Stock Repurchase
Program
On
January 17, 2007, the Company announced a Stock Repurchase Program under the
terms of which up to a million shares of its common stock could be purchased
during the subsequent twelve months. Through December 31, 2007, the
Company has purchased 310,400 shares. The Board has approved the
continuation of this program through December 31, 2008.
|
Issuer
Purchases of Equity Securities:
|
|
Details
of Treasury Stock Purchases for the 12 Months
|
|
|
Period:
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
Per
Share
|
|
|
Total
Number
of
Shares Purchased
As
Part of Publicly
Announced
Program
|
|
|
Maximum
Number
of
Shares that May
Yet
be Purchased
Under
the Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
17, 2007 – September 30, 2007
|
|
|
173,400
|
|
|
$
|
2.12
|
|
|
|
173,000
|
|
|
|
826,600
|
|
|
October
1, 2007 – October 31, 2007
|
|
|
10,100
|
|
|
$
|
2.24
|
|
|
|
10,100
|
|
|
|
816,500
|
|
|
November
1, 2007 – November 30, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
December
1, 2007 – December 31, 2007
|
|
|
126,900
|
|
|
$
|
2.62
|
|
|
|
126,900
|
|
|
|
689,600
|
|
|
Quarterly
Subtotal
|
|
|
137,000
|
|
|
$
|
2.59
|
|
|
|
137,000
|
|
|
|
|
|
|
Total
|
|
|
310,400
|
|
|
$
|
2.33
|
|
|
|
310,400
|
|
|
|
689,600
|
|
NOTE
7 -
Industry Segments
and
Financial Information About Foreign and Domestic Operations
The
Company currently operates primarily in one industry segment which includes
the
development, manufacture and marketing of consumer health care
products.
The
Company operates in foreign and domestic regions. Information about the
Company's operations by geographic area is as follows:
|
|
Net
Sales to External Customers
For
the Three Months Ended December 31,
|
Long-Lived
Assets As of
|
|
|
December
31,
|
September
30,
|
|
|
2007
|
|
2006
|
|
2007
|
2007
|
|
South
Africa
|
$1,036
|
(1)
(2)
|
$ 977
|
(1)
(2)
|
$ -
|
$ -
|
|
Zimbabwe
|
1,133
|
(1)
|
797
|
(1)
|
-
|
-
|
|
France
|
334
|
(1)
|
678
|
(1)
|
-
|
-
|
|
United
States
|
653
|
|
550
|
|
218
|
226
|
|
Brazil
|
*
|
|
*
|
|
-
|
-
|
|
Venezuela
|
*
|
|
*
|
|
-
|
-
|
|
Zambia
|
*
|
|
411
|
|
-
|
-
|
|
Namibia
|
658
|
|
*
|
|
-
|
-
|
|
Tanzania
|
*
|
|
247
|
|
-
|
-
|
|
India
|
*
|
|
*
|
|
214
|
225
|
|
United
Kingdom
|
*
|
|
*
|
|
361
|
315
|
|
Malaysia
|
*
|
|
*
|
|
932
|
864
|
|
Other
|
1,921
|
|
539
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
$5,735
|
|
$4,199
|
|
$1,725
|
$1,630
|
|
*
Less than 5 percent of total net sales
(1)
Comprised
of a customer that is considered to be a major customer (exceeds
10% of
net sales).
(2)
The
revenue amount is a current outstanding accounts receivable balance
as of
December 31, 2007.
|
NOTE
8 -
Contingent
Liabilities
The
testing, manufacturing and marketing of consumer products by the Company entail
an inherent risk that product liability claims will be asserted against the
Company. The Company maintains product liability insurance coverage for claims
arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
NOTE
9 -
Deferred Grant
Income
The
Company receives grant monies from the British Linkage Challenge Fund to help
the Company defray certain expenses and the cost of capital expenditures related
to a specific project. The underlying project relates to the
development of a linkage between the UK subsidiary and Hindustan Latex Limited,
in India, to do end-stage manufacturing of the female condom and develop the
market for the product in that country. The grant received is split
between the Company and Hindustan Latex Limited pro-rata to their respective
expenditure on the project.
The
Company utilized the general precepts of U.S. GAAP and the principles of
matching and conservatism to determine how to account for the grant monies
received. The Company also utilized the guidance
of International Accounting Standard No. 20 – Accounting for
Government Grants and Disclosure of Government Assistance to further support
the
Company's accounting treatment of the grant received. The Company
allocates its share of the grant monies to capital and expense pro-rata to
the
respective cost allocated to the project. Grant proceeds for expenses are
credited to income in the quarter incurred. Grant proceeds for capital
expenditure are deferred and released to income in line with the depreciation
of
the relevant assets.
NOTE
10
–
Income
Taxes
The
Company accounts for income taxes using the liability method, which requires
the
recognition of deferred tax assets or liabilities for the tax-effected temporary
differences between the financial reporting and tax bases of our assets and
liabilities, and for net operating loss and tax credit
carryforwards.
During
2007, the Company recorded an income tax benefit of $825,000. This benefit
consisted of a $825,000 reduction in the valuation allowance related to a
portion of our deferred tax assets that will more likely than not be realized,
based on future projected taxable income. In evaluating our ability to realize
our deferred tax assets we consider all available positive and negative evidence
including our past operating results and our forecast of future taxable income.
In determining future taxable income, we make assumptions to forecast U.S.
federal, U.S. state, and international operating income, the reversal of
temporary differences, and the implementation of any feasible and prudent tax
planning strategies. These assumptions require significant judgment regarding
the forecasts of future taxable income, and are consistent with the forecasts
used to manage our business. We intend to maintain the remaining valuation
allowance until sufficient further positive evidence exists to support further
reversals of the valuation allowance. Our income tax expense recorded for the
three months ended December 31, 2007 has been reduced by an offsetting decrease
in our valuation allowance. Accordingly, no income tax or benefit has
been recognized for the three months ended December 31, 2007.
In
September, 2006, FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 developed
a
two-step process to evaluate a tax position and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted this
interpretation on October 1, 2007. The Company has not recorded a reserve for
any tax positions for which the ultimate deductibility is highly certain but
for
which there is uncertainty about the timing of such
deductibility. The Company files tax returns in all appropriate
jurisdictions. The open tax years are those years ending September
30, 2004 to September 30, 2007, which statutes expire in
2008-2011. As of December 31, 2007, the Company has no liability for
unrecognized tax benefits. The adoption and implementation of FIN 48
had no effect on the Company’s income from operations, net income or basic and
diluted earnings per share for the period ended December 31, 2007.
The
Company recognizes interest and penalties related to uncertain tax positions
as
income tax expense as incurred. No expense for interest and penalties
was recognized for the three months ended December 31, 2007.
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS
General
The
Female Health Company ("FHC" or the "Company") manufactures, markets and sells
the female condom (FC), the only product under a woman's control that is
approved by the U.S. Food and Drug Administration (FDA) to provide
dual protection against unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
FC
has
undergone extensive testing for efficacy, safety and acceptability, not only
in
the United States but also in many countries around the world. Certain of these
studies show that having FC available allows women to have more options,
resulting in an increase in protected sex acts and a decrease in STDs, including
HIV/AIDS.
The
product is currently sold or available through various channels in 116
countries. It is commercially marketed directly to consumers in 15 countries
by
various country specific partners, including in the United States, the United
Kingdom, Canada and France. Currently, public sector female condom programs
in
various stages are ongoing in over 90 countries.
Product
FC
is
made of polyurethane, a thin but strong material which is resistant to rips
and
tears during use. FC consists of a soft, loose fitting sheath and two flexible
O
rings. One of the rings is used to insert the device and helps to hold it in
place. The other ring remains outside the vagina after insertion. FC lines
the
vagina, preventing skin-to-skin contact during intercourse. FC is pre-lubricated
and disposable and is recommended for use during a single sex act.
In
September, 2005, FHC announced that it had completed development of FC2, its
second generation female condom. FC2 has the same physical design, safety and
efficacy profile as FC. Manufactured from a nitrile polymer, FC2 can be produced
more economically than the first generation product. FC2 has received the CE
Mark which allows the Company to market FC2 throughout the European Union
("EU"). In August 2006, the Company was notified by the World Health
Organization (WHO) that after a stringent technical review process regarding
design, product characteristics, quality control and manufacturing technology,
FC2 is in principle being manufactured to at least the same standard as the
polyurethane female condom, FC. In addition, the design and physical
characteristics of FC2, supported by the clinical data, suggest that FC and
FC2
are functionally equivalent, when used correctly. Based on this assessment,
WHO
has stated that FC2 is acceptable for bulk procurement by UN agencies subject
to
the standard quality assurance measures being applied prior to procurement.
The
FC2 pre-market approval application (PMA) submitted by the Company on January
8,
2008, was accepted for FDA review on January 28, 2008. That
acceptance marks the beginning of the FDA review process, which generally can
take up to 180 active review days. During this process, the FDA may
ask questions regarding the submission. The time spent on answering
such questions is not counted as review process time. Following the
FDA review, the submission’s merits will be reviewed and discussed by FDA’s
OB-GYN Device Advisory Panel. The final step to approval is
negotiation and approval of the product’s labeling. The entire
process may typically take up to 360 days.
Raw
Materials
Polyurethane
is the principal raw material the Company uses to produce FC. The Company has
entered into a supply agreement with Deerfield Urethane, Inc. for the purchase
of the Company's requirement of polyurethane. Under this agreement, the parties
negotiate pricing on an annual basis. The term of the agreement expires on
December 31, 2008 and automatically renews for additional one year periods
unless either party gives at least 12 months prior written notice of
termination.
The
principal raw material used to produce FC2 is a nitrile polymer. While general
nitrile formulations are available from a number of suppliers, the Company
has
chosen to work closely with the technical market leader in synthetic polymers
to
develop a grade ideally suited to the bio-compatibility and functional needs
of
a female condom. The supplier has agreed that the Company is the sole
and exclusive owner of the unique polymer formulation that was developed for
FC2.
Global
Market Potential
It
is
more than twenty years since the first clinical evidence of AIDS was noted.
HIV/AIDS is the most devastating pandemic that humankind has faced in recorded
history. The Joint United Nations Programme on HIV/AIDS (“UNAIDS”) in its
December 2006 Aids Epidemic Update reported that 33 million people globally
were living with HIV. Approximately 2.5 million new cases of HIV will be
reported this year while about 2 million people will have died from the disease.
Women now comprise the majority of the new cases in many areas of the world.
In
a published paper by Dr. Colin Mathers and Dejan Loncar of the WHO, “Projections
of Global Mortality and Burden of Disease from 2002 to 2030," they estimate
that
at least 117 million people will have died of or will have AIDS by
2030.
In
2006,
the Centers for Disease Control and Prevention reported that the HIV/AIDS
epidemic is taking an increasing toll on women and girls in the United
States. Women of color, particularly Black women, have been
especially hard hit and represent the majority of new HIV and AIDS cases among
women, and the majority of women living with the disease. Black women
accounted for 67% of AIDS cases among women aged 13 and older diagnosed in
2005,
but only 12% of the U.S. population of women. Latinas accounted for
16% of estimated AIDS cases in 2005, compared to 13% of the female population
aged 13 and over.
For
the
most recent year in which data are available (2002), the Centers for Disease
Control and Prevention reported that HIV infection was:
|
·
|
the
leading cause of death for African American women aged 25-34
years;
|
|
·
|
the
3
rd
leading cause of death for African American women aged 35-44 years;
and
|
|
·
|
the
4
th
leading cause of death for African American women aged 45-54 years
and for
Hispanic women aged 35-44.
|
Most
HIV/AIDS diagnoses among women are due to heterosexual transmission (71% in
2005) followed by injection drug use (27%).
The
Condom Market
The
global male condom market (public and private sector) is estimated to be $3
billion. The global public sector market for male condoms is estimated to be
between 6 and 9 billion units annually. Given the rapid spread of HIV/AIDS
in
India and China, UNAIDS estimates that the annual public sector demand for
condoms, both male and female, will reach 19 billion units within the next
ten
years.
The
FC
Female Condom and the Male Condom
Currently,
there are only three FDA approved products marketed that prevent the
transmission of HIV/AIDS through sexual intercourse: the male latex condom,
the
male polyurethane condom and the FC female polyurethane condom. FC is the only
FDA approved product whose use is controlled by women that prevents sexually
transmitted diseases including HIV/AIDS. It provides women dual protection
against STD’s (including HIV/AIDS) and unintended pregnancy. It is also an
alternative when male condoms are not used for reasons of latex sensitivity
or
choice.
Studies
show that both FC1’s polyurethane and FC2’s nitrile polymer are safe, strong
materials and that method failure rates are similar to that of male
condoms. The female condom offers a number of benefits over natural
rubber latex, the material that is most commonly used in male condoms.
Unlike natural rubber latex, both polyurethane and the nitrile
polymer quickly transfer heat, so the female condom immediately warms to body
temperature when it is inserted, which may enhance pleasure and sensation during
use. Unlike the male condom, the female condom may be inserted in advance of
arousal, eliminating disruption during sexual intimacy. It is not dependent
on
the male erection, does not require immediate withdrawal and is not tight or
constricting. The female condoms can be used with both oil and
water-based lubricants, unlike natural rubber latex male condoms which can
be
used with water-based lubricants only. The products also offer an
alternative to natural rubber latex sensitive users (7% to 20% of the
population) who are unable to use male condoms without irritation. To the
Company's knowledge, there is no reported allergy to polyurethane to
date.
Numerous
clinical and behavioral studies have been conducted regarding use of FC. Studies
show that FC is found acceptable by women and their partners in many cultures.
Importantly studies also show that when FC is made available with male condoms
there is a significant increase in protected sex acts. The increase in
protected sex acts varies by country and averages between 10% and
35%.
Cost
Effectiveness
A
study
entitled "Cost-effectiveness of the female condom in preventing HIV and STDs
in
commercial sex workers in South Africa" was reported in the
Journal of Social Science
and
Medicine
in 2001. This study shows that making FC available is highly
cost effective in reducing public health costs in developing countries as well
as in the U.S.
In
October 2006, a study regarding FC2 entitled “Country-wide distribution of the
nitrile female condom (FC2) in Brazil and South Africa: a cost effectiveness
analysis” was published in
AIDS
. The study concludes
that expanded distribution of FC2 in Brazil and South Africa may avert hundreds
to thousands of HIV infections annually at an incremental cost to government
or
donors that is less than that of antiretroviral therapy. The study also found
that if only 16.6 million female condoms were distributed in
South
Africa, almost 10,000 HIV infections would be prevented. If 53.7 million female
condoms were distributed, 32,000 HIV infections would be prevented. Comparing
the dollar value of health care costs averted with the cost of distributing
the
female condoms, the total cost savings would be between $5.3 million and $35.7
million. Similarly, if 26.2 million female condoms were distributed in Brazil,
600 HIV infections would be averted. If 84.8 million female condoms were
distributed, 2,000 new HIV infections would be prevented. In total, the savings
in Brazil alone could range from $1.1 million to $27 million.
Female
Condom Reuse
Studies
have shown that FC can be reused up to five times. WHO’s website includes the
proper procedure for the washing and preparation of FC if it is going to be
reused. WHO, UNAIDS and FHC concur that FC should only be reused when a new
female condom is not available. FC2 is not reusable.
Worldwide
Regulatory Approvals
FC
received Pre-Market Approval ("PMA") 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 FC
throughout the European Union. In addition to the United States and the EU,
several other countries have formally reviewed and approved FC for sale,
including Canada, Australia, Japan and India.
The
Company believes that FC's PMA and FDA classification as a Class III Medical
Device create a significant barrier to entry in the U.S. market. 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.
FC2
received the CE mark which allows it to be marketed throughout the European
Union. FC2 has also been approved by regulatory authorities in both Brazil
and
India. The Company submitted a pre-market approval application (PMA) for FC2
which was accepted for FDA review on January 28, 2008.
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 FC and FC2.
Strategy
The
Company’s strategy is to fully develop the market for FC and FC2 on a global
basis. In doing so, it has developed contacts and relationships with global
public health sector organizations such as WHO, the United Nations Population
Fund (UNFPA), UNAIDS, the U.S. Agency for International Development (USAID),
country-specific health ministries and non-governmental organizations (NGOs),
and commercial partners in various countries. Because the Company has unique
distribution channels and minimum sales and marketing expense, volume increases
will not result in a corresponding increase in operating expenses. To provide
its customers with technical sales support, the Company has placed
representatives in the major regions of the world: Asia, Africa, Europe, North
America and Latin America. The Company manufactures the first generation
product, FC, in London, England. The second generation product, FC2, is being
manufactured in Selangor D.E., Malaysia and in Cochin, India.
To
accelerate market penetration and increase volume, the Company developed FC2,
a
nitrile polymer product which is less costly to manufacture than FC. In August
2006, the Company received notice from WHO that after a stringent technical
review process regarding design, product characteristics, quality control and
manufacturing technology, FC2 is in principle being manufactured to at least
the
same standard as the polyurethane female condom, FC. In addition, the design
and
physical characteristics of FC2, supported by the clinical data, suggest that
FC
and FC2 are functionally equivalent, when used correctly. Based on this
assessment, WHO has stated that FC2 is acceptable for bulk procurement by UN
agencies subject to the standard measures being applied prior to
procurement.
Commercial
Markets - Direct to Consumers
The
Company markets FC directly in the United Kingdom. The Company has distribution
agreements with commercial partners which market directly to consumers in 15
countries, including the United States, Brazil, Canada, Mexico, Spain, France,
Japan and India. These agreements are generally exclusive for a single country.
Under these agreements, the Company manufactures and sells the female condom
to
the distribution partners, who, in turn market and distribute the product to
consumers in the established territory.
Relationships
and Agreements with Public Sector Organizations
The
Company has an agreement with UNAIDS to supply FC to developing countries at
a
reduced price which can be negotiated each year based on the Company's cost
of
production. The current price per unit ranges between £0.42 and £0.445 (British
pounds sterling), or approximately $0.84 to $0.89, depending on contractual
volumes. Under the agreement, UNAIDS and the Company cooperate in educational
efforts and marketing FC in developing countries. Sales of FC are made directly
to international public agencies and to public health authorities in each
country at the price established by the agreement with UNAIDS. The agreement
expires on December 31, 2008, but is automatically renewed for one year
unless either party gives at least 90 days prior written notice of termination.
FC is available in over 90 countries through public sector
distribution.
In
May
2006, the Company received an initial order for 500,100 FC female condoms from
the National Aids Control Organization (NACO) of the Ministry of Health &
Family Welfare, Government of India. The order was placed through UNFPA, the
United Nations Population Fund. India faces a significant threat of HIV/AIDS,
with existing cases estimated to be 2.5 – 3 million. Since May, 2006,
the Indian Government has developed and tested prevention programs which include
female condoms in six high-incidence states. The government concluded its
assessment of the test program in December, 2007. A survey conducted
as part of the assessment process shows a high acceptance of the female
condom.
The
Company sells the female condom in the United States to city and state public
health clinics as well as not-for-profit organizations such as Planned
Parenthood. The female condom is currently available in 63 locations
in New York City, including both community based organizations and the N.Y.C.
Department of Health and Mental Hygiene units, it is being distributed as part
of New York City’s Female Condom Education and Distribution Project being
conducted by the Bureau of HIV/AIDS Prevention and Control.
Manufacturing
Facilities
FC
The
Company manufactures FC in a 40,000 square-foot leased facility in London,
England. Manufacturing capacity at this facility is expandable to
60 million units per year at a capital expenditure of less than $1 million
for the purchase of additional equipment.
FC2
The
Company began end-stage production of FC2 within a 1,900 square foot leased
facility located in Selangor D.E., Malaysia. On September 1, 2007, the
Company leased a 16,000 sq. ft. production facility, also in Selangor D.E.,
Malaysia, to house the expanding operations also. Operations were re-located
to
the newly leased facility in December, 2007, at which time the lease on the
original space terminated. The Company’s FC2 manufacturing capacity
in Malaysia is 30 million units annually.
The
Company’s India-based FC2 end-stage production capacity is located at a facility
owned by its India business partner, Hindustan Latex Limited (HLL) in the Cochin
Special Export Zone. Production began at that facility in
December 2007. The present FC2 capacity at that facility is 7.5
million units per year.
FHC’s
total FC2 production capacity is currently 37.5 million units
annually. The Company intends to expand its capacity at existing
locations and/or manufacture at additional locations as the demand for FC2
increases.
Government
Regulation
In
the
U.S., FC is regulated by the FDA. Pursuant to section 515(a)(3) of the Safe
Medical Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the PMA if the FDA finds that FC is unsafe
or ineffective, or on the basis of new information with respect to the device,
which, when evaluated together with information available at the time of
approval, indicates a lack of reasonable assurance that the device is safe
or
effective under the conditions of use prescribed, recommended or suggested
in
the labeling. Failure to comply with the conditions of FDA approval invalidates
the approval order. Commercial distribution of a device that is not in
compliance with these conditions is a violation of the SMA Act. The Company
submitted a pre-market approval application (PMA) for FC2 which was accepted
for
FDA review on January 28, 2008.
Competition
The
Company's female condom participates in the same market as male condoms but
is
not seen as directly competing with male condoms. Rather, the Company believes
that providing FC is additive in terms of prevention and choice. Latex male
condoms cost less and have brand names that are more widely recognized than
FC.
In addition, male condoms are generally manufactured and marketed by companies
with significantly greater financial resources than the Company.
Medtech
Products Ltd. ("MP"), a male latex condom company with a manufacturing facility
in Chennai, India, has developed a natural latex female condom. MP's female
condom has been marketed under various names including V-Amour, VA Feminine
Condom and L’Amour. USAID and Family Health International (FHI) are currently
evaluating the MP female condom for consideration to move into Phase 3 clinical
study.
The
manufacturing process has a CE mark for distribution in Europe and may be
available in other countries. MP received the Indian Drug Controller approval
in
January 2003. The product has not received FDA approval nor has it been listed
as an essential product by WHO.
It
is
also possible that other parties may develop a female condom. These competing
products could be manufactured, marketed and sold by companies with
significantly greater financial resources than those of the
Company.
Patents
and Trademarks
The
Company currently holds product and technology patents for FC in the United
States. The Company’s current United States patents expire between 2009 and
2014. The Company understands these U.S. patents to cover FC as sold. The
patents are generally directed to the structural aspects of the product.
While there can be no assurance, these patents could provide the Company with
protection against copycat products entering the U.S. market during the pendency
of the patents. The Company also has patents covering technology and products
relating to FC in Japan, the United Kingdom, France, Italy, Germany, Spain,
the
European Patent Convention, Canada, the People’s Republic of China, South Korea
and Australia. These patents expire from 2008 to
2013. Patent applications for FC2 are pending in the U.S. and in
other countries around the world through the Patent Cooperation Treaty. The
applications cover the key aspects of the second generation female condom,
including its overall design and manufacturing process.
The
Company has the registered trademark “FC Female Condom” in the United
States. The Company has also secured, or applied for, 12 trademarks in 22
countries to protect the various names and symbols used in marketing the product
around the world. These include "femidom" and "femy", “Reality” and others. In
addition, the experience that has been gained through years of manufacturing
the
FC female condom has allowed the Company to develop trade secrets and know-how,
including certain proprietary production technologies that further secure its
competitive position. The Company has registered the trademark “FC2 Female
Condom” in the United States.
Overview
The
Company manufactures, markets and sells the FC female condom, the only
FDA-approved product under a woman's control which provides dual protection
against unintended pregnancy and sexually transmitted diseases, including
HIV/AIDS. During 2003, the Company started developing a second
generation female condom, FC2, which was completed in 2006. The first
substantial sales of FC2 occurred in the second quarter of fiscal 2007.The
Company believes that FC2 will result in a significant reduction in production
costs and accelerate growth.
Revenues
. The
Company's revenues are derived from sales of the female condom, its only
product, and are recognized upon shipment of the product to its
customers. The Company's strategy is to develop a global market and
distribution network for its product by completing partnership arrangements
with
companies with the necessary marketing and financial resources and local market
expertise. The Company's customers include the
following:
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The
Company sells the female condom to the global public sector under
the
umbrella of its agreement with UNAIDS. This agreement
facilitates the availability and distribution of the female condom
at a
reduced price based on the Company's cost of production. The
current price per unit ranges between £0.42 and £0.445 (British pounds
sterling), or approximately $0. 84 to $0.89. Currently, the
female condom is available in over 90 countries through public sector
distribution.
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The
Company also sells FC to the U.S. Agency for International Development
(USAID) for use in USAID prevention programs in developing
countries.
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The
Company sells the female condom in the United States to city and
state
public health clinics as well as not-for-profit organizations such
as
Planned Parenthood. The female condom is currently available in
63 locations in New York City, including both community-based
organizations and the N.Y.C. Department of Health and Mental Hygiene
units. It is being distributed as part of New York City‘s
Female Condom Education and Distribution Project being conducted
by the
Bureau of HIV/AIDS Prevention and
Control.
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The
Company markets FC directly in the United Kingdom. The Company has
distribution agreements with commercial partners which market directly
to
consumers in 15 countries, including the United States, Brazil, Canada,
Mexico, Spain, France, Japan and India. These agreements are generally
exclusive for a single country. Under these agreements, the Company
manufactures and sells the female condom to the distributor partners,
who,
in turn market and distribute the product to consumers in the established
territory.
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Significant
quarter to quarter variations may result from time to time due to the timing
and
shipment of large orders and not any fundamental change in the Company's
business. Because the Company manufactures FC in a leased facility
located in London, England and FC2 in a leased facility located in Malaysia,
a
portion of the Company's operating costs occur in foreign markets. While a
material portion of the Company's future sales are likely to be in foreign
markets, all sales are denominated in British pounds sterling or United States
dollars. Manufacturing costs and sales to foreign markets are subject to normal
currency risks associated with changes in the exchange rate of British pounds
sterling relative to the United States dollar. For the first three months of
fiscal 2008, 61% of the Company’s net revenues, 79% of the Company’s cost of
products sold and 37% of the Company’s operating expenses were affected by
changes in the exchange rate of foreign currencies relative to the United States
dollar.
On
an
ongoing basis, management continues to evaluate its commercial transactions
and
is prepared to employ currency hedging strategies when it believes such
strategies are appropriate. In addition, some of the Company's future
international sales may be in developing nations where dramatic political or
economic changes are possible. Such factors may adversely affect the Company's
results of operations and financial condition. For the first three months of
fiscal 2008, the Company estimates that the favorable net impact of the exchange
rate fluctuations was approximately $39,000.
Expenses
. The
Company manufactures FC at its facility located in the United Kingdom and FC2
at
its facility located in Selangor D.E., Malaysia. The Company's cost
of products sold consists primarily of direct material costs, direct labor
costs
and indirect production and distribution costs. Direct material costs
include raw materials used to make the female condom, principally polyurethane
for FC and a latex hybrid
for
FC2. Indirect product costs include logistics, quality control, and
maintenance expenses, as well as costs for helium, nitrogen, electricity and
other utilities.
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
The
Company has experienced increased costs of products, supplies, salaries and
benefits, and increased general and administrative expenses. In the
first three months of fiscal 2008, the Company has, where possible, increased
selling prices to offset such increases in costs.
As
noted
above, the Company's manufacturing costs are subject to currency risks
associated with changes in the exchange rate of British pounds sterling relative
to the United States dollar. To date, the Company's management has
not deemed it necessary to utilize currency hedging strategies to manage its
currency risks. A decrease of the value of the U.S. dollar compared
to British pounds sterling has the effect of increasing the Company's cost
of
sales and decreasing its gross profit margin.
RESULTS
OF
OPERATIONS
THREE
MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2006
The
Company had net revenues of $5,734,751 and net income attributable to common
stockholders of $813,968 or $0.03 per share for the three months ended December
31, 2007 compared to net revenues of $4,198,879 and net loss attributable to
common stockholders of $(226,924) or $(0.01) per share for the three months
ended December 31, 2006.
Gross
profit increased $1,087,718, or 85%, to $2,366,116 for the three months ended
December 31, 2007 from $1,278,398 for the three months ended December 31, 2006.
Gross profit for the quarter ending December 31, 2007 was positively impacted
by
product mix, with a significant number of FC2 units versus negligible FC2 sales
in the quarter ended December 31, 2006. Further enhancing the gross
margin was a more favorable FC average sales price per unit compared to the
same
period in fiscal year 2007.
Net
revenues increased $1,535,872, or 37%, for the three months ended December
31,
2007 compared with the same period last year. The strong revenue performance
the
Company experienced was attributable to significant growth in demand for the
product.
Significant
quarter to quarter variations result from time to time due to the timing and
shipment of large orders and production scheduling rather than fundamental
change in the business. The Company routinely notes the potential for such
variations in its press releases and SEC filings.
Cost
of
goods sold increased $448,154, or 15%, to $3,368,635 for the three months ended
December 31, 2007 from $2,920,481 for the same period last year. The increase
is
due to increased unit sales.
Advertising
and promotion expenditures decreased $17,520 to $41,518 for the three months
ended December 31, 2007 from $59,038 for the same period in the prior year.
The
decrease relates to decreased use of an outside consulting firm engaged for
public relations.
Selling,
general and administrative expenses increased $120,762, or 9%, to $1,493,824
for
the three months ended December 31, 2007 from $1,373,062 for the three months
ended December 31, 2006.The slight increase was caused by increased employment
costs related to new positions added within the past twelve months partially
offset by reduced consulting fees.
Research
and development cost increased $36,425 to $101,129 for the three months ended
December 31, 2007 from $64,704 for the same period in the prior year. The costs
in the first quarter of fiscal 2007 relate primarily to initiating commercial
production of FC2 in Malaysia and India, and the fiscal year 2008 expenditures
relate to preparation of the FC2 PMA.
Factors
That May Affect Operating Results and Financial Condition
The
Company's future operating results and financial condition are dependent on
the
Company's ability to increase demand for the female condom and to
cost-effectively manufacture sufficient quantities of the female condom.
Inherent in this process are a number of factors that the Company must
successfully manage in order to achieve favorable future results and improve
its
financial condition.
Reliance
on a Single Product
The
Company expects to derive the vast majority, if not all, of its future revenues
from the female condom, its sole current product. While management believes
the
global potential for the female condom is significant, the ultimate level of
consumer demand around the world is not yet known.
Distribution
Network
The
Company's strategy is to develop a global distribution network for the female
condom by entering into partnership arrangements with financially secure
companies with appropriate marketing expertise. This strategy has resulted
in
numerous in-country distributions in the public sector, particularly in Africa,
Latin America and India. The Company has also entered into
several agreements for the commercialization of the female condom in
consumer sector markets around the world. However, the Company is dependent
on
country governments and global donors, as well as U.S. municipal and state
public health departments to continue AIDS/HIV/STD prevention programs that
include female condoms as a component of such programs. The Company’s commercial
market penetration is dependent on its ability to identify appropriate business
partners who will effectively market and distribute the female condom within
its
contractual territory. Failure by the Company's partners to successfully market
and distribute the female condom or failure of country governments to establish
and sustain HIV/AIDS prevention programs which include distribution of female
condoms, the Company’s inability to secure additional agreements with global
AIDS prevention organizations, or the Company’s inability to secure agreements
in new markets, either in the public or private sectors, could adversely affect
the Company’s financial condition and results of operations.
Inventory
and Supply
All
of
the key components for the manufacture of the female condom are essentially
available from either multiple sources or multiple locations within a
source.
Global
Market and Foreign Currency Risks
The
Company manufactures FC in a leased facility located in London, England and
FC2
in a leased facility located in Malaysia. 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.
For the first three months of fiscal 2008, 61% of the Company’s net revenues,
79% of the Company’s cost of products sold and 37% of the Company’s operating
expenses were affected by changes in the exchange rate of foreign currencies
relative to the United States dollar.
For
the
first three months of fiscal 2008, the Company estimates that the favorable
net
impact of the exchange rate fluctuations was approximately
$39,000. On an ongoing basis, management continues to evaluate its
commercial transactions and is prepared to employ currency hedging strategies
when it believes such strategies are appropriate. In addition, some of the
Company's future international sales may be in developing nations where dramatic
political or economic changes are possible. Such factors may adversely affect
the Company's results of operations and financial condition.
Government
Regulation
The
female condom is subject to regulation by the FDA pursuant to the federal Food,
Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign regulatory
agencies. Under the FDC Act, medical devices must receive FDA clearance before
they can be sold. FDA regulations also require the Company to adhere to certain
"Good Manufacturing Practices," which include testing, quality control and
documentation procedures. The Company's compliance with applicable regulatory
requirements is monitored through periodic inspections by the FDA. The failure
to comply with applicable regulations may result in fines, delays or suspensions
of clearances, seizures or recalls of products, operating restrictions,
withdrawal of FDA approval and criminal prosecutions. The Company's operating
results and financial condition could be materially adversely affected in the
event of a withdrawal of approval from the FDA.
Liquidity
and Sources of Capital
In
the
first quarter of fiscal 2008, the Company generated $1.3 million in positive
cash flow from operations as a result of increased sales volume and improved
gross margins. During the first quarter of fiscal 2007, cash used in operations
was $0.1 million as a result of a higher quarter-end receivable balances due
to
the timing of sales and inventory growth related to manufacturing
expansion.
At
December 31, 2007, the Company had working capital of $7.7 million and
stockholder’s equity of $8.2 million compared to working capital of $7.2 million
and stockholder’s equity of $7.4 million as of September 30, 2007.
The
Company believes its current cash position is adequate to fund operations of
the
Company in the near future, although no assurances can be made that such cash
will be adequate. However, the Company may sell equity securities to raise
additional capital and may borrow funds under its Heartland Bank credit
facility.
Presently,
the Company has two revolving notes with Heartland Bank, expiring July 1, 2008,
that allow the Company to borrow up to $1,500,000. These notes were extended
under the same terms as the initial notes dated May 19, 2004, with the exception
of the interest rate which has been reduced to prime plus 1% (prime rate was
7.25% at December 31, 2007). No new warrants were issued as part of the
extension of these notes. These notes are collateralized by substantially all
of
the assets of the Company. No amounts were outstanding under the revolving
notes
at December 31, 2007.
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 general and administrative expenses. In fiscal year
2007
and 2008 the Company has, where possible, increased selling prices to offset
such increases in costs.
Controls
and Procedures
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on
this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
It should be noted that in designing and evaluating the disclosure controls
and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures. The Company has designed its disclosure
controls and procedures to reach a level of reasonable assurance of achieving
desired control objectives and, based on the evaluation described above, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the
Company's disclosure controls and procedures were effective at reaching that
level of reasonable assurance.
There
was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934,
as amended) during the Company's most recently completed fiscal quarter that
has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.