Transcript of Conference Call Edited Transcript The Female Health Company Second Quarter of FY2016 Operating Results Conference Call

Transcript of Conference Call

Good day, ladies and gentlemen, and welcome to

The Female Health Company s Second Quarter Fiscal Year 2016 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After

today s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

The statements made on this

conference call that are not historical in nature are forward-looking statements, including those regarding the outlook for the Company s business and those regarding proposed merger transaction between FHC and Aspen Park Pharmaceuticals and

the integration of our two businesses. Such forward-looking statements reflect the Company s current assessment of the risks and uncertainties related to its business. The Company s actual results and future developments could differ

materially from the results or developments in such forward-looking statements.

Factors that may cause actual results or developments to differ

materially includes such things as product demand and market acceptance; the timing of receipt and shipment of large orders, competition; the ability to execute on new business strategies; the risks that the proposed transaction with Aspen Park

Pharmaceuticals may not be completed in a timely manner or at all; risks that the proposed transaction could disrupt current plans and operations; risks related to the development of Aspen Park s product portfolio and its business; and other

risks detailed in the Company s press releases, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the Company urges you to review its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to Mr. Parrish. Please go ahead.

Thank you Dino. Welcome to The Female Health

Company s Second Quarter 2016 Conference call. Michele Greco, our Executive Vice President and CFO, is here with me in our Chicago office.

morning I ll make two brief comments regarding the Company s strategic objectives, then I ll cover the financial results, key factors that may impact future results. Finally, I ll address the future outlook, including the

proposed merger with Aspen Park Pharmaceuticals. Mitch Steiner, President of Aspen Park Pharmaceuticals is participating today to assist in answering questions regarding the merger.

As usual, when I refer to years, I am referring to the company s fiscal year, which ends September 30th unless otherwise noted.

In July 2014, the Company established two strategic objectives; first, diversifying its product line and second, increasing the marketing of FC2. The

rationale for diversification was based on the significant risk of continuing as a single product company, with increasing competition with dependence on public funding. The proposed merger with Aspen Park Pharmaceuticals would fulfill our

diversification objective and provide a remarkable opportunity for current and future investors. I ll address this in detail when discussing the outlook.

Second, the board has approved an FC2 commercial consumer marketing program in the U.S. based on a review of changes in the U.S. market, contingent on

submission of the detailed creative program and budget. We believe the proposed merger will enhance the FC2 consumer marketing opportunity.

April 28, 2016 at 11:15 a.m.

Turning to financial results, we believe the results from the quarter and first half reflect the volatility

of the public sector market in reference to the timing of tenders, awards and shipments of major orders rather than any change in basic demand. In late 2014, the Company was awarded a record tender by Brazil for up to 50 million FC2

units. This resulted in orders of 40 million units, a significant portion was shipped in the second quarter of 2015, creating a record second quarter and first half. The primary differences in revenues and results between 2016 and 2015 are due

to the comparison of shipments to Brazil.

Specifically in the second quarter unit sales totaled $9.2 million, down 56% from the second quarter of

2015. Net revenues for the quarter totaled $4.8 million, a decrease of 57% from $11.0 million in the prior year quarter.

Gross profit decreased 55%

to $2.8 million for a margin of 60% compared with $6.4 million for a margin of 58% in the prior year quarter.

Operating expenses decreased $670,000 or 19%

to $2.8 million from the prior year quarter.

It s important to note that during the quarter the Company incurred investment expense with no current

return related to the evaluation of the FC2 consumer program and diversification program, totaling $648,683.

Operating income for the quarter totaled

$70,425, compared to $2.9 million in the prior year quarter. Net income totaled $35,045, down from $1.7 million in the second quarter of 2015. Earnings per share were breakeven, a decrease from the $0.06 per share in the prior year

It is important to note that the company remained profitable despite a 56% decrease in revenues and funding investment expenses of $648,683 with

no current return. Excluding these investment expenses, operating income totaled $719,108 for an operating margin of 14%.

Operating income excluding

the investment expenses is a non-GAAP financial measure, we believe that this non-GAAP financial measure is useful for investors as a supplemental measure to evaluate our overall performance. A reconciliation of this appears along with our

For six months, unit sales totaled $24.5 million, down 25% from the first six months of 2015. Net revenues totaled $13 million, a

decrease of 26% from $17.6 million in the prior year period.

Gross profit decreased 19% to $8.2 million, for a margin of 63% compared with $10.2 million

for a margin of 58% in the prior year period.

Operating expenses for the first six months were $5.8 million, which was flat compared to the prior

year. The investment expenses related to the evaluation of an FC2 consumer program and diversification totaled approximately $309,000 and $807,000 respectively, for a total of $1.116 million.

Operating income totaled $2.5 million, a decrease of 44% from $4.4 million in the prior period. The operating margin was 19% versus 25% in the first six

months of 2015. Excluding the investment expenses of $1.116 million, operating income was $3.6 million for an operating margin of 28%.

decreased 38% to $1,525,408 with a margin of 12% from $2,472,491 for a margin of 14% in the first six months of 2015. Earnings per diluted share were $0.05 per share, a decrease of 44% from $0.09 per share in the prior year period.

April 28, 2016 at 11:15 a.m.

Turning to the cash flow, cash flow from operations for the first half was a negative $1,311,679, which

included the investment expense of $1.1 million and a negative change in operating assets of $4 million. Our Brazil receivable net of what we owe our distributor totals $13.4 million. The Company has received significant orders from Brazil over a

10-year period. During this period, we have experienced delays in payments, but never a default. To date no defaults have been reported in reference to the current situation in Brazil. Companies in Brazil and outside of Brazil are continuing to do

business with the government. An important reason for this is Brazil has stronger liquidity position due to significant foreign currency reserves. To date in 2016, the Brazilian economy and currency has actually strengthened. Based on advice

we ve had from consultants and our own opinion, we believe that we will be paid the outstanding receivable.

Turning to tax loss carry forwards, due

to the fact that as of December 31, 2013, the valuation allowance in Company s deferred tax assets was fully reversed, the Company no longer recognizes tax benefits on its P&L statements. However, it is important to note that the net

operating loss carryforwards will continue to be utilized to reduce cash payments for taxes charged. For the first six months of 2016, the Company recorded tax expense of $801,629. However, we paid only $168,220 in taxes or just 21% of the

total charge recorded. This resulted in cash savings of $633,409 for the period.

As of March 31, the Company had tax loss carry forwards of $12.6

million in state and $13.0 million in federal in the U.S. and $61.9 million in the U.K., which may be used to significantly reduce future cash payments for taxes. The U.K. tax loss carry forwards don t expire.

There are four key factors that may impact the Company s future results. First, is diversification, the proposed merger with Aspen Park Pharmaceuticals

is a cardinal element that will impact the future of the Company. I will cover this in more detail when we get to the outlook section.

is that while it will continue to be volatile, we expect the female condom market to grow in the long-term for two reasons; first, for the prevention of HIV/AIDS and other sexually transmitted infections and unintended pregnancies. HIV/AIDS

remains a leading cause of death among women 15 to 44 years of age worldwide; 50% or more of all people living with and new cases of HIV/AIDS are women. In the U.S., 1 in 4, 18 to 24 year olds will contract a sexually transmitted infection

annually. Unintended pregnancies caused American taxpayers $21 billion a year.

The second reason we believe the market will continue to grow is the

Zika virus epidemic. The World Health Organization declared a global emergency regarding the Zika virus. It is transmitted by mosquitoes and through sex. The current Zika outbreak was first detected in Brazil and has now been reported

in more than 40 countries. Women who are or become pregnant and are infected with the virus may give birth to babies with microcephaly resulting in small head size. It has also been linked to Guillain-Barre Syndrome and potentially may

cause other neurological disorders.

Male and female condoms are the only products that can concurrently prevent pregnancy and sexual transmission of the

Zika virus. Female condoms are an ideal choice for prevention due to the unique impact of the virus on women. I would like to note that in Brazil, the Ministry of Health recently issued a statement indicating pregnant women should use

condoms, specifically mentioning the female condom, to prevent the transmission of Zika.

Due to the accelerated use of the female condom FC2 in Brazil,

as a result of Zika, a new tender for female condom is under consideration. If they should issue such a tender, they would have to pay the receivables outstanding. In addition, the World Bank has considered funding such a tender.

April 28, 2016 at 11:15 a.m.

The third factor that will impact the future is the U.S. consumer marketing of FC2. As noted, the board

approved a U.S. consumer promotion based on the evaluation of recent changes in the market. These changes include the fact that female condoms are now reimbursable under Obamacare, the increased focus on preventing unintended pregnancies and

sexually transmitted disease among young women, and increased interest in non-hormonal birth control. The increased role of social media in marketing, increased U.S. drug retailer interest in contributing to health care. The increased online

purchasing of such products, it is estimated 33% of male condoms are purchased online. We believe the consumer promotion will complement public sector promotion and increase the overall awareness and revenue the U.S.

The fourth factor that will impact the future is competition in education and training. The company has had competition in the global public sector for more

than three years. The first competitive product was cleared by WHO in 2012. This year two additional competitive products were cleared by WHO: Velvet marketed by HLL and the Women s Condom marketed by PATH. The FHC s FC2 remains the only

female condom with FDA approval. I should mention that Velvet is made of latex, and unlike FC2 is allergenic and more likely to rip and tear. The PATH product is made of polyurethane and is significantly more expensive than FC2.

To date the competition hasn t been able to obtain a significant market share. The role of education and training is a key factor here. Product specific

education and training increases the number of available products actually used in reducing the cost per protected sex act. The public sector is beginning to focus on the cost per protected sex act. The Company is the only company currently

providing significant education and training for its products. I believe the four factors that I just reviewed will net a positive for the future of the Company.

Now, I would like to turn to the outlook. I believe the long-term outlook for FHC is excellent for three reasons. First, changes in the U.S. market

that provide an excellent opportunity for FC2 consumer promotion.

Second, the fact that the female condom market will continue to grow. The United

Nations joint program on AIDS estimates that since the beginning of the epidemic, condoms have averted 50 million new cases of HIV/AIDS and have called for the availability of 20 billion male and female condoms per year by the year 2020. There is

the impact for the Zika virus in the market. And reflecting this, the Company has shipped over 500 million female condoms and has an average annual compound unit sales growth rate for 10 years of 16%.

Third and most important, is the proposed merger with Aspen Park Pharmaceuticals. The merger is transformative. If completed, it will provide the

potential for long-term growth and enhance shareholder value for five reasons. First, it results in a high potential multiple product portfolio. Second, it provides proprietary product positions, three of which are subject to the potentially

less risky, less costly and expedited 505 (b)(2) FDA regulatory approval process. As a result, this provides potential near-term revenue and cash flow.

Third, the merger will complement and enhance FC2 s consumer market opportunities. Fourth, the multiple product portfolios may capitalize on the

Company s public healthcare status and provide the potential for an increase in investor opportunity. And fifth, it brings an experienced and excellent management team for the new Company.

The FHC board approved the merger, after the Company had evaluated more than 100 potential opportunities and it completed a scientific intellectual property,