T H E F E M A L E H E A LT H C O M P A N Y
A Thriving Future
Annual Report 2015
Thriving Growth...
43%
UNIT SALES
33%
NET REVENUE
69%
OPERATING INCOME
+500M female condoms sold in company history.
16% 10-year compound annual growth rate.
Yet the Need Remains...
ECONOMIC BURDEN OF WORLDWIDE TEEN PREGNANCIES
WOMEN AGED 15–19
are responsible for about 11% of all births
worldwide, while such adolescents
account for 23% of the overall burden of
disease (disability-adjusted life years)
associated with pregnancy and childbirth.
23%
11%
HIV/STIS CONTINUE TO INCREASE
20M
CDC NEW CASES
Estimates that nearly 20 million
new sexually transmitted infections
occur every year in this country,
half among young people aged
15–24, and account for almost $16
billion in health care costs.
215M
WOMEN
215 million women in the world still
do not have access to contraceptives.
1.4M
STI’S
1.4 million cases of chlamydia in
2014 represent the highest number
of annual cases of any condition ever
reported to the Centers for Disease
Control and Prevention.
Annual Report 2015 | 01
DEAR
SHAREHOLDERS,
The Female Health Company posted solid operating results
for 2015. FC2 unit sales totaled 61.0 million, up 43% over
2014 unit sales of 42.5 million.
Operating earnings totaled $6.6 million, with an operating
margin of 20%, up 69% over $3.9 million with a margin of
16% in 2014.
Net earnings totaled $4.3 million or $0.15 per diluted share,
up 79% over $2.4 million or $0.08 per diluted share.
The Company has federal and state net operating loss carry
forwards of $13.0 million and $12.6 million for income tax
purposes in the U.S. and $61.9 million in the U.K. which may
be used to reduce income taxes paid. For example, in 2015
the Company incurred income tax expenses of $2,341,004.
However, due to the tax loss carryforwards we only paid
$294,441 or 13% of the total income tax expense for a cash
saving of $2,046,563.
We are pleased that in 2015, the sale of 61.0 million FC2
female condoms saved lives through the prevention of
potentially fatal disease and contributed to family planning,
gender equity based women’s health care and the reduction
of health care costs.
However, as a significant shareholder, I was disappointed in
the decrease in shareholder value given the solid operating
results. I believe that the future outlook is positive. It is my
objective to produce solid operating results and concurrently
increase shareholder value.
I believe the future outlook is positive for three reasons.
• While there will continue to be year-to-year volatility,
I believe the global public sector market for female con-
doms will continue to grow for two reasons: First, the basic
global need for disease prevention and family planning.
Second, the advocacy of women’s groups worldwide for
universal access to female condoms on a gender equity
basis. For example, women account for more than 50%
of new HIV/AIDS cases but female condom availability is
less than 1% of that for male condoms.
The Female Health Company’s long-term results clearly
reflect this growth trend. The Company introduced the
first ever female condom, and subsequently has sold more
than 500 million units and has a 10-year compound annual
unit sales growth rate of 16%. We expect to remain the
market leader. Currently, the Company is investing in sig-
nificant female condom variations for future introduction
to accelerate this trend.
• Another key factor is the opportunity provided by changes
in the U.S. market. These changes including the following:
FC2 is now reimbursable under Obamacare, an increased
focus on disease prevention and non-hormonal birth
control, increased use of social media to market to young
women and online purchase of personal products, and
increased retailer interest in providing health services to
consumers. As a result, we believe there is new opportu-
nity to launch a direct-to-consumer promotion that will
complement public sector promotion, increase awareness
of FC2 and increase total U.S. sales. The Company is
investing in the development of this special program and
is completing an extensive study of the best way to capital-
ize on the opportunity. Based on the results of this study,
we expect to make decisions on this program in 2016.
• The Company has identified and is actively analyzing
specific diversification opportunities based on potential
contribution to shareholder value. The opportunities being
considered are proprietary. We expect to make decisions
on these opportunities in calendar 2016.
During calendar 2016, the Company plans to invest in the
development of FC2 Female Condom variations, the test
ing of a directtoconsumer promotion and diversification
activities.
Our objectives are twofold: Contribute to global health care
and increase shareholder value.
O.B. Parrish
Chairman and Chief Executive Officer
02 | The Female Health Company
THE FEMALE HEALTH COMPANY THRIVES ON...
SAVING LIVES AND
HELPING WOMEN
AROUND THE WORLD
female condoms over a threeyear period. The Female Health
Company was rewarded with a 20% share. The South Africa
Ministry of Health has called on FHC to collaborate with the
government in the development of a national training strat
egy for female condoms.
Brazil represents the largest number of people living with
HIV in Latin America. Due to progressive action from the
government, the HIV and AIDS epidemic in Brazil is classified
as stable at the national level, with a prevalence rate in the
general population of 0.4%. FHC was pleased to supply
Brazil’s prevention program with 28M FC2 condoms in 2015.
DEVELOPING THE GLOBAL
PUBLIC SECTOR MARKET
Fiscal 2015 was a year of many achievements. The market
for female condoms continued to grow, with a compounded
growth rate of 16% since 2005. The Female Health Company
benefitted from that market growth, selling more than 61
million units in total, the second highest unit sales year in the
history of the Company. The Female Health Company utilized
its position as market leader to increase strategic partner
ships and to increase its visibility on the global stage.
As many as 25.8 million people living with HIV are in sub
Saharan Africa, accounting for 70% of the global total. HIV
disproportionately affects young women with more than
40% of new infections among women aged 15–24.
For that reason we continued our relationships with in coun
try ground level advocacy. FHC created a novel business
model incorporating a Top Down approach into the existing
structure. FHC representatives meet directly with Ministries
of Health in country, demonstrating the value proposition
of the FC2.
South Africa has the largest and most high profile HIV epi
demic in the world, with an estimated 6.3 million people
living with HIV. To combat its spread, The South African
government issued a tender calling for the supply of 54M
WOMEN 15–24
40%
40% of new HIV
Infection are women
15–24.
SAVING LIVES AND
HELPING WOMEN
AROUND THE WORLD
Annual Report 2015 | 03
GROWING OUR PARTNERSHIPS
Working with strategic partners extends our reach and
broadens our connections. This year we signed an agree
ment with dance 4 life, a Netherlandsbased notforprofit
organization who specifically addresses the vulnerability
of young people, their specific needs and behavior.
To assist in our global training programs, FHC has forged an
alliance with the manufacturers of O Cube, a novel demon
stration model for the FC2 female condom. O Cube has
helped FHC grow demand and uptake in remote regions
where training and education is vital to patient acceptance.
To celebrate our achievement of 500M FC1 and FC2 con
doms distributed since launch, FHC cohosted a reception
with the Center for Health and Gender Equity (CHANGE)
during the U.S. Conference on AIDS in Washington D.C.
In attendance were over 100 global supporters, educators
and advocates for the FC2 female condom.
Global Female Condom Day represents a day of celebra
tion for women around the world who are empowered to
take protection and prevention into their own hands. FHC
sponsored events in the Netherlands, Kenya, Mozambique,
Malawi, Zambia, Zimbabwe, South Africa and the United
States, with the FC2 female condom at the center of the
GFCD activities.
STRENGTHENING DONOR COLLABOR ATION
The Female Health Company is thankful to our donor
partners whose generosity makes the FC2 available in 144
countries. Independent research shows that there is a con
dom gap in Africa, where the actual need may be as much
as three times the supply based on three FC2 per woman
per year. A joint UNFPA and USAID program titled “20 by 20”
is designed to assist private sector suppliers in streamlining
supply channels and in communications with Ministries of
Health to help bridge the gap, especially in the middle
income countries of Africa.
INCRE ASING OUR US PUBLIC SECTOR OUTRE ACH
The Female Health Company continued key initiatives and
expanded public health programs in the United States at
colleges, in cities and through industry associations. While
HIV/AIDS is now considered a chronic disease and rates in
the US are lower than developing nations, other sexually
transmitted diseases are on the rise, especially among
young people. One in four 18–24yearolds will contract
gonorrhea, syphilis or Chlamydia each year. For that reason,
FHC has targeted public sector programs aimed at schools
and cities with a large younger population.
18–24 YEAR OLDS
COST TO U.S. TAXPAYERS
25%
will contract gonorrhea,
syphilis or chlamydia
each year.
$21B
Unintended pregnancies cost
American taxpayers $21 billion each
year, according to a new analysis by
the Guttmacher Institute.
04 | The Female Health Company
Our College minigrant program was launched in 2013
to encourage schools to add FC2 programming to their
orientation meetings, sexual health curriculum, and training
at campus clinics. In fiscal 2015, FHC added 20 new minigrant
recipients, taking the total to 72 schools since inception.
FHC signed a cooperative agreement with the National
Coalition of Sexually Transmitted Disease Directors (NCSD)
to combat the increase in sexually transmitted infections.
The program resulted in the nationally advertised program,
“Condoms Still Work” with FC2 front and center. The theme
centered on communicating the importance of condoms,
including FC2, in any HIV/STI prevention program.
The Female Health Company participated in many key trade
shows and conferences with booths, sponsored receptions
and speaking engagements.
EXPANDING OUR US RETAIL PRESENCE
In 2015 the FHC took a step towards expanding our presence
into the retail market by evaluating the opportunity for FC2
in the consumer segment and making the FC2 female con
dom available through internet purchasing.
Two sets of consumer focus groups were conducted to
assess consumer potential. What appealed to customers
is that FC2 is a nonhormonal contraceptive option, has no
preservatives, and is nonallergenic.
FC2 CAN BE PURCHASED ONLINE AT
SHOPFEMALEHEALTH.COM, WALGREENS.COM,
DRUGSTORE.COM, AMAZON.COM AND QUEST.COM.
FHC launched an online shopping option on our home
website. At ShopFemaleHealth.com the consumer can pur
chase the retail 3pack, access a user video and learn about
the product.
ENGAGING HE ALTH CARE PROFESSIONALS
The Female Health Company engaged health care profes
sionals by forming a Medical Advisory Board. The advisory
board consists of private sector ob/gyns, private sector
sexual health professionals, teachers and researchers and
public health practitioners. The MAB noted that with STIs
on the rise, unintended pregnancies reaching 50% and
women in general opposed to the side effects of hormonal
contraceptives, the FC2 female condom is an important
option for health care providers to offer.
Especially important is the fact that FC2 is 100% reimburs
able under the Affordable Care Act with a prescription
under most insurance plans. This benefit allows the HCPs
to write a prescription and provide FC2 to patients at no
outofpocket cost.
MINI-GRANTS AWARDED
97
72 Colleges & Universities have
been awarded FC2 mini-grants
since the program began in
Spring 2013.
T H E F E M A L E H E A LT H C O M P A N Y
10-K Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(cid:2)
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2015
For the transition period from to
Commission file number 1-13602
The Female Health Company
(Name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of incorporation or organization)
39-1144397
(I.R.S. Employer Identification No.)
515 N. State Street, Suite 2225, Chicago, Illinois
(Address of principal executive offices)
60654
(Zip Code)
Registrant’s telephone number, including area code (312) 595-9123
Securities registered under Section 12(b) of the Act:
Title of each class
Common stock, $.01 par value
Name of each exchange on which registered
NASDAQ Stock Market
Securities registered under Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:2) No (cid:1)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. (cid:2)
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(cid:2)
(cid:2)
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated filer
(cid:1)
(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No (cid:1)
The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2015, was approximately $75.0
million based on the per share closing price as of March 31, 2015 quoted on the NASDAQ Capital Market for the registrant’s common
stock, which was $2.83.
There were 29,023,832 shares of the registrant’s common stock, $0.01 par value per share outstanding at November 27, 2015.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2016 Annual Meeting of the Shareholders of the Registrant are incorporated by reference into
Part III of this report.
As used in this report, the terms “we,” “us,” “our,” “The Female Health Company,” “FHC” and the “Company” mean The Female
Health Company and its subsidiaries collectively, unless the context indicates another meaning, and the term "common stock" means
shares of our common stock, par value of $0.01 per share.
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Table of Contents
THE FEMALE HEALTH COMPANY
FORM 10-K
September 30, 2015
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Signatures
Page
5
12
15
16
16
16
17
19
20
26
26
26
26
26
28
28
28
29
29
30
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FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K which are not statements of historical fact are intended to be, and are
hereby identified as, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could,"
"expect," "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "will," "would" or the negative of these terms or
other words of similar meaning. These statements are based upon the Company's current plans and strategies, and reflect the
Company's current assessment of the risks and uncertainties related to its business, and are made as of the date of this report. The
Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, those described
under the caption "Risk Factors" in Item 1A. of this report. The Company undertakes no obligation to make any revisions to the
forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this
report.
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Table of Contents
PART I
Item 1. Business
General
The Female Health Company manufactures, markets, and sells the FC2 Female Condom (FC2). FC2 is the only currently available
female-controlled product approved by the U.S. Food and Drug Administration (FDA) and cleared by the World Health Organization
(WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy and sexually transmitted infections
(STIs), including HIV/AIDS. FC2 was approved by the FDA as a Class III medical device in 2009.
FC2’s primary usages are for disease prevention and family planning, and the public health sector is the Company’s main market.
Within the public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need
but cannot afford to buy such products for themselves.
The Company has a relatively small customer base, with a limited number of customers who generally purchase in large quantities.
Over the past few years, significant customers have included large global agencies, such as the United Nations Population Fund
(UNFPA) and the United States Agency for International Development (USAID), through its facilitator, John Snow, Inc., Sekunjalo
Investments Corporation (PTY) Ltd (Sekunjalo), the Company’s distributor in the Republic of South Africa (RSA), and the Brazil
Ministry of Health either through UNFPA or Semina Indústria e Comércio Ltda (Semina), the Company’s distributor in Brazil. Other
customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors,
and non-governmental organizations (NGOs).
FC2 has been distributed in 144 countries. A significant number of countries with the highest demand potential are in the developing
world. The incidence of HIV/AIDS, other STIs, and unwanted pregnancy in these countries represents a remarkable potential for
significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries
can be volatile and result in unpredictable delays in program development, tender applications, and processing orders.
Purchasing patterns vary significantly from one customer to another, and may reflect factors other than simple demand. For example,
some governmental agencies purchase through a formal procurement process in which a tender (request for bid) is issued for either a
specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product
specifications, regulatory approvals, clearance by WHO, unit pricing, and delivery timetable). Bidders have a limited period of time
in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the
successful bidder. The entire tender process, from publication to award, may take many months to complete. A tender award indicates
acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units. Many
governmental tenders are stated to be “up to” the maximum number of units, which gives the applicable government agency discretion
to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for
orders in the tender and there are no guarantees as to the timing or amount of actual orders or shipments. Orders received may vary
from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections, and changes
in demand. Administrative issues, politics, bureaucracy, process errors, changes in leadership, funding priorities, and/or other
pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may
experience significant quarter-to-quarter sales variations due to the timing and shipment of large orders.
The Company currently operates in one industry segment which includes the development, manufacture, and marketing of consumer
health care products. Therefore, no segment data is disclosed in the Notes to the Consolidated Financial Statements contained in this
report. Information regarding the Company's operations by geographic area is included in Note 10 in the Notes to the Consolidated
Financial Statements contained in this report.
Company History
The female condom was invented by a Danish physician who obtained a U.S. patent for FC1, the Company’s first generation product,
in 1988. The physician subsequently sold certain rights to the condom to Chartex Resources Limited (Chartex). In the years that
followed, Chartex, with resources provided by a Danish entrepreneur and a nonprofit Danish foundation, developed the manufacturing
processes and completed other activities associated with bringing the female condom to market in certain non-U.S. countries. The
Wisconsin Pharmacal Company, Inc. (Wisconsin Pharmacal) owned certain rights to the female condom in the U.S., Canada, and
Mexico. Wisconsin Pharmacal pursued the pre-clinical and clinical studies and overall development of the product, necessary for U.S.
FDA approval and worldwide distribution of the product.
The Female Health Company is the successor to Wisconsin Pharmacal, a company which manufactured and marketed disparate
specialty chemical and branded consumer products. Wisconsin Pharmacal was originally incorporated in 1971.
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In fiscal 1995, the Company's Board of Directors approved a plan to complete a series of actions designed, in part, to maximize the
potential of the Female Condom. First, the Company restructured and transferred the Wisconsin Pharmacal name and all of the assets
and liabilities of the Company other than those related to the Female Condom to a newly formed, wholly-owned subsidiary of the
Company, WPC Holdings, Inc. (Holdings). In January 1996, the Company sold Holdings to an unrelated third party. Then, in
February 1996, the Company acquired Chartex. At the same time, the Company was renamed The Female Health Company. As a
result of the sale of Holdings and the acquisition of Chartex, The Female Health Company evolved to its current state with its sole
business consisting of the manufacture, marketing, and sale of the Female Condom.
The FDA approved FC1 for distribution in the U.S. in 1993 and approved the Company's U.K. FC1 manufacturing facility in 1994.
FC1 was produced from a costly raw material, polyurethane, in a labor intensive manufacturing process in London, England. To
expand women’s access to the female condom, increase sales volume, reduce costs, and significantly increase gross margin, the
Company developed its second generation Female Condom, FC2, which was completed in 2005. The second generation product is
made from a less costly raw material, a nitrile polymer. FC2’s production process is more efficient and less labor and capital intensive
than that of FC1, making it less costly to produce. Its price is now approximately 30 percent less than FC1. FC2 is currently being
produced at the Company’s facility in Selangor D.E., Malaysia. Production in London was discontinued with the final shipment of
FC1 in October 2009. As a result of the successful development of FC2, the Company was able to both reduce the price to the public
health sector and increase its gross margin.
FC2 was first marketed internationally in March 2007 and has been marketed in the U.S. since August 2009. In October 2009, the
Company completed the transition from its first generation product, FC1, to its second generation product, FC2, and production of
FC1 ceased. The Company retains ownership of certain world-wide rights, as well as various patents, regulatory approvals, and other
intellectual property related to FC1.
FC2 was approved by the FDA as a Class III medical device on March 10, 2009. In addition to FDA approval, FC2 has been
approved by other regulatory agencies, including the European Union, India, and Brazil. Based on a rigorous scientific review, WHO
cleared FC2 for purchase by U.N. agencies in 2006.
Since FC2’s introduction in March 2007 through September 30, 2015, approximately 329 million FC2’s have been distributed in 144
countries. It is marketed to consumers through distributors, global public sector procurement organizations, and retailers in 16
countries. Since the first FDA approval in 1993 through September 30, 2015, the Company has manufactured and sold approximately
504 million Female Condoms (FC1 and FC2).
Strategy
The Company’s strategy is to fully develop global markets for FC2 for both contraception and STI prevention, including HIV/AIDS.
Since the introduction of its first generation product, FC1, the Company has developed contacts and relationships with global public
health sector organizations such as WHO, UNFPA, USAID, and the United Nations Joint Programme on HIV/AIDS (UNAIDS),
country-specific health ministries, NGOs and commercial partners in various countries. The Company has representatives in various
locations around the world to provide technical sales support and assist with its customers’ prevention and family planning programs.
In July 2014, the Company announced a new growth strategy with two key elements. The first element seeks to accelerate demand for
FC2 by strengthening key customer relationships and creating greater awareness of FC2 in our current markets through increased sales
and marketing efforts. The Company is currently evaluating the potential for FC2 in consumer markets in the U.S, to be followed by
certain European and other markets. The Company believes its increased sales and marketing investment will accelerate global
demand for FC2. The second element of the Company’s new growth strategy is product diversification. The Company is actively
pursuing the potential acquisition of additional products, technologies, and businesses.
Products
Currently, there are only two FDA approved and marketed products that prevent the transmission of HIV/AIDS through sexual
intercourse: the male condom and FC2. FC2 is currently the only FDA approved and marketed female-controlled product that
prevents STIs, including HIV/AIDS. Used consistently and correctly, FC2 provides women dual protection against STIs, including
HIV/AIDS, and unintended pregnancy. When used correctly the protection rates against unintended pregnancies are 95 percent for
female condoms compared to 98 percent for male condoms according to the FDA. FC2 is not seen as directly competing with the male
condom; it provides an alternative to either unprotected sex or male condom usage.
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An economic analysis of the cost effectiveness of an FC2 HIV/AIDS prevention program conducted by Dr. David Holtgrave, the
chairman of the Department of Health Behavior and Society at the Johns Hopkins Bloomberg School of Public Health, was featured in
the March 26, 2012 issue of AIDS and Behavior. The study showed that the Washington, D.C. FC2 prevention program, a public-
private partnership to provide and promote FC2, prevented enough HIV infections in the first year alone to save over $8 million in
avoided future medical care costs (over and above the cost of approximately $445,000 for the program). This means that for every
dollar spent on the program, there was a cost savings of nearly $20. In the article Dr. Holtgrave concluded, “These results clearly
indicate that delivery of, and education about, Female Condoms is an effective HIV prevention intervention and an outstanding public
health investment.” Washington, D.C. began its program in 2010 to fight a disease that is at epidemic levels. At least 3 percent of
Washington, D.C. residents have HIV or AIDS, a prevalence rate that is the highest of any U.S. city.
In May 2014, a business case was published by Global Health Visions, LLC, commissioned by Rutgers WPF, the advocacy partner of
the Universal Access to Female Condoms (UAFC) Joint Programme. Part of the publication was a study comparing total expected
costs with total estimated economical benefits and it determined there was an excellent return on investment for female condoms in
sub-Saharan Africa. For example, in Nigeria an investment of $1 offers a $3.20 return on investment to the country’s economy.
Numerous clinical and behavioral studies have been conducted regarding use of the female condom. Studies show that in many
cultures, the female condom is found acceptable by women and their partners. Importantly, studies also show that when the female
condom is made available as an option along with male condoms there is a significant increase in protected sex acts with a concurrent
decrease in STIs. The increase in protected sex acts varies by country and averages between 10 percent and 35 percent.
FC2 has basically the same physical design, specifications, safety, and efficacy profile as FC1. Manufactured from a nitrile polymer
formulation that is exclusive to the Company, FC2 is produced more economically than FC1, which was made from a more costly raw
material, polyurethane. FC2 consists of a soft, loose fitting sheath and two rings: an external ring of rolled nitrile and a loose internal
ring made of flexible polyurethane. FC2’s soft sheath lines the vagina, preventing skin-to-skin contact during intercourse. Its external
ring remains outside the vagina, partially covering the external genitalia. The internal ring is used for insertion and helps keep the
device in place during use.
FC2’s primary raw material, a nitrile polymer, offers a number of benefits over natural rubber latex, the raw material most commonly
used in male condoms. FC2’s nitrile polymer is stronger than latex, reducing the probability that the female condom sheath will tear
during use. Unlike latex, FC2’s nitrile polymer quickly transfers heat. FC2 can warm to body temperature immediately upon
insertion, which may enhance the user’s sensation and pleasure. Unlike the male condom, FC2 may be inserted in advance of arousal,
eliminating disruption during sexual intimacy. FC2 is also an alternative to latex sensitive users who are unable to use male condoms
without irritation. For example, 7 percent to 20 percent of the individuals with significant exposure to latex rubber (i.e., health care
workers) experience such irritation. To the Company's knowledge, there is no reported allergy to the nitrile polymer. FC2 is pre-
lubricated, disposable, and recommended for use during a single sex act. FC2 is not reusable.
Global Market Potential
Because FC2 offers a woman dual protection against both unintended pregnancy and STIs, including HIV/AIDS, its market
encompasses both family planning and disease prevention.
Disease Prevention. The first clinical evidence of AIDS was noted more than thirty years ago. Since then, HIV/AIDS has become the
most devastating pandemic facing humankind in recorded history. In November 2009, WHO released statistics indicating that on a
world-wide basis, HIV/AIDS is now the leading cause of death in women 15 to 44 years of age. According to WHO, in 2012
worldwide women comprised 50 percent of all the adults living with HIV and approximately 58 percent of all new adult cases of
HIV/AIDS in Sub-Saharan Africa. In the United States the Centers for Disease Control and Prevention (CDC) and FDA both list
heterosexual sex as the most common method of HIV transmission in women.
For sexually active couples, male condoms and FC2 are the only barrier methods approved by the FDA for preventing sexual
transmission of HIV/AIDS. In recent years, scientists have sought to develop alternative means of preventing HIV/AIDS. Based on
the complexities of such research, a viable prevention alternative is unlikely to be available in the foreseeable future. To date, it is
clear that condoms, male and female, continue to play a key role in the prevention of STIs, including HIV/AIDS. UNAIDS has
reported that, since the beginning of the HIV/AIDS epidemic, it is estimated that condoms have averted approximately 50 million new
cases. FC2, when used consistently and correctly, gives a woman control over her sexual health by providing dual protection against
STIs, including HIV/AIDS, and unintended pregnancy.
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In the United States, the CDC continues to report that the HIV/AIDS epidemic is taking an increasing toll on women and girls.
Women of color, particularly black women, have been especially hard hit. Women of color comprise both the majority of new HIV
and AIDS cases among women and the majority of women living with the disease. In 2010, the CDC listed the rate of new HIV
infection for black women as approximately 8 times the rate for white women in the United States. In 2010, in the United States, it
estimated that one in 32 black women would be diagnosed with HIV in her lifetime, compared to the one in 526 incidence rate
amongst white women.
The CDC estimates there are 20 million new cases of STIs that they track in the U.S. each year. It is also estimated that over 24,000
women each year in the U.S. lose the ability to conceive or carry a pregnancy to term due to undiagnosed or untreated STIs. In March
2008, the CDC announced that a study indicated 26 percent of female adolescents in the U.S. have at least one of the most common
STIs. Led by the CDC’s Sara Forhan, the study is the first to examine the combined national prevalence of common STIs among
adolescent women in the U.S. In addition to overall STI prevalence, the study found that by race, African American teenage girls had
the highest prevalence, with an overall prevalence of 48 percent compared to 20 percent among both whites and Mexican Americans.
Overall, approximately half of all the teens in the study reported ever having sex. Among these girls, the STI prevalence was 40
percent.
On November 29, 2012, in conjunction with World AIDS Day, U.S. Secretary of State Hillary Clinton, as part of the President’s
Emergency Plan For AIDS Relief (PEPFAR), issued a blueprint for an AIDS Free Generation. In the blueprint it states that female
condoms are unique in providing a female-controlled HIV prevention option and that PEPFAR will work with partner governments
and other donors to promote female condoms wherever effective programs can build a sustained demand.
On December 3, 2013, donors pledged $12 billion, which includes $1.5 billion from the U.K. Government, over a 3 year period to the
Global Fund to Fight AIDS, Tuberculosis and Malaria.
Contraception. The feminization of HIV/AIDS has increased the relevance of FC2 for the prevention of unintended pregnancies as
well as disease prevention. Unintended pregnancy may result in maternal and infant death, babies with HIV/AIDS, AIDS orphans,
and increased health care costs.
On July 11, 2012, World Population Day, the U.K. Government and the Bill and Melinda Gates Foundation held a Summit on Family
Planning in London, England (the London Summit). It was attended by public health officials, government officials, and private
sector companies that supply contraceptives and related products. FHC was one of only fourteen companies, and the only condom
manufacturer, invited to attend the London Summit. The primary goal of the London Summit was to increase access to contraceptives
to an additional 120 million poor women in 69 developing countries by 2020.
The Condom Market
The global public health sector market for male condoms is estimated to be greater than 8-10 billion units annually. The private sector
market for male condoms is estimated at 10-15 billion units annually. The combined global male condom market (public and private
sector) is estimated at a value of $4.5 billion annually. The female condom market represents a very small portion of the total global
condom market.
Government Regulation
Female condoms as a group were classified by the FDA as a Class III medical device in 1989. Class III medical devices are deemed
by the FDA to carry potential risks with use which must be tested prior to FDA approval, referred to as Premarket Approval (PMA),
for sale in the U.S. As FC2 is a Class III medical device, prior to selling FC2 in the U.S., the Company was required to submit a PMA
application containing technical information on the use of FC2, such as pre-clinical and clinical safety and efficacy studies, which was
gathered together in a required format and content. The FC2 PMA was approved by the FDA as a Class III medical device in March
2009.
FC2 received the CE Mark which allows it to be marketed throughout the European Union. FC2 has also been approved by regulatory
authorities in Brazil, India, Canada, and other jurisdictions.
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In the U.S., FC2 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 FC2 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. As an FDA
approved medical device, the facilities in which FC2 is produced and tested are subject to periodic FDA inspection to ensure
compliance with current Good Manufacturing Processes. The Company’s most recent FDA inspection was completed in September
2010.
The FDA’s approval order for FC2 includes conditions that relate to product labeling, including information on the package itself and
instructions for use called a “package insert” which accompanies each product. The Company believes it is in compliance with the
FDA approval order.
The Company’s facility may also be subject to inspection by UNFPA, USAID, International Organization for Standardization (ISO),
and country specific ministries of health.
Significant Customers
Because FC2 provides dual protection against both STIs, including HIV/AIDS, and unintended pregnancy, it is an integral part of both
HIV/AIDS prevention and family planning programs throughout the world. These programs are typically supplied by global public
health sector buyers who purchase products for distribution, at low cost or no cost, to those who need but cannot afford to buy such
products themselves. Within the global public health sector are large global agencies, such as UNFPA, USAID, DFID (the U.K.’s
Department for International Development), and PSI (Population Services International), other social marketing groups, various
government health agencies, and NGOs. The Company’s most significant customers are either global public health sector agencies,
country specific ministries of health, or those who facilitate their purchases and/or distribution.
The Company's three largest customers in fiscal 2015 were the Brazil Ministry of Health (through Semina), UNFPA, and USAID.
Semina accounted for 47 percent of unit sales in fiscal 2015 and less than 10 percent of unit sales in fiscal 2014 and 2013. UNFPA
accounted for 18 percent of unit sales in fiscal 2015, 40 percent of unit sales in fiscal 2014, and 62 percent of unit sales in fiscal 2013.
USAID accounted for 16 percent of unit sales in fiscal 2015, 17 percent of unit sales in fiscal 2014, and less than 10 percent of unit
sales in fiscal 2013. Sekunjalo accounted for less than 10 percent of unit sales in fiscal 2015, 13 percent of unit sales in fiscal 2014,
and less than 10 percent of unit sales in fiscal 2013. Azinor International Lda, a customer in Angola (Azinor), accounted for 11
percent of unit sales in fiscal 2014. No other single customer accounted for more than 10 percent of unit sales in fiscal 2015, 2014, or
2013. The Company considers its most significant customers to be UNFPA, USAID, Sekunjalo, and the Brazil Ministry of Health
(either through UNFPA or Semina).
Commercial Markets – Direct to Consumers
The Company has distribution agreements and other arrangements with commercial partners which market to consumers through
distributors and retailers in 16 countries, including the United States, Brazil, Spain, France, and the United Kingdom. These
agreements are generally exclusive for a single country. Under these agreements, the Company sells FC2 to the distributor partners,
who market and distribute the product to consumers in the established territory.
In the U.S., FHC initiated the FC2 College Health Mini-Grant Program in early 2013. The objective is to create awareness and sexual
health knowledge that results in FC2 online/in-store retail purchases by young women and men. Education and training is the key
content element for this program, similar to the public sector. College health and wellness centers were contacted and advised that
they could apply to participate in the FC2 Program. During the pilot, FHC provided a mini-grant ($50-$500) and related education and
training materials to help start or enhance an on-campus FC2 program. Grants were awarded based on a school’s intention to (1) raise
awareness of FC2 on campus, (2) increase access to FC2 on campus, and (3) enhance students’ capacity to effectively and accurately
use FC2. The pilot regions for The FC2 College Campus Program were determined through selection of the following four American
College Health Associations Regional Affiliates: New England, New York, South, and South West College Health Associations. In
total 30 colleges were chosen to receive grants for The FC2 College Campus Program, including Colgate University, Tulane
University, and Duke University, plus student groups from institutions such as Boston College and University of Florida.
Due to the pilot program’s success, the program was implemented in 2014 with 20 schools chosen to receive grants between $500 and
$1,000 along with related education and training materials. In 2015, 49 schools were chosen to receive an in kind donation of 300
FC2’s along with related education and training materials.
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The Company is currently evaluating the potential for FC2 in consumer markets in the U.S., to be followed by certain European and
other markets. Some recent changes in the market environment may represent an opportunity for the promotion of FC2 to consumers:
• FC2 is now reimbursable under the Affordable Care Act and most health plans. FC2 was registered and now has a UPC code
to support reimbursement.
Increased public focus on preventing unwanted pregnancy and disease in young women.
•
• The rise of social media in marketing to young women.
•
Increased online purchasing of condoms. It is estimated 33 percent of male condoms are purchased online.
The Company believes the promotion of FC2 to consumers will be complementary to public sector marketing by increasing awareness
of FC2.
An online store for direct-to-consumer purchases, ShopFemaleHealth.com, was launched in March 2015. Additionally, FC2 may now
be purchased online through various ecommerce websites, including (but not limited to): Amazon.com, Walgreens.com,
Drugstore.com, and MyQuestStore.com.
The Company has formed a medical advisory board to assist with determining the optimal approach to inform health care
professionals of the benefits of FC2. Sampling and support information at gynecological practices is one tactic employed.
Relationships and Agreements with Public Health Sector Organizations
The Company’s customers are primarily large global agencies, NGOs, ministries of health, and other government agencies which
purchase and distribute FC2 for use in HIV/AIDS prevention and family planning programs. The Company offers uniform, volume-
based pricing to such agencies, rather than entering into long-term supply agreements.
In the U.S., FC2 is sold to city and state public health clinics as well as not-for-profit organizations such as Planned Parenthood.
Municipal and state departments of health have been increasing access to FC2 within established condom programming. Chicago, Los
Angeles, San Francisco, New York, and Washington, D.C. are all examples of cities with programs providing female and male
condoms free of charge. In New York City, as of September 30, 2015, FC2 has been distributed to 1,760 locations.
The Company has encouraged growth in the U.S. through education and program development support. To make health professional
education broadly available, the Company introduced its FC2 Online Training Program in March 2012.
The National Female Condom Coalition (NFCC) and UAFC sponsored the fourth annual Global Female Condom Day on September
16, 2015. The 2015 Global Female Condom Day drew greater attention and participation than in the previous years. Public events
highlighting the need for access to female condoms and promoting their use in family planning and disease prevention were organized
around the world and in the U.S., including events specifically initiated or co-sponsored by the Company.
Globally, the Company has a multilingual website that provides downloadable training and education information in English,
Portuguese, Spanish, and French.
Outside of the U.S., training and education sessions were held in 10 countries, with an estimated 32,000 people participating in the
sessions in 2015.
Employees
As of November 27, 2015, the Company had 180 full-time employees, including 11 located in the U.S., 13 in the U.K., 154 in
Malaysia, and 2 in other countries to implement training and programs, and 1 part-time employee located in the U.S. None of the
Company’s employees are represented by a labor union. The Company believes that its employee relations are good. In Malaysia, a
significant proportion of direct labor is supplied by a contracted work force.
Environmental Regulation
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 FC2. The Company has not incurred environmental expenses in fiscal 2015, 2014,
or 2013, nor does it anticipate environmental expenses in the foreseeable future.
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Raw Materials
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. As a result, the Company relies on supply for its principal
raw material from one supplier that could produce the raw material from multiple supply points within its organization.
Manufacturing Facilities
The Company leases production space in Selangor D.E., Malaysia for the production of FC2, which currently has manufacturing
capacity of approximately 100 million units annually. In fiscal 2014 the Company added additional space, resulting in a total of
45,800 sq. ft. in the Company’s Malaysia facility, comprised of production and warehouse space and which provides sufficient space
to add manufacturing capacity of up to an additional 100 million units annually. The Company will consider manufacturing in other
locations as the demand for FC2 develops.
Competition
FC2 participates in the same market as male condoms; however, it is not seen as directly competing with male condoms. Rather,
studies show that providing FC2 is additive in terms of prevention and choice. Male condoms cost less and have brand names that are
more widely recognized than FC2. In addition, male condoms are generally manufactured and marketed by companies with
significantly greater financial resources than the Company.
Other parties have developed and marketed female condoms. None of these female condoms marketed or under development by other
parties have secured FDA approval. FDA approval is required to sell female condoms in the U.S. The Cupid female condom became
the second female condom design to successfully complete the WHO prequalification process in July 2012 and be cleared for
purchase by U.N. agencies. FC2 has also been competing with other female condoms in markets that do not require either FDA
approval or WHO prequalification. We have experienced increasing competition in the global public sector, and competitors
including Cupid received part of the last two South African tenders. Increasing competition in FC2’s markets may put pressure on
pricing for FC2 or adversely affect sales of FC2, and some customers, particularly in the global public sector, may prioritize price over
other features where FC2 may have an advantage. It is also possible that other female condoms may receive FDA approval or
complete the WHO prequalification process, which would increase competition from other female condoms in FC2’s markets.
Patents and Trademarks
FC2 patents have been issued by the United States, Europe, Canada, Australia, South Africa, the People’s Republic of China, Japan,
Mexico, Brazil, India and the African Regional Intellectual Property Organization (ARIPO), which includes Botswana, Gambia,
Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia, and
Zimbabwe. Further, the European patent for FC2 has been validated in the following countries: Austria, Belgium, Bulgaria,
Switzerland, Republic of Cyprus, Czech Republic, Germany, Denmark, Estonia, Spain, Finland, France, United Kingdom, Greece,
Hungary, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, Romania, Sweden, Slovenia, Slovakia, and Turkey. The
patents cover the key aspects of FC2, including its overall design and manufacturing process. The patents have expiration dates in
2023 and 2024. In addition, patent applications for FC2 are pending in a number of other countries around the world. There can be no
assurance that pending patent applications provide the Company with protection against copycat products entering markets during the
pendency of the applications.
The Company has a registration for the trademark “FC2 Female Condom” in the United States. Furthermore, the Company has filed
applications or secured registrations in 39 countries or jurisdictions around the world to protect the various names and symbols used in
marketing FC2. In addition, the experience that has been gained through years of manufacturing its Female Condoms (FC1 and FC2)
has allowed the Company to develop trade secrets and know-how, including certain proprietary production technologies, that further
protect its competitive position.
Backlog
Unfilled product orders totaled $7,386,526 at November 27, 2015 and $9,848,220 at November 28, 2014. Unfilled orders materially
fluctuate from quarter-to-quarter, and the amount at November 27, 2015 includes orders with requested delivery dates later in fiscal
2016. The Company expects current unfilled orders to be filled during fiscal 2016.
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Available Information
The Company maintains a corporate website for investors at www.fhcinvestor.com and it makes available, free of charge, through this
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports that the Company files with or furnishes to the Securities and Exchange Commission (SEC), as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC. Information on the Company's website is not part of this
report.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information included in this Annual Report and
our other SEC filings, in considering our business and prospects. The risks described below are not the only risks we face. Additional
risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the
events or circumstances described in the following risks occur, our business, financial condition, or results of operations could be
materially adversely affected. In such cases, the trading price of our common stock could decline.
Our success is dependent upon the success of FC2.
At this time, we derive our revenues from sales of our only current product, FC2. The ultimate level of demand for FC2 is uncertain,
and we may not be able to grow our business if demand for FC2 does not increase. We also depend on public sector agencies around
the world to continue to include FC2 in their STI prevention and family planning programs, and on our commercial sector distribution
partners to successfully market and distribute FC2. A decline in demand for FC2 would reduce our net revenues and profitability.
Our business may be affected by contracting risks with government and other international health agencies.
Our customers are primarily large international agencies and government health agencies which purchase and distribute FC2 for use in
family planning and HIV/AIDS prevention programs. Sales to such agencies may be subject to government contracting risks,
including the appropriations process and funding priorities, potential bureaucratic delays in awarding contracts under governmental
tenders, process errors, politics or other pressures, and the risk that contracts may be subject to cancellation, delay, or restructuring. A
governmental tender award indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any
minimum number of units. Many governmental tenders are stated to be “up to” the maximum number of units, which gives the
applicable government agency discretion to purchase less than the full maximum tender amount. As a result, government agencies
may order and purchase fewer units than the full maximum tender amount and there are no guarantees as to the timing or amount of
actual orders or shipments under government tenders. Orders received may vary from the amount of the tender award based on a
number of factors, including vendor supply capacity, quality inspections, and changes in demand. These contracting risks may cause
significant quarter-to-quarter variations in our operating results and could adversely affect our net revenues and profitability. Budget
issues, spending cuts, and global health spending priorities affecting government health agencies may also adversely affect demand for
our product and our net revenues.
Competition from other products, including other female condoms, may have an adverse effect on our net revenues and profit
margins.
We may be unable to compete successfully against current and future competitors, and competitive pressures could have a negative
effect on our net revenues and profit margins. Other parties have developed and marketed female condoms, although only one such
product has WHO pre-clearance and none of these female condoms have been approved by the FDA. FDA approval is required to sell
female condoms in the U.S., and WHO pre-clearance is required to sell female condoms to U.N. agencies. FC2 has also been
competing with other female condoms in markets that do not require either FDA approval or WHO prequalification. We have
experienced increasing competition in the global public sector, and competitors received part of the last two South African tenders.
Increasing competition in FC2’s markets may put pressure on pricing for FC2 or adversely affect sales of FC2, and some customers,
particularly in the global public sector, may prioritize price over other features where FC2 may have an advantage. It is also possible
that other companies will develop a female condom, and such companies could have greater financial resources and customer contacts
than us. In addition, other contraceptive methods may compete with FC2 for funding and attention in the global public sector.
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We may experience difficulties in implementing our growth initiatives.
We have announced new initiatives to increase our investment in sales and marketing activities. We may face a number of obstacles
to successfully implement these initiatives, such as the costs associated with entering new markets or expanding current markets,
retaining adequate numbers of effective sales and marketing personnel, developing and implementing effective marketing efforts, and
establishing and maintaining appropriate regulatory compliance. We cannot assure you that we will be successful in implementing
our growth strategies or that such strategies, even if implemented, will lead to the successful achievement of our objectives. Even if
we are able to increase our sales as a result of our growth initiatives, we may not be able to achieve an adequate return on the amount
we invest in these initiatives.
An inability to identify or complete future acquisitions could adversely affect our future growth.
As part of our growth initiatives, we intend to pursue acquisitions of new products, technologies, and/or businesses that are
complementary to FC2 and enable us to leverage our competitive strengths. While we continue to evaluate potential acquisitions, we
may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory
terms, obtain regulatory approval for acquisitions where required, or otherwise complete acquisitions in the future. An inability to
identify or complete future acquisitions could limit our future growth.
We may experience difficulties in integrating strategic acquisitions.
The integration of acquired companies and their operations into our operations involves a number of risks, including:
the acquired business may experience losses that could adversely affect our profitability;
unanticipated costs relating to the integration of acquired businesses may increase our expenses;
possible failure to accomplish the strategic objectives for an acquisition;
the loss of key personnel of the acquired business;
difficulties in achieving planned cost-savings and synergies may increase our expenses or decrease our net revenues;
diversion of management’s attention could impair their ability to effectively manage our business operations;
the acquired business may require significant expenditures for product development or regulatory approvals;
the acquired business may lack adequate internal controls or have other issues with its financial systems;
there may be regulatory compliance or other issues relating to the business practices of an acquired business;
•
•
•
•
•
•
•
•
•
• we may record goodwill and nonamortizable intangible assets that are subject to impairment testing on a regular basis and
•
potential impairment charges and we may also incur amortization expenses related to intangible assets; and
unanticipated management or operational problems or liabilities may adversely affect our profitability and financial
condition.
Additionally, we may borrow funds or issue equity to finance strategic acquisitions. Debt leverage resulting from future acquisitions
could adversely affect our operating margins and limit our ability to capitalize on future business opportunities. Such borrowings may
also be subject to fluctuations in interest rates. Equity issuances may dilute our existing shareholders and adversely affect the market
price of our shares.
We depend on four major customers for a significant portion of our net revenues.
The Company's four largest customers currently are UNFPA, USAID, Sekunjalo and Semina. UNFPA accounted for 18 percent of
unit sales in fiscal 2015, 40 percent of unit sales in fiscal 2014, and 62 percent of unit sales in fiscal 2013. USAID accounted for 16
percent of unit sales in fiscal 2015, 17 percent of unit sales in fiscal 2014, and less than 10 percent of unit sales in fiscal 2013.
Sekunjalo accounted for less than 10 percent unit sales in fiscal 2015, 13 percent of unit sales in fiscal 2014, and less than 10 percent
of unit sales in fiscal 2013. Semina accounted for 47 percent of unit sales in fiscal 2015, and less than 10 percent of unit sales in fiscal
2014 and 2013. An adverse change in our relationship with our largest customers could have a material adverse effect on our net
revenues and profitability. In addition, we may have a concentration of accounts receivable with one or more of our largest customers,
and a delay in payment by a large customer could have a material adverse effect on our cash flows and liquidity.
Since we sell product in foreign markets, we are subject to international business risks that could adversely affect our
operating results.
Our international operations subject us to risks, including:
•
•
•
economic and political instability;
changes in international regulatory requirements, import duties, or export restrictions, including limitations on the
repatriation of earnings;
difficulties in staffing and managing foreign operations;
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•
•
•
complications in complying with trade and foreign tax laws;
price controls and other restrictions on foreign currency; and
difficulties in our ability to enforce legal rights and remedies.
Any of these risks might disrupt the supply of our products, increase our expenses or decrease our net revenues. The cost of
compliance with trade and foreign tax laws increases our expenses, and actual or alleged violations of such laws could result in
enforcement actions or financial penalties that could result in substantial costs.
Increases in the cost of raw materials, labor, and other costs used to manufacture our product could increase our cost of sales
and reduce our gross margins.
We may experience increased costs of raw materials, including the nitrile polymer used in FC2, and increased labor costs. We may
not be able to pass along such cost increases to our customers. As a result, an increase in the cost of raw materials, labor or other costs
associated with manufacturing FC2 could increase our cost of sales and reduce our gross margins.
Currency exchange rate fluctuations could increase our expenses.
Because we manufacture FC2 in a leased facility located in Malaysia, a portion of our operating costs are denominated in a foreign
currency. While a material portion of our future sales of FC2 are likely to be in foreign markets, all sales of FC2 are denominated in
U.S. dollars. Manufacturing costs are subject to normal currency risks associated with fluctuations in the exchange rate of the
Malaysian ringgit (MYR) relative to the U.S. dollar. Historically, we have not hedged our foreign currency risk.
We rely on a single facility to manufacture FC2, which subjects us to the risk of supply disruptions.
We manufacture FC2 in a single leased facility located in Malaysia. Difficulties encountered by this facility, such as fire, accident,
natural disaster, or an outbreak of a contagious disease could halt or disrupt production at the facility, delay the completion of orders,
or cause the cancellation of orders. Any of these risks could increase our expenses or reduce our net revenues.
Our product is subject to substantial government regulation, which exposes us to risks that we will be fined or exposed to civil
or criminal liability, receive negative publicity, or be prevented from selling our product.
FC2 is subject to regulation by the FDA under the Food, Drug and Cosmetic Act, and by foreign regulatory agencies. Under the Food,
Drug and Cosmetic Act, medical devices must receive FDA clearance before they can be sold. FDA regulations also require us to
adhere to "Good Manufacturing Practices," which include testing, quality control, and documentation procedures. Our compliance
with applicable regulatory requirements is monitored through periodic inspections by the FDA and foreign regulatory agencies. If we
fail to comply with applicable regulations, we could:
•
•
•
•
be fined or exposed to civil or criminal liability;
face suspensions of clearances, seizures, or recalls of products or operating restrictions;
receive negative publicity; or
be prohibited from selling our product in the U.S. or in foreign markets.
Uncertainty and adverse changes in the general economic conditions may negatively affect our business.
If general economic conditions in the U.S. and other global markets in which we operate decline, or if consumers fear that economic
conditions will decline, consumers may reduce expenditures for products such as our product. Adverse changes may occur as a result
of adverse global or regional economic conditions, fluctuating oil prices, declining consumer confidence, unemployment, fluctuations
in stock markets, contraction of credit availability, or other factors affecting economic conditions generally. These changes may
negatively affect the sales of our product, increase the cost, and decrease the availability of financing, or increase costs associated with
producing and distributing our product. In addition, a substantial portion of the sales of FC2 are made in the public market to
government agencies, including USAID and other government agencies around the world. Worsening economic conditions as well as
budget deficits and austerity measures may cause pressures on government budgets and result in a reduction in purchases of FC2 by
governmental agencies. Sales of our product fluctuate, which causes our operating results to vary from quarter-to-quarter.
Sales of our product fluctuate based upon demand from our commercial partners and the public sector and the nature of government
procurement processes. Historically, our net revenues and profitability have varied from quarter–to-quarter due to such buying
patterns. Quarterly variations in operating results may cause us to fail to meet our earnings guidance or market expectations for our
operating results and may tend to depress our stock price during such quarters.
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Material adverse or unforeseen legal judgments, fines, penalties, or settlements could have an adverse impact on our profits
and cash flows.
We may, from time to time, become a party to legal proceedings incidental to our business, including, but not limited to, alleged
claims relating to product liability, environmental compliance, patent infringement, commercial disputes, and employment matters.
Future litigation could require us to record reserves or make payments which could adversely affect our profits and cash flows. Even
the successful defense of legal proceedings may cause us to incur substantial legal costs and may divert management's attention and
resources away from our business.
Our success depends, in part, on our ability to protect our intellectual property.
We rely on our patented and other proprietary technology relating to FC2. The actions taken by us to protect our proprietary rights
may not be adequate to prevent imitation of our product, processes, or technology. We cannot assure you that our proprietary
technology will not become known to competitors, or that others will not independently develop a substantially equivalent or better
female condom that does not infringe on our intellectual property rights, or will not challenge or assert rights in, and ownership of, our
patents and other proprietary rights.
There are provisions in our charter documents, Wisconsin law, and change of control agreements with our officers that might
prevent or delay a change in control of our company.
We are subject to a number of provisions in our charter documents, Wisconsin law, and change of control agreements that may
discourage, delay, or prevent a merger or acquisition that a shareholder may consider favorable. These provisions include the
following:
•
•
•
•
•
the authority provided to our Board of Directors in our Amended and Restated Articles of Incorporation to issue preferred
stock without further action by our shareholders;
change of control agreements we have entered into with three of our employees which provide for up to three years of
compensation following a change of control as defined in the agreements;
the provision under Wisconsin law that permits shareholders to act by written consent only if such consent is unanimous;
the provision under Wisconsin law that requires for a corporation such as us, that was formed before January 1, 1973, the
affirmative vote of the holders of at least two-thirds of the outstanding shares of our voting stock to approve an amendment to
our articles of incorporation, a merger submitted to a vote of our shareholders, or a sale of substantially all of our assets; and
the Wisconsin control share acquisition statute and Wisconsin's "fair price" and "business combination" provisions which
limit the ability of an acquiring person to engage in certain transactions or to exercise the full voting power of acquired shares
under certain circumstances.
The trading price of our common stock has been volatile, and investors in our common stock may experience substantial
losses.
The trading price of our common stock has been volatile and may become volatile again in the future. The trading price of our
common stock could decline or fluctuate in response to a variety of factors, including:
•
•
•
•
•
•
our failure to meet market expectations for our performance;
the timing of announcements by us or our competitors concerning significant product developments, acquisitions, or financial
performance;
fluctuation in our quarterly operating results;
substantial sales of our common stock;
general stock market conditions; or
other economic or external factors.
You may be unable to sell your stock at or above your purchase price.
Item 1B. Unresolved Staff Comments
Not Applicable
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Item 2. Properties
The Company leases approximately 5,100 square feet of office space at 515 North State Street, Suite 2225, Chicago, IL 60654. The
lease expires October 31, 2016, although the Company has delivered notice of its intent to extend the term of the lease for an
additional three year period ending October 31, 2019, provided that the Company has the right to rescind such lease extension upon
receipt of the landlord’s notice of the new base rent for the extended term. The Company utilizes warehouse space and sales
fulfillment services of an independent public warehouse located in Glendale Heights, IL for storage and distribution of FC2. In June
2010, the Company entered a new lease agreement for 6,400 square feet of office space located in London, England. The lease
expires in June 2020. The Company manufactures and warehouses FC2 within a leased facility with 45,800 sq. ft. of production and
warehouse space, in Selangor D.E., Malaysia. The FDA-approved manufacturing process is subject to periodic inspections by the
FDA as well as the U.K. based “notified body”, which is responsible for CE and ISO accreditation. The lease currently has an
expiration date of September 1, 2016 and is renewable at the option of the Company for an additional three year term. The Company’s
Malaysian production capacity is approximately 100 million units annually.
Item 3. Legal Proceedings.
The Company is not currently involved in any pending legal proceedings.
Item 4. Mine Safety Disclosures
Not Applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our common stock trade on the NASDAQ Capital Market under the symbol "FHCO". The approximate number of record
holders of our common stock at November 27, 2015 was 270. In January 2010, the Board of Directors adopted a quarterly cash
dividend policy and declared the first cash dividend in the Company's history, which was paid in February 2010. In total, the Board
has declared eighteen quarterly dividends, the most recent of which was paid in May 2014. All dividends have been paid from the
Company's cash on hand. On July 14, 2014, the Company announced that its Board of Directors elected to suspend the payment of
quarterly cash dividends in order to devote operating cash flows towards strategic growth initiatives. Under the Company's credit
facility with Midland States Bank, dividends and share repurchases are permitted as long as after giving effect to the dividend or share
repurchase the Company has a ratio of total liabilities to total stockholders' equity of not more than 1:1. Information regarding the
high and low reported closing prices for our common stock and dividends paid on our common stock for the quarters indicated is set
forth in the table below.
2015 Fiscal Year
Price per common share – High
Price per common share – Low
Dividends paid
2014 Fiscal Year
Price per common share – High
Price per common share – Low
Dividends paid
FIRST
SECOND
THIRD
FOURTH
QUARTERS
$
$
$
$
$
$
4.59
3.32
—
9.94
7.87
0.07
$
$
$
$
$
$
3.92
2.80
—
8.42
6.70
0.07
$
$
$
$
$
$
3.33
1.80
—
7.76
5.49
0.07
$
$
$
$
$
$
1.78
1.32
—
5.84
3.49
—
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Performance Graph
The performance graph set forth below shows the value of an investment of $100 on September 30, 2010 in each of The Female
Health Company, the NASDAQ Composite Index and NASDAQ Health Care Index. All values assume reinvestment of the pre-tax
value of dividends paid by FHC and the companies included in the indices, and are calculated as of September 30 each year. The
historical stock price performance of FHC is not necessarily indicative of future stock performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among The Female Health Company, the NASDAQ Composite Index
and the NASDAQ Health Care Index
$300
$250
$200
$150
$100
$50
$0
9/10
9/11
9/12
9/13
9/14
9/15
The Female Health Company
NASDAQ Composite
NASDAQ Health Care
*$100 invested on 9/30/10 in stock or index, including reinvestment of dividends.
Fiscal year ending September 30.
The Female Health Company
NASDAQ Composite
NASDAQ Health Care
100.00
100.00
100.00
82.42
103.65
106.39
150.44
136.22
153.48
214.34
168.91
213.08
77.79
202.57
274.04
35.22
208.69
285.21
9/10
9/11
9/12
9/13
9/14
9/15
N
N
N
N
N
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Item 6. Selected Financial Data
The data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the Consolidated Financial Statements and Notes thereto appearing in this Annual Report on Form 10-
K. The Consolidated Statement of Income Data for the years ended September 30, 2015, 2014, and 2013, and the Consolidated
Balance Sheet Data as of September 30, 2015 and 2014, are derived from the Consolidated Financial Statements included elsewhere in
this report. The Consolidated Statement of Income Data for the years ended September 30, 2012 and 2011, and the Consolidated
Balance Sheet Data as of September 30, 2013, 2012 and 2011, are derived from Consolidated Financial Statements that are not
included in this report. The historical results are not necessarily indicative of results to be expected for future periods.
Condensed Consolidated Statement of Income Data:
2015
2014
Year ended September 30,
2013
(In thousands, except per share data)
35,034
31,457
24,491
2012
$
$
$
2011
$
18,565
$
32,605
13,635
11,370
13,953
14,413
8,700
18,970
13,121
17,504
20,621
9,865
12,352
9,197
7,714
9,681
6,570
6,618
3,924
9,790
10,940
3,295
Net revenues
Cost of sales
Gross profit
Operating expenses
Operating income
Non-operating income (expense)
69
33
144
(148)
(63)
Income before income taxes
Income tax expense (benefit)
Net income
Net income per basic common share outstanding
Basic weighted average common shares outstanding
Net income per diluted common share outstanding
Diluted weighted average common shares outstanding
Cash dividends declared per share
6,687
3,957
9,934
10,792
3,232
2,341
1,524
(4,409)
(4,507)
(2,167)
4,346
$
2,433
$
14,343
$
15,299
$
5,399
0.15
28,532
0.15
28,834
—
$
$
$
0.09
28,523
0.08
28,865
0.21
$
$
$
0.51
28,377
0.50
28,726
0.26
$
$
$
0.55
27,694
0.53
28,933
0.22
$
$
$
0.20
27,287
0.19
28,971
0.20
$
$
$
$
Condensed Consolidated Balance Sheet Data:
2015
2014
Year ended September 30,
2013
(In thousands)
2012
2011
Cash and cash equivalents
Working capital
Total assets
Accumulated deficit
Long-term obligations
Total stockholders' equity
$
$
4,106
17,361
37,472
(27,996)
15
33,133
$
$
5,796
9,695
31,673
(32,342)
39
28,065
$
$
8,922
13,424
35,170
(28,715)
67
31,403
$
$
5,296
10,966
30,446
(35,594)
174
24,218
$
$
4,318
7,454
19,443
(44,697)
209
16,753
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company manufactures, markets and sells FC2. FC2 is the only currently available female-controlled product approved by the
FDA that provides dual protection against unintended pregnancy and STIs, including HIV/AIDS.
FC2’s primary usages are for disease prevention and family planning, and the public health sector is the Company’s main market.
Within the public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need
but cannot afford to buy such products for themselves.
FC2 has been distributed in 144 countries. A significant number of countries with the highest demand potential are in the developing
world. The incidence of HIV/AIDS, other STIs and unwanted pregnancy in these countries represents a remarkable potential for
significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries
can be volatile and result in unpredictable delays in program development, tender applications and processing orders.
The Company has a relatively small customer base, with a limited number of customers who generally purchase in large quantities.
Over the past few years, major customers have included large global agencies, such as UNFPA and USAID. Other customers include
ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and NGOs.
Purchasing patterns vary significantly from one customer to another, and may reflect factors other than simple demand. For example,
some governmental agencies purchase through a formal procurement process in which a tender (request for bid) is issued for either a
specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product
specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited period of time in
which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful
bidder. The entire tender process, from publication to award, may take many months to complete. A tender award indicates
acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units. Many
governmental tenders are stated to be “up to” the maximum number of units, which gives the applicable government agency discretion
to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for
orders in the tender and there are no guarantees as to the timing or amount of actual orders or shipments. Orders received may vary
from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections and changes
in demand. Administrative issues, politics, bureaucracy, process errors, changes in leadership, funding priorities and/or other
pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may
experience significant quarter-to-quarter sales variations due to the timing and shipment of large orders.
During fiscal 2011, the Company’s unit shipments, revenues, and net income were adversely affected by bureaucratic delays and other
timing issues involving the receipt and shipment of large orders from Brazil and RSA. Significant orders for both countries were
received in the first quarter of fiscal 2012. The 20 million unit order received for shipment to Brazil which had been the largest order
in the Company’s history. Receipt of these orders positively impacted fiscal 2012 and 2013 results.
In October 2014, the Company announced that Semina was awarded an exclusive contract under a public tender. The contract was
valid through August 20, 2015, allowing the Brazil Ministry of Health to place orders against this tender at its discretion. Through the
end of the contract, the Company received orders for 40 million units in fulfillment of the tender, 28 million of which were shipped
during the year ended September 30, 2015.
Details of the quarterly unit sales for the last five fiscal years are as follows:
Period
2015
2014
2013
October 1 – December 31
12,154,570
11,832,666
17,114,630
January 1 – March 31
April 1 – June 30
July 1 - September 30
Total
20,760,519
14,413,032
7,298,968
13,693,652
16,675,035
12,583,460
13,687,462
9,697,341
8,386,800
61,015,583
42,522,627
54,759,925
2012
15,166,217
13,945,320
15,198,960
17,339,500
61,649,997
2011
6,067,421
8,905,099
5,922,334
11,977,716
32,872,570
Revenues. The Company's revenues are derived from sales of FC2, and are recognized upon shipment of the product to its customers.
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The Company’s most significant customers are either global public health sector agencies or those who facilitate their purchases
and/or distribution of FC2 for use in HIV/AIDS prevention and/or family planning. The Company's four largest customers currently
are UNFPA, USAID, Sekunjalo and Semina. UNFPA accounted for 18 percent of unit sales in fiscal 2015, 40 percent of unit sales in
fiscal 2014, and 62 percent of unit sales in fiscal 2013. USAID accounted for 16 percent of unit sales in fiscal 2015, 17 percent of unit
sales in fiscal 2014, and less than 10 percent of unit sales in fiscal 2013. Sekunjalo accounted for less than 10 percent of unit sales in
fiscal 2015, 13 percent of unit sales in fiscal 2014, and less than 10 percent of unit sales in fiscal 2013. Semina accounted for 47
percent of unit sales in fiscal 2015 and less than 10 percent of unit sales in fiscal 2014 and 2013. Azinor accounted for 11 percent of
unit sales in fiscal 2014. No other single customer accounted for more than 10 percent of unit sales in fiscal 2015, 2014, or 2013. We
sell to the Brazil Ministry of Health either through UNFPA or Semina. In the U.S., FC2 is sold to city and state public health clinics
as well as to not-for-profit organizations such as Planned Parenthood.
Because the Company manufactures FC2 in a leased facility located in Malaysia, a portion of the Company's operating costs are
denominated in foreign currencies. While a material portion of the Company's future sales are likely to be in foreign markets, all sales
are denominated in the U.S. dollar. Effective October 1, 2009, the Company’s U.K. and Malaysia subsidiaries adopted the U.S. dollar
as their functional currency, further reducing the Company’s foreign currency risk.
Expenses. The Company manufactures FC2 at its facility located in Selangor D.E., Malaysia. The Company's cost of sales consists
primarily of direct material costs, direct labor costs and indirect production and distribution costs. Direct material costs include raw
materials used to make FC2, principally a nitrile polymer. Indirect production costs include logistics, quality control and maintenance
expenses, as well as costs for electricity and other utilities. All of the key components for the manufacture of FC2 are essentially
available from either multiple sources or multiple locations within a source.
On April 1, 2015, a tariff exemption in Brazil for condoms was eliminated subjecting all shipments of FC2 clearing customs in Brazil
on or after that date to a tariff. The Company agreed to share 50 percent of these tariff costs with Semina, its distributor in Brazil.
The Company's share of these tariff costs was approximately $398,000 for the portion of the initial 25 million unit order received
under the 2014 tender that was subject to the tariff. In August 2015, the Company announced it has received an additional order for
15 million units. The Company agreed to share 50 percent of the tariff costs with Semina for this additional order and will recognize
the expense as the units are shipped.
The Company's operating expenses include costs for sales, marketing, education and training relating to FC2. During the London
Summit, the Company announced a program to support the London Summit's goal to provide contraceptives to an additional 120
million women by 2020. This program includes a plan for the Company to invest up to $14 million over the period from 2013 through
2018 in reproductive health and HIV/AIDS prevention marketing, education and training in collaboration with global agencies. Such
investment in marketing, education and training may increase the Company’s operating expenses in future periods, although the
Company has not set a specific timetable for any such increased spending. In connection with the London Summit, the Company
implemented a volume purchasing incentive program to award major public sector purchasers with FC2 equal to 5 percent of their
total annual units purchased, at no-cost. The Company reserved for the no-cost product as a cost of sales, which impacted the
Company’s gross margin. Effective January 1, 2015, the Company reduced the unit price to the major public sector purchasers to
reflect the 5 percent no-cost product instead of awarding no-cost product.
Fiscal Year Ended September 30, 2015 Compared to Fiscal Year Ended September 30, 2014
Operating Highlights. The Company had net revenues of $32,604,865 during fiscal 2015, compared to $24,490,586 in fiscal 2014.
The Company’s fiscal 2015 unit sales were 43 percent higher than fiscal 2014. The increase in unit sales and net revenues is primarily
due to 28 million units shipped during fiscal 2015 under the 2014 Brazilian tender. The average sales price of FC2 decreased 7.2
percent in fiscal 2015 from fiscal 2014. Effective January 1, 2015, the unit price has been reduced for major public sector purchasers
to replace the previous 5 percent no-cost product policy under the Company’s volume purchasing incentive program. The remaining
decrease is primarily due to sales mix.
The Company used cash in operations of $1,548,697 in fiscal 2015 compared to $3,665,413 of cash generated from operations in
fiscal 2014.
The Company had net income of $4,346,036, or $0.15 per diluted share, in fiscal 2015 compared to net income of $2,433,061, or
$0.08 per diluted share, in fiscal 2014.
Results of Operations. The Company had net revenues of $32,604,865 and net income of $4,346,036, or $0.15 per diluted share, in
fiscal 2015, compared to net revenues of $24,490,586 and net income of $2,433,061, or $0.08 per diluted share, in fiscal 2014. Net
revenues increased $8,114,279, or 33 percent, in fiscal 2015 compared to the prior fiscal year.
Cost of sales increased $2,265,798, or 20 percent, to $13,634,906 in fiscal 2015 from $11,369,108 in fiscal 2014.
21
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Gross profit increased $5,848,481, or 45 percent, to $18,969,959 in fiscal 2015 from $13,121,478 in fiscal 2014. Gross profit as a
percentage of net revenues increased to 58 percent in fiscal 2015 from 54 percent in fiscal 2014. The increase reflects the favorable
impact of changes in currency exchange rates slightly offset by higher costs associated with the increased unit sales.
Selling, general and administrative expenses increased $2,997,867, or 33 percent, to $12,131,737 in fiscal 2015 from $9,133,870 in
fiscal 2014. Approximately 56 percent of the increased spending related to payments to our Brazilian distributor for ongoing
programming related to the 2012 tender and for marketing and management fees related to the 2014 tender. $398,000 of the increase
was for the Company’s share of tariff cost related expenses for the Brazilian tender. An accrual for fiscal year end incentive
compensation, not incurred in the prior year period, was approximately 15 percent of the increase. Business development consulting
costs associated with the portfolio diversification strategy was approximately 23 percent of the increase, minimal costs were incurred
in the prior year period. These increased expenses were partially offset by a reduction of expenses relating to employee compensation.
Research and development expenses increased $214,240 to $219,815 in fiscal 2015 from $5,575 in fiscal 2014. The increase is
primarily related to product enhancements.
Total operating expenses increased $3,153,986 to $12,351,552 in fiscal 2015 from $9,197,566 in fiscal 2014.
The Company's operating income increased $2,694,495, or 69 percent, to $6,618,407 in fiscal 2015 from $3,923,912 in fiscal 2014.
The increase is primarily due to increased net revenues and improved gross margins partially offset by higher operating expenses.
The Company recorded non-operating income of $68,633 in fiscal 2015 compared to $33,279 in fiscal 2014. The impact of the
foreign currency transactions was a gain of $58,483 in fiscal 2015 compared to a loss of $83,844 in fiscal 2014.
Income tax expense increased $816,874 to $2,341,004 in fiscal 2015 compared to income tax expense of $1,524,130 in fiscal 2014.
The effective tax rate for fiscal 2015 and 2014 was 35.0 percent and 38.5 percent, respectively. The reduction in the effective tax rate
is due to the mix of tax jurisdictions in which the Company recognized income before income taxes and the reduction in the Illinois
state income tax rate, effective January 1, 2015, from 9.5 percent to 7.75 percent. The Company’s net operating loss (NOL)
carryforwards will be utilized to reduce cash payments for income taxes based on the statutory rate in effect at the time of such
utilization. Actual income taxes paid are reflected on the Company’s consolidated statements of cash flows. In fiscal 2015 the
Company recorded income tax expense of $2,341,004, while due to the use of NOL carryforwards the Company made cash payments
of $294,441 for income taxes.
Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013
Operating Highlights. The Company had net revenues of $24,490,586 during fiscal 2014, compared to $31,456,778 in fiscal 2013.
The Company’s fiscal 2014 unit sales were 22 percent lower than fiscal 2013. The average sales price of FC2 increased 0.3 percent in
fiscal 2014 from fiscal 2013.
The Company generated cash from operations of $3,663,596 in fiscal 2014 compared to $11,793,081 in fiscal 2013.
The Company had net income of $2,433,061, or $0.08 per diluted share, in fiscal 2014 compared to net income of $14,342,598, or
$0.50 per diluted share, in fiscal 2013.
Results of Operations. The Company had net revenues of $24,490,586 and net income of $2,433,061, or $0.08 per diluted share, in
fiscal 2014, compared to net revenues of $31,456,778 and net income of $14,342,598, or $0.50 per diluted share, in fiscal 2013. Net
revenues decreased $6,966,192, or 22 percent, in fiscal 2014 compared to prior fiscal year. Results in fiscal 2013 were in part
impacted by the receipt and shipment of Brazil orders delayed from fiscal 2011. The delayed orders were shipped in fiscal 2012 and
2013 and did not continue in fiscal 2014.
Cost of sales decreased $2,583,312, or 19 percent, to $11,369,108 in fiscal 2014 from $13,952,420 in fiscal 2013. The decrease is
primarily due to a reduction in material costs due to lower unit sales partially offset by increased costs of quality control testing, a net
increase in rent due to the leased warehouse facility and an increase in insurance costs.
Gross profit decreased $4,382,880, or 25 percent, to $13,121,478 in fiscal 2014 from $17,504,358 in fiscal 2013. Gross profit as a
percentage of net revenues decreased to 54 percent in fiscal 2014 from 56 percent in fiscal 2013.
Advertising expenses decreased $163,597 to $58,121 in fiscal 2014 from $221,718 in fiscal 2013. The decrease is primarily due to a
program launched in fiscal 2013 which did not recur in fiscal 2014.
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Selling, general and administrative expenses increased $1,645,572, or 22 percent, to $9,133,870 in fiscal 2014 from $7,488,298 in
fiscal 2013. The increase was primarily due to increased spending in sales, marketing, training and education. The majority of the
increased spending relates to payments to our Brazilian distributor for programming related to the 2012 tender and for management
fees for the recently announced 2014 tender.
Total operating expenses increased $1,482,805 to $9,197,566 in fiscal 2014 from $7,714,761 in fiscal 2013.
The Company's operating income decreased $5,865,685 to $3,923,912 in fiscal 2014 from $9,789,597 in fiscal 2013. The decrease is
primarily due to lower unit sales and the increased spending in sales, marketing, training and education.
The Company recorded non-operating income of $33,279 in fiscal 2014 compared to $144,257 in fiscal 2013. The decrease is
primarily due to the distribution upon demutualization of an insurance carrier received in fiscal 2013. The impact of the foreign
currency transactions was a loss of $83,844 in fiscal 2014 compared to a loss of $101,288 in fiscal 2013.
Income tax expense increased $5,932,874 to $1,524,130 in fiscal 2014 compared to an income tax benefit of $4,408,744 in fiscal
2013. The increase is primarily due to the Company no longer recognizing an income tax benefit associated with reducing the
Company’s valuation allowance on its deferred tax assets related to net operating loss carryforwards. During the year ended
September 30, 2013, the valuation allowance on the Company’s deferred tax assets was fully realized and as a result the Company
does not expect to recognize such tax benefits to any significant extent in its consolidated statements of income for periods after
September 30, 2013. However the Company’s net operating loss carryforwards will be utilized to reduce cash payments for income
taxes based on the statutory rate in effect at the time of such utilization. Actual income taxes paid are reflected on the Company’s
consolidated statements of cash flows.
Liquidity and Sources of Capital
We generally fund our operations and working capital needs through cash generated from operations. Our operating activities used
cash of $1.5 million in fiscal 2015, generated cash of $3.7 million in fiscal 2014, and generated cash of $11.8 million in fiscal 2013.
The decrease of $5.2 million in cash generated from operating activities in fiscal 2015 as compared to fiscal 2014 was primarily due to
an increase in accounts receivable of $11.2 million from $2.9 million at September 30, 2014 to $14.1 million at September 30, 2015.
This increase is a result of orders received under the awarded Brazil 2014 tender. Semina’s accounts receivable balance represents 70
percent of the Company’s accounts receivable as September 30, 2015. Semina normally pays upon payment from the Brazilian
Government; however due to economic issues in Brazil the government has been slower in paying vendors. In addition, total current
liabilities increased $0.8 million, primarily due to $1.6 million owed to Semina related to the 2014 tender. In fiscal 2015, investing
activities used cash of $0.1 million and financing activities used cash of $6,288. In fiscal 2014, investing activities used cash of $0.1
million and financing activities used cash of $6.7 million, most of which was used to pay quarterly cash dividends.
At September 30, 2015, the Company had working capital of $17.4 million and stockholders' equity of $33.1 million compared to
working capital of $9.7 million and stockholders' equity of $28.1 million as of September 30, 2014.
Beginning February 16, 2010, through May 7, 2014, the Company paid a total of 18 consecutive dividends. The first 9 quarterly
dividends were paid at a quarterly rate per share of $0.05 through February 9, 2012, 4 were paid at a quarterly rate per share of $0.06
from May 9, 2012 through February 6, 2013 and 5 were paid at a quarterly rate per share of $0.07 from May 8, 2013 through May 7,
2014. Cash dividends paid totaled $29.4 million during this period. The Company paid cash dividends of approximately $6.1 million
and $7.5 million in fiscal 2014 and fiscal 2013, respectively. On July 14, 2014, the Company announced that its Board of Directors
has elected to suspend the payment of quarterly cash dividends in order to devote operating cash flows towards strategic growth
initiatives.
The Company believes its current cash position is adequate to fund operations of the Company in the next 12 months, although no
assurances can be made that such cash will be adequate. If the Company needs additional cash, it may sell equity securities to raise
additional capital and may borrow funds under its Midland States Bank credit facility.
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Table of Contents
On August 1, 2015, the Company entered into an amendment to the Second Amended and Restated Loan Agreement (as amended, the
Loan Agreement) with Midland States Bank to extend the term of the Company’s revolving line of credit to August 1, 2016. The
credit facility consists of a single revolving note for up to $2 million with Midland States Bank, with borrowings limited to a
borrowing base determined based on 70 percent to 80 percent of eligible accounts receivable plus 50 percent of eligible inventory.
Significant restrictive covenants in the Loan Agreement include prohibitions on any merger, consolidation or sale of all or a
substantial portion of the Company’s assets and limits on the payment of dividends or the repurchase of shares. The Loan Agreement
does not contain any financial covenants that require compliance with ratios or amounts. Dividends and share repurchases are
permitted as long as after giving effect to the dividend or share repurchase the Company has a ratio of total liabilities to total
stockholders’ equity of no more than 1:1. Borrowings on the revolving note bear interest at the national prime rate published by the
Wall Street Journal (3.25 percent at September 30, 2015). The note is collateralized by substantially all of the assets of the Company.
No amounts were outstanding under the revolving note at either September 30, 2015 or 2014.
As of November 27, 2015, the Company had approximately $3.9 million in cash, net trade accounts receivable of $14.6 million and
current trade accounts payable of $0.5 million. Presently, the Company has no required debt service obligations.
The following table includes information relating to our contractual obligations as of September 30, 2015 in future fiscal years:
p
Contractual
Obligations
Long-term debt
Capital lease
obligations
Operating lease
obligations
Purchase obligations
Other long-term
obligations
Total
$
-
-
Total
2016
2017
2018
2019
2020
$
-
$
- $
-
$
-
$
Thereafter
-
-
$
-
-
-
-
-
839,972
371,528
131,032
123,002
122,491
91,919
-
-
-
-
-
-
-
839,972
$
-
371,528
$
-
131,032
$
-
123,002
$
-
122,491
$
-
91,919
$
$
-
—
-
-
—
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates and use assumptions that affect certain reported
amounts and disclosures. Critical accounting estimates include the deferred income tax valuation allowance. Actual results may differ
from those estimates.
The Company files separate income tax returns for its foreign subsidiaries. ASC Topic 740 requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred
tax assets are also provided for carryforwards for income tax purposes. In addition, the amount of any future tax benefits is reduced by
a valuation allowance to the extent such benefits are not expected to be realized.
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 assets and liabilities, and for net operating
loss and tax credit carryforwards.
The Company completes a detailed analysis of its deferred income tax valuation allowance on an annual basis or more frequently if
information comes to our attention that would indicate that a revision to its estimates is necessary. In evaluating the Company’s
ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country by country
basis, including past operating results and forecast of future taxable income. In determining future taxable income, management
makes assumptions to forecast U.S. federal and state, U.K. and Malaysia 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 the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Company’s
business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis. Since fiscal 2006, the
Company has consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the
Company can reasonably expect to generate taxable income. In management’s analysis to determine the amount of the deferred tax
asset to recognize, management projected future taxable income for each tax jurisdiction.
24
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Although management uses the best information available, it is reasonably possible that the estimates used by the Company will be
materially different from the actual results. These differences could have a material effect on the Company's future results of
operations and financial condition.
Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes and
reversal of the valuation allowance against the NOL carryforwards. Our future effective tax rates could be adversely affected by
earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where
we have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, and
accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of
our provision for income taxes.
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. The Company has, where possible,
increased selling prices to offset such increases in costs.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
N
The Company's exposure to market risk is limited to fluctuations in raw material commodity prices, particularly the nitrile polymer
used to manufacture FC2, and foreign currency exchange rate risk associated with the Company's foreign operations. The Company
does not utilize financial instruments for trading purposes or to hedge risk and holds no derivative financial instruments which would
expose it to significant market risk. Effective October 1, 2009, the Company's U.K. subsidiary and Malaysia subsidiary each adopted
the U.S. dollar as its functional currency. The consistent use of the U.S. dollar as the functional currency across the Company reduces
its foreign currency risk and stabilizes its operating results. The Company’s distributors are subject to exchange rate risk as their
orders are denominated in the U.S. dollars and they generally sell to their customers in the local country currency. If currency
fluctuations have a material impact on a distributor it may ask the Company for pricing concessions or other financial
accommodations. The Company currently has no significant exposure to interest rate risk. The Company has a line of credit with
Midland States Bank, consisting of a revolving note for up to $2 million with borrowings limited to a percentage of eligible accounts
receivable and eligible inventory. Outstanding borrowings under the line of credit will incur interest at a rate equal to the national
prime rate published by the Wall Street Journal. As the Company has had no outstanding borrowings in the last five years, it currently
has no significant exposure to market risk for changes in interest rates. Should the Company incur future borrowings under its line of
credit, it would be subject to interest rate risk related to such borrowings.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this report. See “Index to Consolidated Financial Statements” for a list
of the financial statements being filed herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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.
Changes in Internal Control Over Financial Reporting
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 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.
Management’s Report on Internal Control Over Financial Reporting
The report of management required under this Item 9A is contained on page F-1 of this Annual Report on Form 10-K under the
heading "Management's Report on Internal Control over Financial Reporting."
Report of Independent Registered Public Accounting Firm
The attestation report required under this Item 9A is contained on page F-2 of this Annual Report on Form 10-K under the heading
"Report of Independent Registered Public Accounting Firm."
Item 9B. Other Information
26
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None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to this item is incorporated herein by reference to the discussion under the headings “Proposal 1: Election of
Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Matters-
Director Nominations” and “Audit Committee Matters – Audit Committee Financial Expert” in the Company’s Proxy Statement for
the 2016 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2016. Information regarding the
Company’s Code of Business Ethics is incorporated herein by reference to the discussion under “Corporate Governance Matters –
Code of Business Ethics” in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders, which will be filed with
the SEC on or before January 28, 2016.
u
The Audit Committee of the Company’s Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) of the
Securities Exchange Act of 1934. The members of the Audit Committee are Mary Margaret Frank (Chairperson), David R. Bethune
and Andrew S. Love.
Item 11. Executive Compensation
Information with respect to this item is incorporated herein by reference to the discussion under the headings “Director Compensation
and Benefits,” and “Executive Compensation” in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders,
which will be filed with the SEC on or before January 28, 2016. The information under the subsection "Executive Compensation –
Compensation Committee Report" is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A
under the Securities Exchange Act of 1934 or to be the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be
deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent it is specifically incorporated by reference into such a filing.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Security Ownership” in
the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders, which will be filed with the SEC on or before January
28, 2016.
Equity Compensation Plan Information
The following table summarizes share information, as of September 30, 2015, for the Company's equity compensation plans and
arrangements. The plans and arrangements dated prior to July 2007 were not required to be approved by the Company's shareholders,
and, accordingly, none of these plans or arrangements have been approved by the Company's shareholders. In March 2008, the
Company’s shareholders approved the 2008 Stock Incentive Plan and authorized 2 million shares (subject to adjustment in the event
of stock splits and other similar events) for issuance under the plan.
Number of Shares To Be
Issued Upon Exercise Of
Outstanding Options
Weighted-Average
Exercise Price Of
Outstanding Options
Shares Remaining
Available For Future
Issuance Under Equity
Compensation Plans
Equity Plan Category
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
Total
______________
(1)
at a holder’s election cash based on the fair market value of the shares, contingent on continued employment or service.
90,000
272,333
182,333 (1) $
1.27
2.33
$
$
2.86
Includes a right to receive 9,333 shares contingent on continued employment and rights to receive a total of 83,000 shares, or
712,115
—
712,115
The Company's equity compensation plans not approved by shareholders consists of the 1997 Stock Option Plan. Options granted
under the 1997 Stock Option Plan are nonqualified stock options under the Internal Revenue Code. Options expire at such time as the
Board of Directors determines, provided that no stock option may be exercised later than the tenth anniversary of the date of its grant.
Options cannot be exercised until the vesting period, if any, specified by the Board of Directors. Options are not transferable other
than by will or the laws of descent and distribution, and may be exercised during the life of the participant only by him or her. The
option price per share is determined by the Board of Directors, but cannot be less than 100 percent of the fair market value of the
28
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common stock on the date such option is granted. The 1997 Stock Option Plan expired as of December 31, 2006, thus no further
shares can be issued under this plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Certain Relationships
and Related Transactions” in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders, which will be filed with
the SEC on or before January 28, 2016. Information regarding director independence is incorporated by reference to the discussions
under “Corporate Governance Matters – Director Independence” in the Company’s Proxy Statement for the 2016 Annual Meeting of
Shareholders, which will be filed with the SEC on or before January 28, 2016.
Item 14. Principal Accountant Fees and Services.
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Audit Committee
Matters – Fees of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2016 Annual Meeting
of Shareholders, which will be filed with the SEC on or before January 28, 2016.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1.
Financial Statements
The following consolidated financial statements of the Company are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2015 and 2014
Consolidated Statements of Income for the Years Ended September 30, 2015, 2014, and 2013
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the Years Ended September 30, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related
instructions, are inapplicable or the required information is shown in the financial statements or notes thereto, and therefore, have been
omitted.
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Exhibits
3.
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of
authorized shares of common stock to 27,000,000 shares. (2)
3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of
authorized shares of common stock to 35,500,000 shares. (3)
3.4 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of
authorized shares of common stock to 38,500,000 shares. (4)
3.5 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company designating the terms and
preferences for the Class A Preferred Stock – Series 3. (5)
3.6 Amended and Restated By-Laws of the Company. (6)
4.1 Amended and Restated Articles of Incorporation, as amended (same as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5).
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the Company (included in Exhibit 3.6).
10.1 1997 Stock Option Plan, as amended. (7)
10.2 Letter Agreement dated December 5, 2013 between the Company and Karen King. (8)
10.3 Change of Control Agreement effective as of January 20, 2014, between the Company and Karen King. (8)
10.4 Separation Agreement and General Release, dated as of July 10, 2015, among the Company, Karen King and certain
directors of the Company. (9)
10.5 Change of Control Agreement between the Company and Michele Greco dated November 9, 2012. (10)
10.6 Letter Agreement dated November 9, 2012 between the Company and Michele Greco. (10)
10.7 Consulting Agreement, dated as of January 1, 2013, between the Company and Donna Felch. (11)
10.8 First Amendment to Consulting Agreement, dated as of October 1, 2014, between the Company and Donna Felch. (12)
10.9 Letter Agreement dated August 27, 2015 terminating Consulting Agreement with Donna Felch.
10.10 Letter Agreement dated November 18, 2014 terminating Amended and Restated Change of Control Agreement of O.B.
Parrish. (12)
10.11 Consulting Agreement, dated as of December 31, 2013, between the Company and Mary Ann Leeper. (13)
10.12 Letter Agreement dated July 10, 2014 between the Company and Susan Ostrowski. (14)
10.13 Change of Control Agreement effective as of July 10, 2014, between the Company and Susan Ostrowski. (14)
10.14 Consultancy Agreement, dated as of September 15, 2014, between The Female Health Company (UK) PLC and Michael
Pope. (15)
10.15 Service Agreement, dated September 15, 2014, between The Female Health Company (UK) PLC and Martin Tayler. (15)
10.16 Change of Control Agreement dated September 15, 2014 between the Company and Martin Tayler. (15)
10.17 The Female Health Company 2008 Stock Incentive Plan. (16)
10.18 Form of Nonstatutory Stock Option Grant Agreement for The Female Health Company 2008 Stock Incentive Plan. (17)
31
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10.19 Form of Restricted Stock Grant Agreement for The Female Health Company 2008 Stock Incentive Plan. (18)
10.20 Second Amended and Restated Loan Agreement, dated as of August 1, 2011, between the Company and Heartland Bank.
(19)
10.21 First Amendment to Second Amended and Restated Loan Agreement, dated as of August 1, 2012, between the Company and
Heartland Bank. (20)
10.22 Second Amendment to Second Amended and Restated Loan Agreement, dated as of August 1, 2013, between the Company
and Heartland Bank. (18)
10.23 Third Amendment to Second Amended and Restated Loan Agreement, dated as of August 1, 2014, between the Company
and Heartland Bank. (14)
10.24 Fourth Amendment to Second Amended and Restated Loan Agreement, dated as of August 1, 2015, between the Company
and Midland States Bank, successor-by-merger to Heartland Bank.
10.25 Commercial Security Agreement, dated as of July 20, 2004, between the Company and Heartland Bank. (21)
10.26 First Amendment to Commercial Security Agreement, dated as of July 1, 2010, between the Company and Heartland Bank.
(22)
10.27 Second Amendment to Commercial Security Agreement, dated as of August 1, 2011, between the Company and Heartland
Bank. (19)
10.28 Share Charge, dated as of August 30, 2011, between the Company and Heartland Bank. (23)
10.29 Consulting Agreement, effective as of September 10, 2015, between the Company and SMI, Strategic Marketing &
Consulting.
21
Subsidiaries of Registrant.
23.1 Consent of RSM US LLP.
24.1 Power of Attorney (included as part of the signature page hereof).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002. (24)
101 The following materials from the Company's Annual Report on Form 10-K for the year ended September 30, 2015, formatted
in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of
Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the
Notes to Consolidated Financial Statements.
____________
(1)
Incorporated herein by reference to the Company's Form SB-2 Registration Statement filed on October 19, 1999.
(2)
Incorporated herein by reference to the Company's Form SB-2 Registration Statement filed on September 21, 2000.
(3)
Incorporated herein by reference to the Company's Form SB-2 Registration Statement filed on September 6, 2002.
(4)
Incorporated herein by reference to the Company's March 31, 2003 Form 10-QSB.
(5)
Incorporated herein by reference to the Company's March 31, 2004 Form 10-QSB.
(6)
Incorporated herein by reference to the Company's Form 8-K filed on May 22, 2013.
32
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(7)
Incorporated herein by reference to the Company's Form S-8 Registration Statement filed on March 26, 2010.
(8)
Incorporated herein by reference to the Company's Form 8-K filed on December 11, 2013.
(9)
(10)
Incorporated by reference to the Company’s Form 8-K filed on July 16, 2015.
Incorporated herein by reference to the Company's Form 8-K filed on November 9, 2012.
(11)
Incorporated herein by reference to the Company's Form 8-K filed on January 7, 2013.
(12)
Incorporated by reference to the Company’s December 31, 2014 Form 10-Q.
(13)
Incorporated herein by reference to the Company's December 31, 2013 Form 10-Q.
(14)
Incorporated by reference to the Company’s September 30, 2014 Form 10-K.
(15)
Incorporated herein by reference to the Company’s Form 8-K filed on September 16, 2014.
(16)
Incorporated herein by reference to the Company's Form 8-K filed on March 31, 2008.
(17)
Incorporated herein by reference to the Company's September 30, 2009 Form 10-K.
(18)
Incorporated herein by reference to the Company's September 30, 2013 Form 10-K.
(19)
Incorporated herein by reference to the Company's June 30, 2011 Form 10-Q.
(20)
Incorporated herein by reference to the Company's September 30, 2012 Form 10-K.
(21)
Incorporated herein by reference to the Company's March 31, 2010 Form 10-Q.
(22)
Incorporated herein by reference to the Company's June 30, 2010 Form 10-Q.
(23)
Incorporated herein by reference to the Company’s September 30, 2011 Form 10-K.
(24) This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.
The response to this portion of Item 15 is submitted as a separate section of this report.
(c) Financial Statement Schedules
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 1, 2015
THE FEMALE HEALTH COMPANY
BY:
BY:
/s/ O.B. Parrish
O.B. Parrish, Chairman and
Chief Executive Officer
/s/ Michele Greco
Michele Greco, Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints O.B. Parrish and Michele Greco, and each of them individually,
his true and lawful attorney-in-fact, with power to act with or without the other and with full power of substitution and resubstitution,
in any and all capacities, to sign any or all amendments to the Form 10-K and file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature
/s/ O.B. Parrish
O.B. Parrish
/s/ Michele Greco
Michele Greco
/s/ William R. Gargiulo
William R. Gargiulo
/s/ David R. Bethune
David R. Bethune
/s/ Donna Felch
Donna Felch
/s/ Mary Margaret Frank
Mary Margaret Frank
/s/ Andrew S. Love
Andrew S. Love
Sharon Meckes
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date
December 1, 2015
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
December 1, 2015
Secretary and Director
December 1, 2015
December 1, 2015
December 1, 2015
December 1, 2015
December 1, 2015
December 1, 2015
Director
Director
Director
Director
Director
34
88535 FemaleHealth_AR15_10K.indd 36
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Table of Contents
The Female Health Company
Index to Consolidated Financial Statements
Document
Audited Consolidated Financial Statements.
Management's Report on Internal Control over Financial Reporting.
Report of RSM US LLP, Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of September 30, 2015 and 2014.
Consolidated Statements of Income for the years ended September 30, 2015, 2014, and 2013.
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2015, 2014, and 2013.
Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013.
Notes to Consolidated Financial Statements.
Page No.
F-1
F-2
F-3
F-4
F-5 through F-7
F-8
F-9 through F-21
88535 FemaleHealth_AR15_10K.indd 37
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35
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control
over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding
the preparation and fair presentation of published financial statements. The Company’s internal control over financial reporting includes
those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2015. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework in 2013. Based on its assessment, management believes that, as of
September 30, 2015, the Company's internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of September 30, 2015 has been audited by RSM US LLP, an
independent registered public accounting firm, as stated in their report. See ”Report of Independent Registered Public Accounting
Firm,” which appears on page F-2 of this report.
December 1, 2015
p
p
/
F-1
88535 FemaleHealth_AR15_10K.indd 38
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
The Female Health Company
es
We have audited the accompanying consolidated balance sheets of The Female Health Company as of September 30, 2015 and 2014,
and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended
September 30, 2015. We also have audited The Female Health Company's internal control over financial reporting as of September 30,
2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. The Female Health Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
The Female Health Company as of September 30, 2015 and 2014, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2015, in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, The Female Health Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2015, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ RSM US LLP
Chicago, Illinois
December 1, 2015
F-2
88535 FemaleHealth_AR15_10K.indd 39
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THE FEMALE HEALTH COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2015 AND 2014
ASSETS
Current Assets
Cash
Accounts receivable, net of allowance for doubtful accounts of $48,068 for
2015 and 2014
Income tax receivable
Inventory, net
Prepaid expenses and other current assets
Deferred income taxes
TOTAL CURRENT ASSETS
2015
2014
$
4,105,814 $
5,796,223
N
14,088,390
21,251
1,745,180
609,320
1,016,000
21,585,955
2,943,850
—
2,983,447
638,243
711,000
13,072,763
Other assets
136,766
166,084
N
N
N
N
PLANT AND EQUIPMENT
Equipment, furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
Plant and equipment, net
Deferred income taxes
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Accrued expenses and other current liabilities
Accrued compensation
TOTAL CURRENT LIABILITIES
LONG-TERM LIABILITIES
Deferred rent
Deferred income taxes
TOTAL LIABILITIES
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock; no shares issued and outstanding in 2015 or 2014.
Common Stock, par value $0.01 per share; authorized 38,500,000 shares;
issued 31,192,536 and 30,958,669, and 29,008,832 and 28,775,215 shares
outstanding in 2015 and 2014 respectively
Additional paid-in-capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock, at cost
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
F-3
4,680,246
323,147
(3,763,403)
1,239,990
14,509,000
37,471,711 $
1,077,349 $
2,555,231
592,428
4,225,008
15,389
98,252
4,338,649
4,590,124
323,147
(3,310,964)
1,602,307
16,832,000
31,673,154
1,124,859
1,816,508
436,843
3,378,210
39,105
190,513
3,607,828
—
—
311,925
69,205,201
(581,519)
(27,995,940)
(7,806,605)
33,133,062
37,471,711 $
309,587
68,484,889
(581,519)
(32,341,976)
(7,805,655)
28,065,326
31,673,154
$
$
$
88535 FemaleHealth_AR15_10K.indd 40
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THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013
Net revenues
Cost of sales
Gross profit
Operating expenses:
Research and development
Advertising
Selling, general, and administrative
Total operating expenses
2015
2014
2013
$
32,604,865
$
24,490,586
$
31,456,778
13,634,906
11,369,108
13,952,420
18,969,959
13,121,478
17,504,358
219,815
—
12,131,737
12,351,552
5,575
58,121
9,133,870
9,197,566
4,745
221,718
7,488,298
7,714,761
Operating income
6,618,407
3,923,912
9,789,597
Non-operating income:
Interest and other income, net
Foreign currency transaction gain (loss)
Total non-operating income
Income before income taxes
Income tax expense (benefit)
Net income
Net income per basic common share outstanding
Basic weighted average common shares outstanding
Net income per diluted common share outstanding
Diluted weighted average common shares outstanding
Cash dividends declared per common share
See notes to consolidated financial statements.
10,150
58,483
68,633
117,123
(83,844)
33,279
245,545
(101,288)
144,257
6,687,040
3,957,191
9,933,854
2,341,004
4,346,036
$
1,524,130
2,433,061
0.15
$
0.09
(4,408,744)
14,342,598
0.51
$
$
28,532,327
28,522,525
28,376,607
0.15
$
0.08
$
0.50
28,917,048
28,865,384
28,726,478
—
$
0.21
$
0.26
$
$
$
$
F-4
88535 FemaleHealth_AR15_10K.indd 41
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88535 FemaleHealth_AR15_10K.indd 42
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88535 FemaleHealth_AR15_10K.indd 43
88535 FemaleHealth_AR15_10K.indd 43
12/16/15 2:06 PM
12/16/15 2:06 PM
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88535 FemaleHealth_AR15_10K.indd 44
88535 FemaleHealth_AR15_10K.indd 44
12/16/15 2:06 PM
12/16/15 2:06 PM
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2015, 2014 and 2013
OPERATIONS
Net income
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization
Provision for obsolete inventory
Provision for bad debts
Share-based compensation
Deferred income taxes
Loss on disposal of fixed assets
Changes in operating assets and liabilities:
Accounts receivable
Income tax receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other current liabilities
Net cash (used in) provided by operating activities
INVESTING ACTIVITIES
Capital expenditures
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from exercise of stock options
Purchases of common stock for treasury shares
Dividends paid on common stock
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
CASH AT END OF YEAR
Supplemental Disclosure of Cash Flow Information:
Cash payments for income taxes
Schedule of noncash financing and investing activities:
Dividends payable
Reduction of accrued expense upon issuance of shares
See notes to consolidated financial statements.
2015
2014
2013
$
4,346,036
$
2,433,061
$
14,342,598
494,258
173,634
—
489,689
1,925,739
3,483
(11,144,540)
(21,251)
1,064,633
58,241
(47,510)
1,108,891
(1,548,697)
589,343
37,603
38,068
858,615
1,012,334
491
(619,753)
78,440
(561,633)
(151,656)
220,810
(270,310)
3,665,413
556,304
(6,662)
3,180
727,609
(5,259,065)
940
4,903,572
(51,071)
(994,556)
93,933
(871,278)
(1,652,423)
11,793,081
(135,424)
(135,424)
(97,311)
(97,311)
(302,198)
(302,198)
—
(950)
(5,338)
(6,288)
117,600
(737,745)
(6,074,164)
(6,694,309)
—
(395,667)
(7,468,248)
(7,863,915)
(1,690,409)
5,796,223
4,105,814
(3,126,207)
8,922,430
5,796,223
$
$
$
3,626,968
5,295,462
8,922,430
294,441
773,041
345,657
—
255,577
6,913
311,515
12,530
200,088
88535 FemaleHealth_AR15_10K.indd 45
88535 FemaleHealth_AR15_10K.indd 45
12/16/15 2:06 PM
12/16/15 2:06 PM
F-8
The Female Health Company
Notes to Consolidated Financial Statements
Note 1.
Nature of Business and Significant Accounting Policies
Principles of consolidation and nature of operations: The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, The Female Health Company – UK, and its wholly owned subsidiaries, The Female Health Company -
UK, plc and The Female Health Company (M) SDN.BHD. All significant intercompany transactions and accounts have been
eliminated in consolidation. The Female Health Company (FHC or the Company) is currently engaged in the marketing, manufacture
and distribution of a consumer health care product, the FC2 female condom (FC2). The Female Health Company - UK, is the holding
company of The Female Health Company - UK, plc, which is located in a 6,400 sq. ft. leased office facility located in London,
England (collectively the U.K. subsidiary). The Female Health Company (M) SDN.BHD leases a 45,800 sq. ft. manufacturing facility
located in Selangor D.E., Malaysia (the Malaysia subsidiary).
FC2 has been distributed in either or both commercial (private sector) and public health sector markets in 144 countries. It is
marketed to consumers through distributors, public health programs and retailers in 16 countries.
The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a
territory, so accounts receivable is affected by the mix of purchasers within the period. As is typical in the Company's business,
extended credit terms may occasionally be offered as a sales promotion or for certain sales. The Company has agreed to credit terms
of up to 150 days with our distributor in the Republic of South Africa. For the most recent order of 15 million units under the Brazil
tender, the Company has agreed to up to 360 day credit terms with our distributor in Brazil subject to earlier payment upon receipt of
payment by the distributor from the Brazilian Government. For the past twelve months, the Company's average days’ sales
outstanding was approximately 131 days. Over the past five years, the Company’s bad debt expense has been less than 0.03 percent of
product sales.
Use of estimates: The preparation of financial statements requires management to make estimates and use assumptions that affect
certain reported amounts and disclosures. Significant accounting estimates include the deferred income tax valuation allowance and
the value of share-based compensation. Actual results may differ from those estimates.
Cash concentration: The Company’s cash is maintained primarily in three financial institutions, located in Clayton, Missouri, London,
England and Kuala Lumpur, Malaysia, respectively.
Accounts receivable and concentration of credit risk: Accounts receivable are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a periodic basis. The components of accounts
receivable consist of the following at September 30, 2015 and 2014:
Trade receivables
Other receivables
Accounts receivable, gross
Less: allowance for doubtful accounts
Accounts receivable, net
2015
2014
$
$
13,975,905
160,553
14,136,458
(48,068)
14,088,390
$
$
2,814,558
177,360
2,991,918
(48,068)
2,943,850
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments on accounts receivable. Management determines the allowance for doubtful accounts by identifying troubled
accounts and by using historical experience applied to an aging of accounts. Management also periodically evaluates individual
customer receivables and considers a customer’s financial condition, credit history, and the current economic conditions. Accounts
receivable are written-off when deemed uncollectible. The table below sets forth the components of the allowance for doubtful
accounts for the years ended September 30:
Year
2013
2014
2015
$
$
$
Balance at
October 1
Provision Charges
to Expenses
Write offs/
Recoveries
Balance at
September 30
41,625
13,180
48,068
$
$
$
3,180
38,068
—
$
$
$
(31,625) $
(3,180) $
$
—
13,180
48,068
48,068
_
b
88535 FemaleHealth_AR15_10K.indd 46
88535 FemaleHealth_AR15_10K.indd 46
12/16/15 2:06 PM
12/16/15 2:06 PM
F-9
The Female Health Company
Notes to Consolidated Financial Statements
Recoveries of accounts receivable previously written-off are recorded when received. The Company’s customers are primarily large
global agencies, non-government organizations, ministries of health and other governmental agencies which purchase and distribute
the female condom for use in HIV/AIDS prevention and family planning programs. In fiscal year 2015, our significant customers were
Semina Indústria e Comércio Ltda (Semina), United Nations Population Fund (UNFPA), and John Snow, Inc., facilitator of USAID I
DELIVER project (USAID). In fiscal year 2014, our significant customers were UNFPA, USAID, Sekunjalo Investments
Corporation (PTY) Ltd (Sekunjalo), and Azinor International Lda (Azinor). In fiscal year 2013, our significant customer was
UNFPA. No other single customer accounted for more than 10 percent of unit sales during those periods.
Significant Customers
Semina
UNFPA
USAID
Sekunjalo
Azinor
Total Percentage of Unit Sales
_____________________
* Less than 10 percent of unit sales.
Percentage of Unit Sales
2014
2015
2013
47%
18%
16%
*
*
81%
*
40%
17%
13%
11%
81%
*
62%
*
*
*
62%
Semina’s accounts receivable balance represented 46 percent of current assets at September 30, 2015 and UNFPA’s accounts
receivable balance represented 12 percent of current assets at September 30, 2014. No other single customer’s accounts receivable
balance accounted for more than 10 percent of current assets at the end of those periods.
Inventory: Inventories are valued at the lower of cost or market. The cost is determined using the first-in, first-out (FIFO) method.
Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date. Write-downs
of inventories establish a new cost basis which is not increased for future increases in the market value of inventories or changes in
estimated obsolescence.
Foreign currency translation and operations: Effective October 1, 2009, the Company determined that there were significant changes
in facts and circumstances, triggering an evaluation of its subsidiaries’ functional currency. The evaluation indicated that the U.S.
dollar is the currency with the most significant influence upon the subsidiaries. Because all of the U.K. subsidiary's future sales and
cash flows would be denominated in U.S. dollars following the October 2009 cessation of production of the Company’s first
generation product, FC1, the U.K. subsidiary adopted the U.S. dollar as its functional currency effective October 1, 2009. As the
Malaysia subsidiary is a direct and integral component of the U.K. parent’s operations, it, too, adopted the U.S. dollar as its functional
currency as of October 1, 2009. The consistent use of the U.S. dollar as functional currency across the Company reduces its foreign
currency risk and stabilizes its operating results. The Company recognized a foreign currency transaction gain of $58,483 and a
foreign currency transaction loss of $83,844 and $101,288 for the years ended September 30, 2015, 2014, and 2013, respectively. The
cumulative foreign currency translation loss included in accumulated other comprehensive loss was $581,519 as of September 30,
2015 and 2014. Assets located outside of the U.S. totaled approximately $10,000,000 and $12,000,000 at September 30, 2015 and
2014, respectively.
Equipment, furniture and fixtures: Depreciation and amortization are computed using primarily the straight-line method.
Depreciation and amortization are computed over the estimated useful lives of the respective assets which range as follows:
Manufacturing equipment
Office equipment
Furniture and fixtures
5 – 10 years
3 years
7 – 10 years
Depreciation on leased assets is computed over the lesser of the remaining lease term or the estimated useful lives of the assets.
Depreciation on leased assets is included with depreciation on owned assets.
F-10
88535 FemaleHealth_AR15_10K.indd 47
88535 FemaleHealth_AR15_10K.indd 47
12/16/15 2:06 PM
12/16/15 2:06 PM
p
N
The Female Health Company
Notes to Consolidated Financial Statements
Patents and trademarks: The costs for patents and trademarks are expensed when incurred. FC2 patents have been issued by the
United States, Europe, Canada, Australia, South Africa, the People’s Republic of China, Japan, Mexico, Brazil, India and the African
Regional Intellectual Property Organization (ARIPO), which includes Botswana, Gambia, Ghana, Kenya, Lesotho, Malawi,
Mozambique, Namibia, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. Further, the European patent for
FC2 has been validated in the following countries: Austria, Belgium, Bulgaria, Switzerland, Republic of Cyprus, Czech Republic,
Germany, Denmark, Estonia, Spain, Finland, France, United Kingdom, Greece, Hungary, Ireland, Italy, Luxembourg, Monaco,
Netherlands, Portugal, Romania, Sweden, Slovenia, Slovakia, and Turkey. The patents cover the key aspects of FC2, including its
overall design and manufacturing process. The patents have expiration dates in 2023 and 2024. In addition, patent applications for
FC2 are pending in a number of other countries around the world. There can be no assurance that pending patent applications provide
the Company with protection against copycat products entering markets during the pendency of the applications.
The Company has a registration for the trademark “FC2 Female Condom” in the United States. Furthermore, the Company has filed
applications or secured registrations in 39 countries or jurisdictions around the world to protect the various names and symbols used in
marketing FC2. In addition, the experience that has been gained through years of manufacturing its Female Condoms (FC1 and FC2)
has allowed the Company to develop trade secrets and know-how, including certain proprietary production technologies, that further
protect its competitive position.
Financial instruments: The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework
requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or
liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management
judgment.
The Company currently does not have any assets or liabilities measured at fair value on a recurring or non-recurring basis.
Substantially all of the Company’s cash, as well as restricted cash, are held in demand deposits with three financial institutions. The
Company has no financial instruments for which the carrying value is materially different than fair value.
Research and development costs: Research and development costs are expensed as incurred. The amount of costs expensed for the
years ended September 30, 2015, 2014, and 2013 were $219,815, $5,575, and $4,745, respectively.
Restricted cash: Restricted cash relates to security provided to one of the Company’s U.K. banks for performance bonds issued in
favor of customers. The Company has a facility of $250,000 for such performance bonds. 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 customer
or its provider of funds. The expiration of the bond is defined by the completion of the event such as, but not limited to, a period of
time after the product has been distributed or expiration of the product shelf life. Restricted cash was $85,697 and $55,806 for the
years ended September 30, 2015 and 2014, respectively, and is included in cash on the accompanying balance sheets.
Revenue recognition: The Company recognizes revenue from product sales when each of the following conditions has been met: an
arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured.
Share-based compensation: The Company accounts for stock-based compensation expense for equity awards exchanged for services
over the vesting period based on the grant-date fair value. In many instances, the equity awards are issued upon the grant date subject
to vesting periods. In certain instances, the equity awards provide for future issuance contingent on future continued employment or
performance of services as of the issuance date.
Advertising: The Company's policy is to expense advertising costs as incurred. Advertising costs were $0, $58,121, and $221,718 for
the years ended September 30, 2015, 2014, and 2013, respectively.
Income taxes: The Company files separate income tax returns for its foreign subsidiaries. ASC Topic 740 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are also provided for carryforwards for income tax purposes. In addition, the amount of any future tax
benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized.
Earnings per share (EPS): Basic EPS is computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares
outstanding during the period after giving effect to all dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and unvested
shares granted to employees and directors.
F-11
88535 FemaleHealth_AR15_10K.indd 48
88535 FemaleHealth_AR15_10K.indd 48
12/16/15 2:06 PM
12/16/15 2:06 PM
The Female Health Company
Notes to Consolidated Financial Statements
Other comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities, such as foreign currency translation adjustments, are
reported as a separate component of the equity section of the accompanying consolidated balance sheets, these items, along with net
income, are components of comprehensive income.
The U.S. parent company and its U.K. subsidiary routinely purchase inventory produced by its Malaysia subsidiary for sale to their
respective customers. These intercompany trade accounts are eliminated in consolidation. The Company’s policy and intent is to settle
the intercompany trade account on a current basis. Since the U.K. and Malaysia subsidiaries adopted the U.S. dollar as their
functional currencies effective October 1, 2009, no foreign currency gains or losses from intercompany trade are recognized. In fiscal
2015, 2014, and 2013, comprehensive income is equivalent to the reported net income.
Reclassifications: Certain items in the 2014 and 2013 consolidated financial statements have been reclassified to conform to the 2015
presentation.
Note 2.
Earnings per Share
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period
after giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock options and unvested shares granted to employees and
directors.
Denominator
Weighted average common shares outstanding - basic
Net effect of dilutive securities:
Options
Unvested restricted shares
Total net effect of dilutive securities
Weighted average common shares outstanding - diluted
Income per common share – basic
Income per common share – diluted
2015
28,532,327
Year Ended September 30,
2014
28,522,525
50,473
334,248
384,721
28,917,048
0.15
0.15
$
$
109,583
233,276
342,859
28,865,384
0.09
0.08
$
$
$
$
2013
28,376,607
162,195
187,676
349,871
28,726,478
0.51
0.50
Options to purchase approximately 90,000 shares of common stock at an exercise price of $3.92 per share that were outstanding for
the year end September 30, 2015, were not included in the computation of diluted net income per share because their effect was anti-
dilutive. All other outstanding stock options were included in the computation of diluted net income per share for the years ended
September 30, 2015, 2014, and 2013.
Note 3.
Inventory
The components of inventory consist of the following at September 30, 2015 and 2014:
Raw material
Work in process
Finished goods
Inventory, gross
Less: inventory reserves
Inventory, net
2015
2014
$
$
839,179
77,483
868,270
1,784,932
(39,752)
1,745,180
$
$
1,091,703
15,962
1,936,655
3,044,320
(60,873)
2,983,447
F-12
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The Female Health Company
Notes to Consolidated Financial Statements
The change in the inventory reserve for the years ended September 30 is as follows:
Year
2013
2014
2015
Balance at
October 1
Charged to Costs
and Expenses
Write-offs
Balance at
September 30
$
$
$
49,810 $
41,133 $
60,873 $
(6,662) $
37,603 $
173,634 $
(2,015) $
(17,863) $
(194,755) $
41,133
60,873
39,752
Note 4.
Revolving Line of Credit
On August 1, 2015, the Company entered into an amendment to the Second Amended and Restated Loan Agreement (as amended, the
“Loan Agreement”) with Midland States Bank to extend the term of the Company’s revolving line of credit to August 1, 2016. The
credit facility consists of a single revolving note for up to $2 million with Midland States Bank, with borrowings limited to a
borrowing base determined based on 70 percent to 80 percent of eligible accounts receivable plus 50 percent of eligible inventory.
Significant restrictive covenants in the Loan Agreement include prohibitions on any merger, consolidation or sale of all or a
substantial portion of the Company’s assets and limits on the payment of dividends or the repurchase of shares. The Loan Agreement
does not contain any financial covenants that require compliance with ratios or amounts. Dividends and share repurchases are
permitted as long as after giving effect to the dividend or share repurchase the Company has a ratio of total liabilities to total
stockholders’ equity of no more than 1:1. Borrowings on the revolving note bear interest at the national prime rate published by the
Wall Street Journal (3.25 percent at September 30, 2015). The note is collateralized by substantially all of the assets of the Company.
No amounts were outstanding under the revolving note at either September 30, 2015 or 2014.
Note 5.
Operating Leases and Rental Expense
The Company’s corporate headquarters is located in approximately 5,100 square feet of office space located in Chicago, Illinois. On
March 10, 2011, the Company signed a lease amendment, effective November 1, 2010, which extended the lease term for this office
space for a five year period commencing on November 1, 2011 and ending on October 31, 2016. The lease amendment grants the
Company a five month lease abatement beginning November 1, 2010, reduces base rent and provides a tenant improvement
allowance. The lease requires escalating monthly payments ranging from $6,797 to $7,859, plus real estate taxes, utilities and
maintenance expenses from April 1, 2011 to October 31, 2016. The Company has delivered notice of its intent to extend the term of
the lease for an additional three year period ending October 31, 2019. The Company has the right to rescind such lease extension
upon receipt of the landlord’s notice of the new base rent for the extended term.
The Company leases 6,400 square feet of office space located in London, England. The lease expires in June 2020. The lease requires
quarterly payments of approximately $13,500 through December 2011 and quarterly payments of approximately $27,000 from
January 2012 through June 2015. The lease stipulated that after 5 years (June 2015) the principal rent will be reviewed and adjusted to
the higher of the principal rent immediately prior to the review date or the market rate. As of September 30, 2015, the lease has not
been reviewed or adjusted and quarterly payments of approximately $27,000 will continue. Based on the terms of the lease
agreement, the Company was also required to make a security deposit equivalent to six months’ rent (approximately $67,000).
The Company leases 45,800 square feet of manufacturing space in Selangor D.E., Malaysia under a lease that requires monthly
payments of approximately $13,000 through September 2016 and may be renewed at the option of the Company for an additional
three year term.
The Company also leases equipment under a number of lease agreements which expire at various dates through June 2020. The
aggregate monthly rental was $616 at September 30, 2015. Details of operating lease expense, including real estate taxes and
insurance, for the years ended September 30, 2015, 2014, and 2013 are as follows:
Factory and office leases
Other
Total
2015
2014
2013
$
$
470,049
7,387
477,436
$
$
439,722
4,758
444,480
$
$
404,678
5,541
410,219
b
b
N
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The Female Health Company
Notes to Consolidated Financial Statements
Future minimum payments under leases consist of the following as of September 30, 2015:
2016
2017
2018
2019
2020
Total minimum lease payments
Note 6.
Income Taxes
Operating
Leases
371,528
131,032
123,002
122,491
91,919
839,972
$
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 assets and liabilities, and for net operating
loss and tax credit carryforwards.
The Company completes a detailed analysis of its deferred income tax valuation allowance on an annual basis or more frequently if
information comes to our attention that would indicate that a revision to its estimates is necessary. In evaluating the Company’s
ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country by country
basis, including past operating results and forecast of future taxable income. In determining future taxable income, management
makes assumptions to forecast U.S. federal and state, U.K. and Malaysia 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 the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Company’s
business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis. Since fiscal year 2006,
the Company has consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the
Company can reasonably expect to generate taxable income. In management’s analysis to determine the amount of the deferred tax
asset to recognize, management projected future taxable income for each tax jurisdiction.
Although management uses the best information available, it is reasonably possible that the estimates used by the Company will be
materially different from the actual results. These differences could have a material effect on the Company's future results of
operations and financial condition.
Income before income taxes was taxed by the following jurisdictions for the years ended September 30, 2015, 2014, and 2013:
Domestic
Foreign
Total
2015
4,524,499
2,162,541
6,687,040
$
$
2014
2,837,835
1,119,356
3,957,191
$
$
2013
7,461,329
2,472,525
9,933,854
$
$
A reconciliation of income tax expense (benefit) and the amount computed by applying the statutory Federal income tax rate to
income before income taxes for the years ended September 30, 2015, 2014, and 2013 is as follows:
Income tax expense at statutory rates
State income tax, net of federal benefits
Non-deductible expenses
Effect of lower foreign income tax rates
Effect of change in U.K. tax rate
Effect of reinvestment allowance - Malaysia
Effect of export allowance - Malaysia
Effect of change in Illinois tax rate
Effect of conversion of charitable contribution to NOL
Other
Change in valuation allowance
Income tax expense (benefit)
2015
2,274,000
362,000
51,000
(351,244)
—
—
(85,000)
202,000
(36,174)
(59,578)
(16,000)
2,341,004
$
$
2014
1,345,000
248,000
(5,000)
(175,632)
—
(9,000)
—
—
—
56,762
64,000
1,524,130
$
$
2013
3,378,000
623,000
129,000
(395,441)
(159,000)
(75,000)
—
—
—
—
(7,909,303)
(4,408,744)
$
$
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The Female Health Company
Notes to Consolidated Financial Statements
As of September 30, 2015, the Company had federal and state net operating loss carryforwards of approximately $13,023,000 and
$12,587,000, respectively, for income tax purposes expiring in years 2020 to 2027. The Company's U.K. subsidiary has U.K. net
operating loss carryforwards of approximately $61,938,000 as of September 30, 2015, which can be carried forward indefinitely to be
used to offset future U.K. taxable income.
The federal and state income tax expense (benefit) for the years ended September 30, 2015, 2014, and 2013 is summarized below:
Deferred – U.S.
Deferred – U.K.
Deferred – Malaysia
Subtotal
Current – U.S.
Current – Malaysia
Current - U.K.
Subtotal
Income tax expense (benefit)
2015
1,856,000
162,000
(92,261)
1,925,739
83,606
331,659
—
415,265
2,341,004
$
$
2014
561,000
496,000
(44,666)
1,012,334
219,000
292,796
—
511,796
1,524,130
$
$
2013
(12,000)
(5,288,000)
40,935
(5,259,065)
625,606
221,625
3,090
850,321
(4,408,744)
$
$
p
p
Significant components of the Company's deferred tax assets and liabilities are as follows at September 30, 2015 and 2014:
Deferred Tax Assets
Federal net operating loss carryforwards
State net operating loss carryforwards
AMT credit carryforward
Foreign net operating loss carryforwards – U.K.
Foreign capital allowance – U.K.
Other, net - Malaysia
Share-based compensation
Other, net - U.S.
Gross deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
Deferred Tax Liabilities:
Foreign capital allowance – Malaysia
Net deferred tax assets
$
2015
2014
$
4,428,000
644,000
390,000
12,388,000
114,000
13,097
128,000
8,000
18,113,097
(2,575,000)
15,538,097
5,871,000
1,067,000
301,000
12,574,000
110,000
30,153
204,000
7,000
20,164,153
(2,591,000)
17,573,153
(111,349)
15,426,748
$
(220,666)
17,352,487
$
The deferred tax amounts have been classified in the accompanying consolidated balance sheets at September 30 as follows:
Current assets – U.S.
Current assets – U.K.
Total current assets
Long-term assets – U.S.
Long-term assets – U.K
Total long-term assets
Long-term liability – Malaysia
2015
2014
854,000
162,000
1,016,000
4,740,000
9,769,000
14,509,000
(98,252)
15,426,748
$
$
711,000
—
711,000
6,739,000
10,093,000
16,832,000
(190,513)
17,352,487
$
$
F-15
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The Female Health Company
Notes to Consolidated Financial Statements
The change in the valuation allowance for deferred tax assets for the years ended September 30 is as follows:
Year
2013
2014
2015
Balance at
October 1
12,600,000
2,147,000
2,591,000
$
$
$
Charged to Costs
and Expenses
Deductions/Other
Balance at
September 30
$
$
$
(5,300,000) $
$
432,000
(16,000) $
(5,153,000) $
$
12,000
$
—
2,147,000
2,591,000
2,575,000
The valuation allowance decreased by $16,000, increased by $444,000, and decreased by $10,453,000 for the years ended September
30, 2015, 2014, and 2013, respectively. Under the Internal Revenue Code, certain ownership changes, including the prior issuance of
preferred stock, the public offering of common stock and the exercise of common stock warrants and options may subject the
Company to annual limitations on the utilization of its net operating loss carryforward. Under the Inland Revenue statutes, certain
triggering events may subject the Company to limitations on the utilization of its net operating loss carryforward in the U.K. As of
September 30, 2015, management does not believe any limitations have occurred.
The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries because it is the
present intention of management to reinvest the undistributed earning indefinitely. Generally such earnings become subject to U.S.
tax upon remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax or
such undistributed earnings.
ASC Topic 740 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. ASC Topic 740 developed a two-step process to evaluate a tax position
and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. 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, including foreign, U.S. Federal and Illinois and Virginia State tax
returns. The following summarizes open tax years in the relevant jurisdictions:
• For the U.S., a tax return may be audited any time within 3 years from filing date. The U.S. open tax years are for fiscal
years 2012 through 2014, which expire in years 2016 through 2018, respectively.
• For Malaysia, a tax return may be audited any time within 5 years from filing date (7 months after the fiscal year end). The
Malaysia open tax years are for 2010 through 2014, which expire on December 31, 2015 through 2019.
• For the U.K., a tax return may be audited within 1 year from the later of: the filing date or the filing deadline (1 year after the
end of the accounting period). The U.K. open tax year is for 2014, which expires in 2016.
The fiscal year 2015 tax returns for each jurisdiction have not been filed as of the date of this filing. As of September 30, 2015 and
2014, the Company has no recorded liability for unrecognized tax benefits.
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 years ended September 30, 2015, 2014, and 2013.
Note 7.
Equity and Share-based Payments
In March 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which is utilized to provide equity opportunities
and performance–based incentives to attract, retain and motivate those persons who make (or are expected to make) important
contributions to the Company. A total of 2 million shares are available for issuance under the plan. As of September 30, 2015, a total
of 1,287,885 shares have been granted under the plan, of which 150,000 shares were in the form of stock options and the remainder
were in the form of restricted stock or other share grants.
F-16
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The Female Health Company
Notes to Consolidated Financial Statements
Stock Option Plans
Under the Company’s previous share-based long-term incentive compensation plan, the 1997 Stock Option Plan, the Company
granted non-qualified stock options to employees. There are no shares available for grant under this plan which expired on December
31, 2006. Options issued under this plan expire 10 years after the date of grant and generally vested 1/36 per month, with full vesting
after three years. Under the Company’s 2008 Stock Incentive Plan, options issued expire 10 years after the date of grant and vest 1/36
per month, with full vesting after three years. The Company did not grant any options during the years ended September 30, 2015,
2014, and 2013.
Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date
of grant based on historical experience and future expectations. There was no stock compensation expense related to options for the
years ended September 30, 2015, 2014, and 2013.
Option Activity
The following table summarizes the stock options outstanding and exercisable at September 30, 2015:
Weighted Average
Remaining
Exercise Price Contractual Term
Shares
Per Share
(years)
Aggregate
Intrinsic
Value
Outstanding at September 30, 2012
Granted
Exercised
Forfeited
Outstanding at September 30, 2013
Granted
Exercised
Forfeited
Outstanding at September 30, 2014
Granted
Exercised
Forfeited
Outstanding at September 30, 2015
Exercisable on September 30, 2015
276,250
—
(36,250)
—
240,000
—
(60,000)
—
180,000
—
—
—
180,000
180,000
$
$
$
$
$
2.57
-
2.05
-
2.64
—
2.79
—
2.60
—
—
—
2.60
2.60
2.34
2.34
$
$
27,900
27,900
No stock options were exercised during the year ended September 30, 2015. During the year ended September 30, 2014, stock option
holders exercised 60,000 stock options, 30,000 shares using the cashless exercise option available under the plan which entitled them
to 16,963 shares of common stock and 30,000 shares using the cash exercise option available under the plan resulting in cash proceeds
of $117,600. During the year ended September 30, 2013, stock option holders exercised 36,250 stock options, using the cashless
exercise option available under the plan which entitled them to 28,172 shares of common stock.
The aggregate intrinsic value in the table above is before income taxes, based on the Company’s closing stock price of $1.58 on the
last day of business for the period ended September 30, 2015. The total intrinsic value of options exercised during the years ended
September 30, 2015, 2014, and 2013, was approximately $0, $154,000 and $272,000, respectively.
Restricted Stock
The Company issues restricted stock to employees, directors and consultants. Such issuances may have vesting periods that range
from one to three years. In addition, the Company has issued stock awards to certain employees and directors that provide for future
issuance contingent on continued employment or performance of services for periods that range from one to three years.
p
u
u
p
F-17
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The Female Health Company
Notes to Consolidated Financial Statements
A summary of the non-vested stock activity for fiscal years 2015, 2014, and 2013 is summarized in the table below:
Total Outstanding September 30, 2012
Stock Granted
Vested
Forfeited
Total Outstanding September 30, 2013
Stock Granted
Vested
Forfeited
Total Outstanding September 30, 2014
Stock Granted
Vested
Forfeited
Total Outstanding September 30, 2015
Weighted Average
Grant -Date
Fair Value
Shares
Vesting Period
93,818
64,676
(117,992)
(7,000)
33,502
213,576
(105,393)
(250)
141,435
293,500
(92,963)
(58,250)
283,722
$
$
$
$
5.59
7.29 September 2013 - May 2016
6.17
5.80
6.80
7.80 September 2014 - December 2016
8.15
9.68
7.30
1.70 September 2015 - August 2018
4.70
7.36
2.31
The Company granted a total of 293,500, 213,576 and 64,676 shares of restricted stock or shares issuable pursuant to promises to
issue shares of common stock during the years ended September 30, 2015, 2014, and 2013, respectively. The stock granted during the
year ended September 30, 2015 includes rights to receive a total of 83,000 shares, or at a holder’s election cash based on the fair
market value of the shares, contingent on continued employment or service. The fair value of the awards granted was approximately
$499,000, $1,665,000 and $471,000 for the years ended September 30, 2015, 2014, and 2013, respectively. All such shares of
restricted stock vest and all such shares must be issued pursuant to the vesting period noted, provided the grantee has not voluntarily
terminated service or been terminated for cause prior to the vesting or issuance date. There were 58,250, 250 and 7,000 shares of
restricted stock forfeited during the years ended September 30, 2015, 2014, and 2013, respectively.
The Company recognized the fair value of the restricted stock or promises to issue shares of common stock that vested during the
fiscal year as share-based compensation expense of approximately $437,000, $859,000 and $728,000 for the years ended September
30, 2015, 2014, and 2013, respectively, $23,000, $256,000 and $227,000 of which was included in accrued expenses at year end since
the related shares have not yet been issued at September 30, 2015, 2014, and 2013, respectively. For the year ended September 30,
2015, the Company issued a portion of the executive bonus in stock for a total share-based compensation expense of approximately
$53,000. The share-based compensation expense was included in selling, general and administrative expenses for the respective
periods. The Company recorded a tax benefit for stock-based compensation expenses of approximately $114,000, $204,000 and $0
for the years ended September 30, 2015, 2014, and 2013, respectively. The Company realized the tax benefit for stock-based
compensation expenses, for the shares which vested, of approximately $190,000, $0 and $0 for the years ended September 30, 2015,
2014, and 2013, respectively. As of September 30, 2015, there was approximately $655,000, representing approximately 284,000
unvested shares, of total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted
under the incentive plans. This unrecognized cost will be recognized over the weighted average period of the next 2.64 years.
Common Stock Purchase Warrants
The Company did not issue any common stock purchase warrants in fiscal year 2015, 2014, or 2013. In fiscal year 2013, a warrant
holder exercised 52,000 warrants using the cashless exercise option available within the warrant agreements which entitled the warrant
holder to 43,465 shares of common stock. There is no unrecognized compensation cost related to warrants as of September 30, 2015.
At September 30, 2015 and 2014, there were no outstanding warrants.
Preferred Stock
The Company has 5,000,000 shares designated as Class A Preferred Stock with a par value of $.01 per share. There are 1,040,000
shares of Class A Preferred Stock - Series 1 authorized; 1,500,000 shares of Class A Preferred Stock- Series 2 authorized; and 700,000
shares of Class A Preferred Stock - Series 3 authorized. There were no shares of Class A Preferred Stock of any series issued and
outstanding in fiscal 2015 or 2014. The Company has 15,000 shares designated as Class B Preferred Stock with a par value of $.50
per share. There were no shares of Class B Preferred Stock issued and outstanding in fiscal 2015 or 2014.
F-18
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The Female Health Company
Notes to Consolidated Financial Statements
Note 8.
Stock Repurchase Program
The Company’s Stock Repurchase Program was announced on January 17, 2007. At initiation, the plan’s terms specified that up to
1,000,000 shares of its common stock could be purchased during the subsequent twelve months. Subsequently, the Board has amended
the plan a number of times to both extend its term and increase the maximum number of shares which could be repurchased.
Currently, the plan allows for a maximum repurchase of up to 3,000,000 shares through the period ending December 31, 2015. From
the program’s onset through September 30, 2015, the total number of shares repurchased by the Company is 2,183,704. The Stock
Repurchase Program authorizes purchases in privately negotiated transactions as well as in the open market. In October 2008, the
Company's Board of Directors authorized repurchases in private transactions under the Stock Repurchase Program of shares issued
under the Company's equity compensation plans to directors, employees and other service providers at the market price on the
effective date of the repurchase request. Total repurchases under this provision currently are limited to an aggregate of 450,000 shares
per calendar year and to a maximum of 50,000 shares annually per individual. Total repurchase transaction are as follows (in shares):
Open market repurchase transactions
Private repurchase transactions
Total repurchase transactions
Total repurchase activity is as follows:
Issuer Purchases of Equity
Securities:
Period
January 1, 2007 – September 30, 2012
October 1, 2012 – September 30, 2013
October 1, 2013 – September 30, 2014
October 1, 2014 – September 30, 2015
Total
Note 9.
Employee Benefit Plan
2015
2014
2013
-
250
250
165,000
4,000
169,000
10,000
45,625
55,625
N
Average
Price Paid
Per
Share
Aggregate Number
of Shares Purchased
As Part of Publicly
Announced Program
Details of Treasury Stock Purchases to Date through September 30, 2015:
Total
Number
of Shares
Purchased
1,958,829
55,625
169,000
250
2,183,704
Maximum Number
of Shares that May
Yet be Purchased
Under the Program
1,958,829
2,014,454
2,183,454
2,183,704
2,183,704
3.41
7.11
4.37
3.80
3.57
1,041,171
985,546
816,546
816,296
816,296
$
$
The Company has a Simple Individual Retirement Account (IRA) plan for its employees. Employees are eligible to participate in the
plan if their compensation reaches certain minimum levels and are allowed to contribute up to a maximum of $15,500 annual
compensation to the plan. The Company has elected to match 100 percent of employee contributions to the plan up to a maximum of
3 percent of employee compensation for the years ended September 30, 2015, 2014, and 2013. Annual Company contributions were
approximately $37,000, $31,000, and $29,000 for the years ended September 30, 2015, 2014, and 2013, respectively.
In March 2014, the Company elected to contribute 3 percent into the personal pension schemes of certain senior U.K. employees.
Contributions for the years ended September 30, 2015 and 2014 were approximately $26,000 and $6,000, respectively. Pension
contributions were not made for the certain senior U.K. employees for the year ended September 30, 2013.
Note 10.
Industry Segments and Financial Information about Foreign and Domestic Operations
The Company currently operates in one industry segment which includes the development, manufacture and marketing of consumer
health care products.
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The Female Health Company
Notes to Consolidated Financial Statements
The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows
(in thousands).
Net Revenues to External Customers for
the Year Ended September 30,
2014
2013
Long-Lived Asset As Of
September 30,
2015
2014
*
2,064
2,928 (1)
2,381
2,477 (1)
2,185
1,936
*
*
*
*
10,520
24,491
$
$
4,480 (1) $
*
5,421 (1)
2,611
*
2,467
*
2,879
2,997
*
*
10,602
31,457
$
-
-
-
123
-
-
-
-
-
1,134
120
-
1,377
$
$
-
-
-
88
-
-
-
-
-
1,528
152
-
1,768
2015
14,841 (1) $
$
2,696
2,331
2,029
*
*
*
*
*
*
*
10,708
32,605
$
$
Brazil
Zimbabwe
South Africa
United States
Angola
DR of Congo
Tanzania
Nigeria
Uganda
Malaysia
United Kingdom
Other
Total
* Less than 5 percent of total net revenues.
(1) Exceeds 10 percent of total net revenues.
Note 11.
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 $10 million for FHC's consumer health care product.
Note 12.
Dividends
Beginning February 16, 2010 through May 7, 2014, the Company paid 18 quarterly cash dividends. The first 9 were paid at a
quarterly rate per share of $0.05 through February 9, 2012, 4 were paid at a quarterly rate per share of $0.06 from May 9, 2012
through February 6, 2013, and 5 were paid at a quarterly rate per share of $0.07 from May 8, 2013 through May 7, 2014. Cash
dividends paid totaled $29.4 million through September 30, 2014. The Company paid cash dividends of approximately $6.1 million
and $7.5 million in 2014 and 2013, respectively. On July 14, 2014, the Company announced that its Board of Directors elected to
suspend the payment of quarterly cash dividends in order to devote operating cash flows towards strategic growth initiatives.
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The Female Health Company
Notes to Consolidated Financial Statements
Note 13.
Quarterly Financial Data (Unaudited)
2015
Net revenues
Gross profit
Operating expenses
Income tax expense
Net income
Net income per common share – basic
Net income per common share – diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
Ended
$
6,659,206 $
3,819,673
2,365,824
670,430
804,917
0.03
0.03
10,977,467 $
6,394,107
3,444,714
1,306,445
1,667,574
0.06
0.06
7,813,207 $
4,632,535
3,178,687
284,900
1,170,974
0.04
0.04
7,154,985 $
4,123,644
3,362,327
79,229
702,571
0.02
0.02
32,604,865
18,969,959
12,351,552
2,341,004
4,346,036
0.15
0.15
$
2014
Net revenues
Gross profit
Operating expenses
Income tax expense
Net income (loss)
Net income (loss) per common share – basic
Net income (loss) per common share – diluted
6,690,195 $
3,678,494
2,094,858
98,875
1,464,603
0.05
0.05
4,346,223 $
2,385,941
1,590,718
504,898
375,081
0.01
0.01
7,900,055 $
4,170,270
2,142,640
851,321
1,159,498
0.04
0.04
5,554,113 $
2,886,773
3,369,350
69,036
(566,121)
(0.02)
(0.02)
24,490,586
13,121,478
9,197,566
1,524,130
2,433,061
0.09
0.08
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Corporate Information
and Chief Financial Officer
William R. Gargiulo, Jr.
OFFICERS
O.B. Parrish
Chairman and
Chief Executive Officer
Michele Greco
Executive Vice President
Martin Tayler
Executive Vice President of
Global Operations
Susan Ostrowski
Executive Vice President of
Sales and Marketing
BOARD OF DIRECTORS
O.B. Parrish
Chairman of the Board
Chief Executive Officer
David R. Bethune
Andrew Love
Former Executive Chairman
Chairman
Zila, Inc.
Love Savings Holding Company
The Female Health Company
Phoenix, Arizona
St. Louis, Missouri
Chicago, Illinois
Vice President (retired)
and Secretary
Mary Margaret Frank, Ph.D.
Sharon Meckes
Associate Professor
University of Virginia
Owner
SMI, Strategic Marketing
Darden Graduate School
& Consulting
The Female Health Company
of Business
Bernardsville, New Jersey
Chicago, Illinois
Charlottesville, Virginia
Donna Felch
Former Vice President and
Chief Financial Officer
William R. Gargiulo, Jr.
The Female Health Company
Secretary
Chicago, Illinois
ADDITIONAL INFORMATION
Corporate Headquarters
515 North State Street
Suite 2225
Chicago, Illinois 60654
312.595.9123
U.K. Global Operations
3 Mansfield Road
Western Avenue Business Park
London W3 0BZ
England
011-44-208-993-4669
Manufacturing Location
Cheras Jaya, Balakong
Selangor D.E., Malaysia
Web Addresses
www.femalehealth.com
www.fhcinvestor.com
www.fc2.us.com
www.fc2training.com
www.femalecondom.org
E-mail Address
Inquiries
fhcinvestor@femalehealthcompany.com
Shareholders, prospective investors,
Transfer Agent and Registrar
Computershare Investor Services
Chicago, Illinois
Independent Auditors
RSM US LLP
Chicago, Illinois
Legal Counsel
stockbrokers, financial analysts and
other parties seeking additional
information about The Female Health
Company (including Securities and
Exchange Commission Form 10-K and
Form 10-Q Reports) should contact
Investor Relations at 312.595.9123,
ext. 238.
Reinhart Boerner Van Deuren s.c.
Send an e-mail request to:
Milwaukee, Wisconsin
fhcinvestor@femalehealthcompany.com
Stock Exchange Listing
NASDAQ Capital Market,
Or write to:
Investor Relations
under the trading symbol “FHCO”
Michele Greco
The Female Health Company
515 North State Street
Suite 2225
Chicago, Illinois 60654
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
THE FEMALE HE ALTH COMPANY
515 North State Street | Chicago, Illinois 60654 | www.femalehealth.com
Copyright © 2016 The Female Health Company. All rights reserved.