OREANDA-NEWS. The Female Health Company (NASDAQ:FHCO) (the Company or FHC), which manufactures and markets the FC2 Female Condom® (FC2), today reported its operating results for its fiscal third quarter and first nine months ended June 30, 2016.  The Company will host an investor conference call today at 11:15 a.m. Eastern Time (ET) to discuss these results and other topics of interest (see details below).

Management Comments

“In July 2014, FHC announced a major strategic goal of diversifying the Company’s product line.  The objective was to drive growth and generate a higher return for our shareholders by adding multiple, high-potential proprietary products to our portfolio, while at the same time mitigating the risk associated with being a single product company,” said O.B. Parrish, Chairman and Chief Executive Officer of The Female Health Company.

“On April 6, 2016, we announced a proposed merger transaction with Aspen Park Pharmaceuticals (APP) that would fulfill this objective.

“On July 15, 2016, FHC announced that July 28, 2016 is the record date for the special meeting of the Company’s shareholders in connection with the proposed merger.  The staff of the Securities and Exchange Commission (SEC) has completed its review of FHC's preliminary proxy statement relating to the special meeting, and FHC expects to mail the definitive proxy statement to its shareholders on or about August 8, 2016.  The date, time and location of the special meeting will be announced at a later time.

“I believe the proposed merger is a remarkable opportunity for our company and its shareholders for three reasons:

  • It would result in a product portfolio of multiple potential high margin proprietary products that target large markets;
  • It would mitigate the risk of being a single product company; and
  • It would significantly broaden our growth opportunities with the potential to enhance value for shareholders.

“The new company will have five proprietary pharmaceutical product opportunities. Three of the proprietary product opportunities are candidates for the FDA 505(b)(2) regulatory pathway, which can significantly reduce the cost, risk and time required in securing FDA approval.  The 505(b)(2) pathway permits the use of established data on currently marketed products for securing new claims and/or dosage forms for such products. 

“The new company will include a women’s health division that will focus on expanding FHC’s existing, profitable business while developing newly acquired oncology assets for breast and ovarian cancer; and, a men’s health division focused on the areas of benign prostatic hyperplasia, male infertility, hot flashes in men on prostate cancer therapy, gout and advanced prostate cancer, together with consumer health products for premature ejaculation and sexual health vitamin supplements.  Following the business combination, the Company will be renamed Veru Healthcare Inc.

“Turning to our financial results, we believe the decrease in net revenues and operating income for the third quarter and year to date were due to the volatility of the public sector market.  In 2014, FHC was awarded a tender for Brazil, which resulted in orders for 40 million units, most of which were shipped in FY2015.  Shipments to Brazil in the third quarter and year to date in FY2016 were significantly less than in the same periods of FY2015.

“Despite a 29% decrease in net revenues for the quarter, the Company generated operating income of $848,519, or 15% of net revenues.  Year to date, the Company reported operating income of $3,311,499, or 18% of net revenues.  The Company remains debt free, reflecting our capacity to cope with market volatility and remain profitable.

“In addition, operating expenses for the quarter and year to date periods included investment expense of $750,006 and $1,865,452, respectively, for the diversification project and FC2 consumer study.  Excluding these expenses, operating income for the quarter would have been $1,598,525, or 29% of net revenues, and year to date would have been $5,176,951, or 28% of net revenues.

“I believe the long-term demand for the female condom will continue to rise due to the increased incidences of HIV/AIDS, desire to prevent unwanted pregnancy and ever growing global impact of the Zika virus.”

Third Quarter Results

For the three months ended June 30, 2016, the Company generated net revenues of $5,560,776 and net income of $570,258, or $0.02 per diluted share, compared with net revenues of $7,813,207 and net income of $1,170,974, or $0.04 per diluted share, for the three months ended June 30, 2015.   

Net revenues decreased $2,252,431 on a 25 percent decrease in unit sales compared with the same period last year.  The principal factor in the decrease is the period to period impact of the record tender shipments to Brazil in fiscal 2015.  The Company had record net revenues of $7,813,207 in the third quarter of fiscal year 2015, which included net revenues of $3,056,625 from Brazil.  The FC2 average sales price per unit decreased 4.6 percent compared with the same period last year due to changes in sales mix and a unit price reduction for all major public sector purchases effective April 1, 2016.

Cost of sales decreased $853,089 to $2,327,583 from $3,180,672 for the same period last year.  The reduction is due to lower unit sales, reduction of certain costs and the favorable impact of currency exchange rates.

Gross profit decreased $1,399,342, or 30 percent, to $3,233,193 from $4,632,535 for the three months ended June 30, 2015.  Gross profit margin was 58 percent of net revenues versus 59 percent of net revenues for the same period last year.

Significant quarter-to-quarter variations in the Company’s results have historically resulted from the timing and shipment of large public sector orders rather than from any fundamental changes in the business or the underlying demand for female condoms.

Operating expenses decreased $794,013, or 25 percent, to $2,384,674 from $3,178,687 in the prior year period.  The decrease is due to reduced payments due to our Brazilian distributor for marketing and management fees for the 2014 tender, no investment expenses for a study regarding a potential FC2 consumer program in the U.S. and lower employee compensation expense.  These decreases were partially offset by increased investment expense for diversification, including expenses for the proposed merger transaction with APP.  These investment expenses with no current return related to the FC2 consumer study and diversification were $0 and $750,006 for the three months ended June 30, 2016, respectively, compared to $183,069 and $200,681 in the prior year period, respectively.

Operating income decreased $605,329, or 42 percent, to $848,519, for a margin of 15%, from operating income of $1,453,848 in the third quarter of fiscal year 2015.  The decrease was primarily a result of the factors discussed above.  Excluding the investment expenses related to the FC2 consumer study and diversification of $750,006, operating income was $1,598,525, or 29% of net revenues, for the three months ended June 30, 2016.  A reconciliation of non-GAAP measures is included in the tables in the section entitled “Additional Non-GAAP Performance Measures” at the end of this release.

The Company's net income decreased $600,716, or 51 percent, to $570,258 from $1,170,974 in the same period of the prior year, as a result of the factors discussed above. The net income margin was 10 percent and 15 percent of net revenues for the three months ended June 30, 2016 and 2015, respectively.

Adjusted EBITDA totaled $1,012,723 in the third quarter of FY2016, compared with adjusted EBITDA of $1,739,360 in the same period last year.  A reconciliation of non-GAAP measures is included in the tables in the section entitled “Additional Non-GAAP Performance Measures” at the end of this release.

Nine Month Results

For the nine months ended June 30, 2016, the Company generated net revenues of $18,564,236 and net income of $2,095,666, or $0.07 per diluted share, compared with net revenues of $25,449,880 and net income of $3,643,465, or $0.13 per diluted share, for the nine months ended June 30, 2015. 

Net revenues decreased $6,885,644 on a 25 percent decrease in unit sales compared with the same period last year.  Effective April 1, 2016, the unit price was reduced for all major public sector purchases.  The FC2 average sales price per unit decreased 2.2 percent compared with the same period last year due to changes in sales mix and the public sector price adjustment noted above. 

Cost of sales decreased $3,520,254 to $7,083,311 from $10,603,565 for the same period last year.  The reduction is due to lower unit sales, reduction of certain costs and the favorable impact of currency exchange rates.

Gross profit decreased $3,365,390, or 23 percent, to $11,480,925 from $14,846,315 for the nine months ended June 30, 2015.  Gross profit margin increased to 62 percent of net revenues from 58 percent of net revenues for the same period last year, primarily due to the reduction of certain costs and the favorable impact of currency exchange rates on cost of sales.

Significant quarter-to-quarter variations in the Company’s results have historically resulted from the timing and shipment of large orders rather than from any fundamental changes in the business or the underlying demand for female condoms.

Operating expenses decreased $819,799 to $8,169,426 from $8,989,225 in the prior year period.  The decrease was a result of a reduction in payments due to our Brazilian distributor for marketing and management fees for the 2014 tender and a reduction in employee compensation expense, partially offset by increased investment expenses for a study regarding a potential FC2 consumer program in the U.S. and for diversification, including expenses related to the proposed merger transaction with APP.  These investment expenses with no current return related to the FC2 consumer study and diversification were $308,800 and $1,556,652 for the nine months ended June 30, 2016, respectively, compared to $183,069 and $382,085 in the prior year period, respectively.

Operating income decreased $2,545,591, or 43 percent, to $3,311,499, for a margin of 18%, from operating income of $5,857,090 in the nine months ended June 30, 2015.  The decrease was primarily a result of the factors discussed above.  Excluding the investment expenses related to the FC2 consumer study and diversification of $1,865,452, operating income would have been $5,176,951, or 28% of net revenues, for the nine months ended June 30, 2016.  A reconciliation of non-GAAP measures is included in the tables in the section entitled “Additional Non-GAAP Performance Measures” at the end of this release.

Income tax expense was $1,032,840, a decrease of $1,228,935 from $2,261,775 for the same period in fiscal year 2015.  The effective tax rate was 33.0 percent and 38.3 percent for the nine months ended June 30, 2016 and 2015, 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.  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.  During the nine months ended June 30, 2016 the Company recorded income tax expense of $1,032,840, while due to the use of NOL carryforwards the Company made cash payments of $276,284 for income taxes, or 27 percent of income tax expense.  This resulted in a cash savings of $756,556.

The Company's net income decreased $1,547,799, or 42 percent, to $2,095,666 from $3,643,465 in the same period of the prior year, as a result of the factors discussed above.  Net income was 11 percent and 14 percent of net revenues for the nine months ended June 30, 2016 and 2015, respectively.  

Adjusted EBITDA totaled $3,819,309 compared with $6,817,876 in the same period of the prior year.  A reconciliation of non-GAAP measures is included in the tables in the section entitled “Additional Non-GAAP Performance Measures” at the end of this release.

About The Female Health Company

The Female Health Company, based in Chicago, Illinois, manufactures and markets the FC2 Female Condom® (FC2). Since the Company began distributing FC2 in 2007, the product has been shipped to 144 countries. The Company owns certain worldwide rights to the FC2 Female Condom®, including patents that have been issued in a number of countries around the world. The patents cover key aspects of FC2, including its overall design and manufacturing process.  The FC2 Female Condom® is the only currently available female-controlled product approved by FDA that offers dual protection against sexually transmitted infections, including HIV/AIDS, the Zika virus and unintended pregnancy. The World Health Organization (WHO) has cleared FC2 for purchase by U.N. agencies.

The Female Health Company
Unaudited Condensed Consolidated Balance Sheets
 
  June 30,    September 30, 
    2016       2015  
Cash $   3,210,684     $   4,105,814  
Accounts receivable, net   18,636,643         14,088,390  
Income tax receivable   29,000       21,251  
Inventory, net   2,337,436       1,745,180  
Prepaid expenses and other current assets   544,265       609,320  
Deferred income taxes   244,105       1,016,000  
Total current assets   25,002,133       21,585,955  
       
Other non-current assets   191,071       136,766  
Plant and equipment, net   916,207       1,239,990  
Deferred income taxes   14,509,000       14,509,000  
Total assets $   40,618,411     $   37,471,711  
       
Accounts payable $   1,059,410     $   1,077,349  
Accrued expenses and other current liabilities   3,692,367       2,555,231  
Accrued compensation   235,457       592,428  
Total current liabilities   4,987,234       4,225,008  
       
Deferred rent   4,801       15,389  
Deferred income taxes   115,554       98,252  
Total liabilities   5,107,589       4,338,649  
       
Total stockholders' equity   35,510,822       33,133,062  
Total liabilities and stockholders’ equity $   40,618,411     $   37,471,711  
The Female Health Company
Unaudited Condensed Consolidated Statements of Income
 
  Three Months Ended
  June 30,
  2016   2015
           
Net revenues $   5,560,776     $   7,813,207  
           
Cost of sales     2,327,583         3,180,672  
           
Gross profit     3,233,193         4,632,535  
           
Operating expenses     2,384,674         3,178,687  
           
Operating income     848,519         1,453,848  
           
Interest and other expense, net     (7,399 )       (1,941 )
Foreign currency transaction (loss) gain     (39,651 )       3,967  
           
Income before income taxes     801,469         1,455,874  
           
Income tax expense     231,211         284,900  
Net income $   570,258     $   1,170,974  
           
Net income per basic common share outstanding $   0.02     $   0.04  
           
Basic weighted average common shares outstanding     28,655,970         28,538,908  
           
Net income per diluted common share outstanding $   0.02     $   0.04  
           
Diluted weighted average common shares outstanding     29,054,147         28,759,443  
           
The Female Health Company
Unaudited Condensed Consolidated Statements of Income
 
  Nine Months Ended
  June 30,
  2016   2015
           
Net revenues $    18,564,236      $   25,449,880  
           
Cost of sales     7,083,311         10,603,565  
           
Gross profit     11,480,925         14,846,315  
           
Operating expenses     8,169,426         8,989,225  
           
Operating income     3,311,499         5,857,090  
           
Interest and other expense, net     (54,551 )       (5,130 )
Foreign currency transaction (loss) gain     (128,442 )       53,280  
           
Income before income taxes     3,128,506         5,905,240  
           
Income tax expense     1,032,840         2,261,775  
Net income $   2,095,666     $   3,643,465  
           
Net income per basic common share outstanding $   0.07     $   0.13  
           
Basic weighted average common shares outstanding     28,647,275         28,520,972  
           
Net income per diluted common share outstanding $   0.07     $   0.13  
           
Diluted weighted average common shares outstanding     29,058,576         28,755,444  
           
The Female Health Company
Unaudited Condensed Consolidated Statements of Cash Flows
 
    Nine Months Ended
    June 30,
      2016       2015  
Net income $     2,095,666   $   3,643,465  
         
Adjustments to reconcile net income to net cash used in operating activities:
  Depreciation and amortization       327,632       372,535  
  Share-based compensation     364,700        

542,724

  
  Deferred income taxes       789,197         1,883,411  
  Loss on disposal of fixed assets     496        

3,483

  
  Changes in current assets and liabilities     (4,469,396 )      

(9,483,239

)
Net cash used in operating activities     (891,705 )      
(3,037,621

)
Net cash used in investing activities     (3,425 )       (127,588 )
Net cash used in financing activities     0        

(6,288

)
Net decrease in cash     (895,130 )      

(3,171,497

)
Cash at beginning of period     4,105,814        

5,796,223

  
Cash at end of period $   3,210,684   $    

2,624,726

  

The Female Health Company
Additional Non-GAAP Performance Measures

In addition to the results reported in accordance with U.S. generally accepted accounting principles ("GAAP") included in this release, the Company has provided the non-GAAP measures of operating income excluding investment expenses related to the FC2 consumer study and diversification and adjusted EBITDA.  Adjusted EBITDA represents net income before interest income or expense, income tax expense, depreciation and amortization, and further adjusted for the share-based compensation reflected in the reconciliation table set forth below.

We believe that adjusted EBITDA is a useful measure for investors for the following reasons:

  • Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions and tax attributes, capital structures and the methods by which assets were acquired;
     
  • Investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our Company, including our ability to satisfy our cash needs;
     
  • By comparing our Adjusted EBITDA in different historical periods, investors can evaluate our operating performance excluding the impact of items described below;
     
  • Adjusted EBITDA excludes the impact of income tax expense on net income, which has a smaller impact on cash flows because the Company has significant U.S. and U.K. net operating loss carryforwards that can be used to reduce cash payments for income taxes; and
     
  • Adjusted EBITDA excludes the impact of share-based compensation on net income, which does not affect cash and which fluctuates based on the timing of share grants and share price.

Adjusted EBITDA is not adjusted for all non-cash expenses or for working capital, capital expenditures or other investment requirements and, accordingly, is not necessarily indicative of amounts of cash that may be available for discretionary uses.  Thus, Adjusted EBITDA should not be considered in isolation or as a substitute for net income or cash used in operating activities, each prepared in accordance with GAAP, when measuring profitability or liquidity.

We believe that operating income excluding investment expenses related to the FC2 consumer study and diversification is a useful measure for investors because such investment expenses related to corporate initiatives that do not provide for a current return and it enhances the ability of investors to make period-to-period comparisons of the Company's operating results.

The following table reconciles Adjusted EBITDA to net income:

  Three Months Ended   Nine Months Ended
  June 30,   June 30,
  2016   2015   2016   2015
Net income $     570,258     $     1,170,974     $   2,095,666     $   3,643,465  
Adjustments:                      
Interest income       (281 )       (232 )       (1,529 )       (2,623 )
 

Income tax expense

       231,211         284,900         1,032,840         2,261,775  
                       
Depreciation and amortization     100,951         121,152         327,632         372,535  
                       
Share-based compensation     110,584         162,566         364,700         542,724  
Adjusted EBITDA $   1,012,723     $   1,739,360     $   3,819,309     $   6,817,876  
                       

The following table reconciles operating income as reported to operating income excluding investment expenses related to the FC2 consumer study and diversification.

  Three Months Ended   Nine Months Ended
  June 30, 2016   June 30, 2016
  Amount   % of Net
Revenues		   Amount   % of Net
Revenues
Operating income as reported $   848,519         15 %   $ 3,311,499         18 %
                       
Add investment expenses related to FC2 consumer study and diversification   750,006       13 %     1,865,452       10 %
                       
Operating income excluding investment expenses related to FC2 consumer study and diversification $ 1,598,525       29 %   $ 5,176,951       28 %