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EX-32.1 - EX-32.1 - VERU INC.veru-20170630xex32_1.htm
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EX-31.1 - EX-31.1 - VERU INC.veru-20170630xex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2017





 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from              to             



Commission file number 1-13602





Veru Inc.

(Name of registrant as specified in its charter)





 

 

 

 

 

Wisconsin

 

39-1144397

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

 

4400 Biscayne Boulevard, Suite 888

Miami, FL

 

33137

(Address of principal executive offices)

 

(Zip Code)



305-509-6897

(Registrant’s telephone number, including area code)



N/A

(Former Name or Former Address, if Changed Since Last Report)





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       No  



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      No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company

(Do not check if smaller reporting company)

 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      



Indicate by check mark whether the registrant is a shell company (as determined by Rule 12b-2 of the Exchange Act).    Yes      No  



As of August 4, 2017, the registrant had 53,208,439  shares of $0.01 par value common stock outstanding.

 

 


 

VERU INC.





 



 

                       INDEX

PAGE



 



 



 

Cautionary Statement Regarding Forward Looking Statements



 

PART I.          FINANCIAL INFORMATION

 



 

Item 1.  Financial Statements



 

Unaudited Condensed Consolidated Balance Sheets -

 

     June 30, 2017 and September 30, 2016 



 

Unaudited Condensed Consolidated Statements of Operations -

 

     Three Months Ended June 30, 2017 and June 30, 2016

     Nine Months Ended June 30, 2017 and June 30, 2016



 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity -

 

     Nine Months Ended June 30, 2017



 

Unaudited Condensed Consolidated Statements of Cash Flows -

 

     Nine Months Ended June 30, 2017 and June 30, 2016



 

Notes to Unaudited Condensed Consolidated Financial Statements



 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

23 



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

29 



 

Item 4.  Controls and Procedures

29 



 

PART II.          OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

30 



 

Item 1A.  Risk Factors

30 



 

Item 6.  Exhibits

31 



 







 

2


 

CAUTIONARY STATEMENT REGARDING

FORWARD LOOKING STATEMENTS



Certain statements included in this quarterly report on Form 10-Q 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," "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "will," "would" or the negative of these terms or other words of similar meaning.  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 achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: the Company's ability to secure adequate capital to fund product development, working capital requirements, advertising and promotional expenditures and strategic initiatives; factors related to increased competition from existing and new competitors including the potential for reduced sales, pressure on pricing and increased spending on marketing; limitations on the Company's opportunities to enter into and/or renew agreements with international partners, the failure of the Company or its partners to successfully market, sell and deliver its products in international markets, and risks inherent in doing business on an international level, such as laws governing medical devices that differ from those in the U.S., unexpected changes in the regulatory requirements, political risks, export restrictions, tariffs and other trade barriers and fluctuations in currency exchange rates; the disruption of production at the Company's manufacturing facilities due to raw material shortages, labor shortages and/or physical damage to the Company's facilities; the Company’s reliance on its major customers and risks relating to delays in payment of accounts receivable by major customers; the Company's ability to manage its growth and to adapt its administrative, operational and financial control systems to the needs of the expanded entity and the failure of management to anticipate, respond to and manage changing business conditions; the loss of the services of executive officers and other key employees and the Company's continued ability to attract and retain highly-skilled and qualified personnel; the costs and other effects of litigation, governmental investigations, legal and administrative cases and proceedings, settlements and investigations; product demand and market acceptance; risks related to the development of the Company's product portfolio, including clinical trials, regulatory approvals and time and cost to bring to market; many of the Company's products are at an early stage of development and the Company may fail to successfully commercialize such products; risks related to intellectual property, including licensing risks; government contracting risks, including the appropriations process and funding priorities, potential bureaucratic delays in awarding contracts, process errors, politics or other pressures, and the risk that government tenders and 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, and as a result government ministries or other public sector customers may order and purchase fewer units than the full maximum tender amount; the Company’s ability to identify, successfully negotiate and complete suitable acquisitions or other strategic initiatives; and the Company’s ability to successfully integrate acquired businesses, technologies or products. Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk Factors," in the Company's Form 10-K for the year ended September 30, 2016. 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.

3


 

Item 1Financial Statements

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS







 

 

 

 

 



 

 

 

 

 



June 30, 2017

 

September 30, 2016

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

$

2,671,132 

 

$

2,385,082 

Accounts receivable, net

 

5,760,147 

 

 

10,775,200 

Income tax receivable

 

37,104 

 

 

2,387 

Inventory, net

 

2,765,369 

 

 

2,492,644 

Prepaid expenses and other current assets

 

800,814 

 

 

634,588 

TOTAL CURRENT ASSETS

 

12,034,566 

 

 

16,289,901 



 

 

 

 

 

PLANT AND EQUIPMENT

 

 

 

 

 

Equipment, furniture and fixtures

 

4,165,498 

 

 

4,625,472 

Leasehold improvements

 

300,752 

 

 

323,147 

Less accumulated depreciation and amortization

 

(3,793,950)

 

 

(4,123,532)

Plant and equipment, net

 

672,300 

 

 

825,087 



 

 

 

 

 

Other trade receivables

 

7,837,500 

 

 

7,837,500 

Other assets

 

183,317 

 

 

189,219 

Deferred income taxes

 

9,027,096 

 

 

13,482,000 

Intangible assets, net

 

20,793,084 

 

 

 —

Goodwill

 

6,878,932 

 

 

 —

TOTAL ASSETS

$

57,426,795 

 

$

38,623,707 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

1,915,772 

 

$

701,035 

Accrued expenses and other current liabilities

 

1,593,830 

 

 

2,380,571 

Unearned revenue

 

964,382 

 

 

 —

Accrued compensation

 

396,893 

 

 

264,871 

TOTAL CURRENT LIABILITIES

 

4,870,877 

 

 

3,346,477 



 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Other liabilities

 

1,233,750 

 

 

1,233,750 

Deferred rent

 

61,442 

 

 

 —

Deferred income taxes

 

465,766 

 

 

110,069 

TOTAL LIABILITIES

 

6,631,835 

 

 

4,690,296 



 

 

 

 

 

Series 4 Preferred Stock

 

17,981,883 

 

 

 —

Commitments and Contingencies

 

 —

 

 

 —

STOCKHOLDERS' EQUITY

 

 

 

 

 

Preferred stock

 

 —

 

 

 —

Common stock

 

335,220 

 

 

312,740 

Additional paid-in-capital

 

72,449,908 

 

 

69,660,010 

Accumulated other comprehensive loss

 

(581,519)

 

 

(581,519)

Accumulated deficit

 

(31,583,927)

 

 

(27,651,215)

Treasury stock, at cost

 

(7,806,605)

 

 

(7,806,605)

TOTAL STOCKHOLDERS' EQUITY

 

32,813,077 

 

 

33,933,411 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

57,426,795 

 

$

38,623,707 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 











4


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 



Three Months Ended



June 30,



2017

 

2016



 

 

 

 

 

Net revenues

$

4,314,068 

 

$

5,560,776 

   

 

 

 

 

 

Cost of sales

 

2,019,154 

 

 

2,327,583 

   

 

 

 

 

 

Gross profit

 

2,294,914 

 

 

3,233,193 

   

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

3,134,239 

 

 

2,361,951 

Research and development

 

426,811 

 

 

22,723 

Total operating expenses

 

3,561,050 

 

 

2,384,674 

   

 

 

 

 

 

Operating (loss) income

 

(1,266,136)

 

 

848,519 

   

 

 

 

 

 

Non-operating expenses:

 

 

 

 

 

Interest and other expense, net

 

(13,323)

 

 

(7,399)

Foreign currency transaction loss

 

(20,143)

 

 

(39,651)

Total non-operating expenses

 

(33,466)

 

 

(47,050)

   

 

 

 

 

 

(Loss) income before income taxes

 

(1,299,602)

 

 

801,469 

   

 

 

 

 

 

Income tax (benefit) expense

 

(509,713)

 

 

231,211 



 

 

 

 

 

Net (loss) income

$

(789,889)

 

$

570,258 

   

 

 

 

 

 

Net (loss) income per basic common share outstanding

$

(0.03)

 

$

0.02 

   

 

 

 

 

 

Basic weighted average common shares outstanding

 

30,991,247 

 

 

28,655,970 

   

 

 

 

 

 

Net (loss) income per diluted common share outstanding

$

(0.03)

 

$

0.02 



 

 

 

 

 

Diluted weighted average common shares outstanding

 

30,991,247 

 

 

29,054,147 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 





5


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 



Nine Months Ended



June 30,

   

2017

 

2016

   

 

 

 

 

 

Net revenues

$

9,963,186 

 

$

18,564,236 

   

 

 

 

 

 

Cost of sales

 

4,738,333 

 

 

7,083,311 

   

 

 

 

 

 

Gross profit

 

5,224,853 

 

 

11,480,925 

   

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

8,909,939 

 

 

8,073,288 

Research and development

 

2,034,973 

 

 

96,138 

Total operating expenses

 

10,944,912 

 

 

8,169,426 

   

 

 

 

 

 

Operating (loss) income

 

(5,720,059)

 

 

3,311,499 

   

 

 

 

 

 

Non-operating expenses:

 

 

 

 

 

Interest and other expense, net

 

(35,630)

 

 

(54,551)

Foreign currency transaction loss

 

(40,838)

 

 

(128,442)

Total non-operating expenses

 

(76,468)

 

 

(182,993)

   

 

 

 

 

 

(Loss) income before income taxes

 

(5,796,527)

 

 

3,128,506 

   

 

 

 

 

 

Income tax (benefit) expense

 

(1,863,815)

 

 

1,032,840 



 

 

 

 

 

Net (loss) income

$

(3,932,712)

 

$

2,095,666 

   

 

 

 

 

 

Net (loss) income per basic common share outstanding

$

(0.13)

 

$

0.07 

   

 

 

 

 

 

Basic weighted average common shares outstanding

 

30,983,271 

 

 

28,647,275 

   

 

 

 

 

 

Net (loss) income per diluted common share outstanding

$

(0.13)

 

$

0.07 



 

 

 

 

 

Diluted weighted average common shares outstanding

 

30,983,271 

 

 

29,058,576 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 





























































 

6


 



VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Treasury

 

 

 

   

Preferred

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stock

 

 

 

   

Stock

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

at Cost

 

Total

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016

$

 —

 

31,273,954 

 

$

312,740 

 

$

69,660,010 

 

$

(581,519)

 

$

(27,651,215)

 

$

(7,806,605)

 

$

33,933,411 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 —

 

247,999 

 

 

2,480 

 

 

440,871 

 

 

 —

 

 

 —

 

 

 —

 

 

443,351 

Issuance of 2,000,000 shares of common stock in connection with the APP Merger.

 

 —

 

2,000,000 

 

 

20,000 

 

 

1,806,097 

 

 

 —

 

 

 —

 

 

 —

 

 

1,826,097 

Issuance of 2,585,379 warrants in connection with the APP Merger.

 

 —

 

 —

 

 

 —

 

 

542,930 

 

 

 —

 

 

 —

 

 

 —

 

 

542,930 

Net loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,932,712)

 

 

 —

 

 

(3,932,712)

Balance at June 30, 2017

$

 —

 

33,521,953 

 

$

335,220 

 

$

72,449,908 

 

$

(581,519)

 

$

(31,583,927)

 

$

(7,806,605)

 

$

32,813,077 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







































 

7


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS







 

 

 

 

 



 

 

 

 

 



Nine Months Ended



June 30,



2017

 

2016



 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net (loss) income

$

(3,932,712)

 

$

2,095,666 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

267,193 

 

 

327,632 

Amortization of intangible assets

 

106,916 

 

 

 —

Share-based compensation

 

527,785 

 

 

364,700 

Warrants issued

 

542,930 

 

 

 —

Deferred income taxes

 

(1,989,399)

 

 

789,197 

Loss on disposal of fixed assets

 

9,973 

 

 

496 

Changes in current assets and liabilities, net of effects of acquisition of a business:

Decrease (increase) in accounts receivable

 

5,022,028 

 

 

(4,548,253)

Decrease (increase) in income tax receivable

 

(34,717)

 

 

(7,749)

Decrease (increase) in inventory

 

(131,684)

 

 

(592,256)

Decrease (increase) in prepaid expenses and other assets

 

(159,985)

 

 

10,750 

(Decrease) increase in accounts payable

 

127,525 

 

 

(17,939)

(Decrease) increase in unearned revenue

 

964,382 

 

 

 —

(Decrease) increase in accrued expenses and other current liabilities

 

(914,763)

 

 

686,051 

Net cash provided by (used in) operating activities

 

405,472 

 

 

(891,705)



 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(119,422)

 

 

(3,425)

Net cash used in investing activities

 

(119,422)

 

 

(3,425)



 

 

 

 

 

Net increase (decrease) in cash

 

286,050 

 

 

(895,130)

Cash at beginning of period

 

2,385,082 

 

 

4,105,814 



 

 

 

 

 

CASH AT END OF PERIOD

$

2,671,132 

 

$

3,210,684 



 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

  Cash payments for income taxes paid

$

215,893 

 

$

276,284 

Schedule of noncash financing and investing activities:

 

 

 

 

 

Issuance of common stock in connection with the APP Merger

$

1,826,097 

 

 

 —

Issuance of Series 4 Preferred Stock in connection with the APP Merger

$

17,981,883 

 

 

 —

Reduction of accrued expense upon issuance of shares

$

22,176 

 

 

 —



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



8


 

VERU INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - Basis of Presentation 



The accompanying condensed consolidated financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flow for the periods presented in conformity with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.



Operating results for the three and nine months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2016.  



Principles of Consolidation and Nature of Operations



Veru Inc. (Veru or the Company) is a biopharmaceutical company focused on urology and oncology.  The Company does business as both "Veru Healthcare" and "The Female Health Company."  On July 31, 2017, the Company changed its corporate name from The Female Health Company to Veru Inc.



Veru specifically focuses on the development and commercialization of pharmaceutical products that qualify for FDA's 505(b)(2) regulatory approval pathway, which is designed to allow for potentially expedited regulatory approval based on a previously established safety and efficacy profile of the product.  The Company is developing products under the 505(b)(1) pathway as well, which is the traditional new drug application (NDA) pathway.  The Company is currently developing prescription products for benign prostatic hyperplasia (BPH or enlarged prostate), hot flashes associated with prostate cancer hormone treatment, male infertility and novel oral chemotherapy for a variety of malignancies, including metastatic prostate, breast and ovarian cancers.  In addition, the Company initiated selling the FC2 Female Condom® in the US via prescription in April 2017 through its own dedicated sales force.  The Company also sells PREBOOST® (4% benzocaine medicated individual wipe), which is a male genital desensitizing drug for the prevention of premature ejaculation, direct to consumers.    



The Company’s division, The Female Health Company, manages the Global Public Health Division, which is focused on the global public health sector FC2 business.  This division manufactures and markets the Company’s Female Condom (FC2) to entities, including ministries of health, government health agencies, U.N. agencies, nonprofit organizations and commercial partners, that work to support and improve the lives, health and well-being of women around the world.



The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Aspen Park Pharmaceuticals, Inc. (APP) and The Female Health Company Limited, and The Female Health Company Limited’s 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. Prior to the completion of the acquisition of APP through the merger of a wholly owned subsidiary of the Company into APP (the APP Merger) (see Note 3, APP Merger Transaction), the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer health care product, the FC2 female condom.  The Female Health Company Limited, is the holding company of The Female Health Company (UK) plc, which is located in London, England (collectively the U.K. subsidiary). The Female Health Company (M) SDN.BHD leases a manufacturing facility located in Selangor D.E., Malaysia (the Malaysia subsidiary).  The Company headquarters is located in Miami, Florida and a regional office is located in Chicago, Illinois, both in leased office facilities.



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.



9


 

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 has averaged approximately 429 days.  The balance in the allowance for doubtful accounts was $38,000  at both June 30, 2017 and September 30, 2016.



Unearned Revenue



FC2 is distributed in the U.S. prescription channel principally through the retail pharmacy, which initiates through large pharmaceutical wholesalers in the U.S.  Unearned revenue as of June 30, 2017 was $964,382 and was com-prised mainly of sales made to wholesalers. We lack the experiential data which would allow us to estimate returns; therefore, as of June 30, 2017, we have determined that we do not yet meet the criteria for the recognition of reve-nue at the time of shipment to wholesalers as allowances for returns cannot be reasonably estimated. Accordingly, the Company deferred recognition of revenue on prescription products sold to wholesale distributors until the right of return no longer exists, which occurs at the earlier of the time the prescription products were dispensed through patient prescriptions or expiration of the right of return. The corresponding costs of product revenues for which we have not recognized product revenue have similarly not yet been reflected in our Unaudited Condensed Consoli-dated Statement of Operations.



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 funds’ provider. 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 $134,247 and $134,443 at June 30, 2017 and September 30, 2016, respectively, and is included in cash on the accompanying Unaudited Condensed Consolidated Balance Sheets.



Foreign Currency and Change in Functional Currency



The Company recognized a foreign currency transaction loss of  $20,143 and  $40,838 for the three and nine months ended June 30, 2017,  respectively, compared to a loss of  $39,651 and  $128,442 for the three and nine months ended June 30, 2016, respectively. The consistent use of the U.S. dollar as functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. As a result of the U.S. dollar being the functional currency of the Company and all of its subsidiaries, comprehensive income is equivalent to the reported net income.



Business Combinations



The Company accounts for acquisitions using the acquisition method of accounting which requires the recognition of tangible and identifiable intangible assets acquired and liabilities assumed at their estimated fair values as of the business combination date. The Company allocates any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed to goodwill. Transaction costs are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in the Company's operating results from the date of acquisition.



10


 

Goodwill and Intangible Assets



Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets with indefinite useful lives are related to acquired in-process research and development projects and are measured at their respective fair values as of the acquisition date. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment on an annual basis or more frequently if the Company becomes aware of any events or changes that would indicate the fair values of the assets are below their carrying amounts. Intangible assets related to in-process research and development projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized based on their respective estimated useful lives at that point in time. The Company has not recorded an impairment of goodwill or in-process research and development since inception.



Intangible assets with finite useful lives are amortized over their estimated useful lives, either on a straight-line basis or over the projected related revenue stream.



Impairment of Long-Lived Assets



The Company reviews its long-lived assets, including property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated from the use of the asset and its eventual disposition. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the impaired assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. The Company has not recorded an impairment of long-lived assets since inception.



Accrued Research and Development Costs



The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled and the rate of patient enrollments may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.



Series 4 Preferred Stock



The Company issued 546,756 shares of Class A Convertible Preferred Stock – Series 4 (the Series 4 Preferred Stock) in connection with the completion of the APP Merger on October 31, 2016. The Series 4 Preferred Stock is classified as temporary equity in the balance sheet due to the requirement that the Company redeem the Series 4 Preferred Stock for cash upon certain events, including liquidation or sale of the Company or the 20th anniversary of the date of issuance of the Series 4 Preferred Stock. The carrying values of the Series 4 Preferred Stock were not adjusted to the cash redemption price of such shares because it is not considered probable that the shares will be redeemed for cash. The outstanding shares of Series 4 Preferred Stock automatically converted into shares of the Company’s common stock effective July 31, 2017 as described in Note 11,  Subsequent Events.



11


 

Recently Issued Accounting Pronouncement



In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires deferred tax liabilities and assets to be classified as non-current in the consolidated balance sheet.  Current accounting principles require an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position.  ASU 2015-17 will be effective for the Company beginning on October 1, 2017.  Early adoption of the standard is permitted, and the Company adopted this standard during the quarter ended December 31, 2016 and applied it to all periods presented.  Adoption of this standard resulted in presenting current and prior period deferred tax assets and liabilities as non-current and net of one another on the balance sheet.  These non-current deferred tax assets and liabilities are netted by tax jurisdiction.  Current deferred tax assets totaling $2,025,000 at September 30, 2016 were reclassified to non-current and presented net with non-current deferred tax liabilities.



Reclassifications



Certain items in the September 30, 2016 consolidated financial statements have been reclassified to conform to the June 30, 2017 presentation.



NOTE 2 – (Loss) Income per Share 



Basic (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted (loss) income per share 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, warrants, and unvested shares granted to employees and directors.   







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Weighted average common shares outstanding - basic

 

30,991,247 

 

 

28,655,970 

 

 

30,983,271 

 

 

28,647,275 

Net effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

Options

 

 —

 

 

1,624 

 

 

 —

 

 

14,748 

Unvested restricted shares

 

 —

 

 

396,553 

 

 

 —

 

 

396,553 

Total net effect of dilutive securities

 

 —

 

 

398,177 

 

 

 —

 

 

411,301 

Weighted average common shares outstanding - diluted

 

30,991,247 

 

 

29,054,147 

 

 

30,983,271 

 

 

29,058,576 

(Loss) income per common share – basic

$

(0.03)

 

$

0.02 

 

$

(0.13)

 

$

0.07 

(Loss) income per common share – diluted

$

(0.03)

 

$

0.02 

 

$

(0.13)

 

$

0.07 



Options to purchase 297,500 shares of common stock, warrants to purchase 2,585,379 shares of common stock, and 198,750 unvested restricted shares that were outstanding during the three and nine months ended June 30, 2017 were not included in the computation of diluted net loss per share because their effect was anti-dilutive.  Series 4 Preferred Stock is convertible into common stock; however, there were not sufficient common shares for conversion during the three and nine months ended June 30, 2017,  and therefore the Series 4 Preferred Stock is not included in the calculation.  Options to purchase approximately 90,000 and 17,500 shares of common stock at exercise prices of $3.92 per share and $1.82 per share, respectively, that were both outstanding during the three and nine months ended June 30, 2016 were not included in the computation of diluted net income per share because their effect was anti-dilutive.    All other outstanding stock options and unvested restricted shares were included in the computation of diluted net income per share for the three and nine months ended June 30, 2016.



12


 

Note 3APP Merger Transaction



On October 31, 2016, as part of the Company's strategy to diversify its product line to mitigate the risks of being a single product company, the Company completed its acquisition of APP through the APP Merger. APP is a company focused on the development and commercialization of pharmaceutical and consumer health products for men's and women's health and oncology. For men, product and product candidates are in the areas of benign prostatic hyperplasia, male infertility, amelioration of side effects of hormonal prostate cancer therapies, gout, sexual dysfunction, and prostate cancer.  For women, product candidates are for advanced breast and ovarian cancers and for female sexual health. 



The APP Merger was pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of October 31, 2016, (the Amended Merger Agreement), among the Company, APP, and the Company’s wholly owned subsidiary Blue Hen Acquisition, Inc. (APP Merger Sub). Pursuant to the Amended Merger Agreement, on October 31, 2016, APP became a wholly-owned subsidiary of the Company through the merger of APP Merger Sub with and into APP with APP continuing as the surviving corporation. Consummation of the APP Merger did not require the current approval of the Company’s shareholders.



Under the terms of the Amended Merger Agreement, pursuant to the APP Merger, the outstanding shares of APP common stock and preferred stock were converted into the right to receive in the aggregate 2,000,000 shares of the Company’s common stock and 546,756 shares of Series 4 Preferred Stock.



The terms of the Series 4 Preferred Stock include the following:



·

Each share of Series 4 Preferred Stock will automatically convert into 40 shares of the Company's common stock upon receipt by the Company of approval by the affirmative vote of the Company's shareholders by the required vote under the Wisconsin Business Corporation Law and the NASDAQ listing rules, as applicable, of (i) an amendment to the Company's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of the Company's common stock by a sufficient amount to permit such conversion and (ii) the conversion of the Series 4 Preferred Stock pursuant to applicable NASDAQ rules.

·

Upon a Liquidation Event, the holders of the Series 4 Preferred Stock will be entitled to a liquidation preference equal to the greater of (a) $1.00 per share (or $546,756 in the aggregate for all of the shares of Series 4 Preferred Stock), or (b) the amount holders would have received if the Series 4 Preferred Stock had converted to the Company's common stock.  A "Liquidation Event" includes any voluntary or involuntary liquidation, dissolution or winding up of the Company and certain transactions involving an acquisition of the Company (which are referred to as Fundamental Changes).

·

The Series 4 Preferred Stock is redeemable on the first to occur of (i) the 20th anniversary of the date of original issuance or (ii) a Fundamental Change, at a price equal to $1.00 per share, unless converted into the Company's common stock prior to such redemption.

·

The Series 4 Preferred Stock is senior to all existing and future classes of the Company's capital stock upon a Liquidation Event, and no senior or additional pari passu preferred stock may be issued without the consent of the holders of a majority of the outstanding shares of Series 4 Preferred Stock.

·

The Series 4 Preferred Stock participates in dividends paid to holders of the Company's common stock on an as converted basis.

·

The Series 4 Preferred Stock has one vote per share and will generally vote with the Company's common stock on a one share to one share basis.



The outstanding shares of Series 4 Preferred Stock automatically converted into shares of the Company’s common stock effective July 31, 2017 as described in Note 11, Subsequent Events



Each of Harry Fisch, M.D., Karen Fisch, K&H Fisch Family Partners, LLC and Mitchell Steiner, M.D., has entered into an Amended and Restated Lock-Up Agreement (the Lock-Up Agreements) with the Company which generally prohibits each such holder from transferring 75% of the shares of the Company’s common stock and Series 4 Preferred Stock the holder is entitled to receive in the APP Merger for a period of 18 months following the closing of the APP Merger.



13


 

The shares of the Company’s common stock and Series 4 Preferred Stock that are subject to the Lock-Up Agreements are being held in escrow for a period of one-year following the closing of the APP Merger as the sole remedy for APP’s indemnification obligations set forth in the Amended Merger Agreement pursuant to the terms of an Escrow Agreement. Seventy-five percent of the shares held in escrow are eligible for release from escrow six months after the closing of the APP Merger, although any shares released from escrow will remain subject to the Lock-Up Agreements until the end of their term.



In connection with the APP Merger, the Company entered into a Registration Rights Agreement (the RRA) with the former APP stockholders granting them certain “Demand” and “Piggyback” registration rights for a period of up to 5 years. The Company will pay for the expenses of registration and related costs but not the selling expenses related thereto. The Company is only required to use its best efforts and in the event the registration does not occur, the Company is not required to pay any compensation to the former APP stockholders. The Company has evaluated the RAA under ASC 825-20, Registration Payment Arrangements, and determined accounting recognition is not required.



The allocation of acquisition consideration for APP is based on estimates, assumptions, valuations and other studies which have not yet been finalized in order to make a definitive allocation.



A summary of the total purchase consideration on October 31, 2016 is as follows:







 

 



 

 

Common stock

$

1,826,097 

Series 4 Preferred Stock

 

17,981,883 

Total purchase consideration

$

19,807,980 



The total estimated purchase price of approximately $19,807,980 is based on the issuance to the APP stockholders of a total of 2,000,000 shares of the Company’s common stock and 546,756 shares of Series 4 Preferred Stock.  The common stock issued was valued based on the share price of the Company’s common stock on October 31, 2016 less an 8 percent discount on the shares subject to the Lock-Up Agreements, due to the lack of liquidity since the shares are not freely tradeable for a set time period.  The Series 4 Preferred Stock were valued using an as-converted basis based on the share price of the Company’s common stock on October 31, 2016 less a 12 percent discount since the shares are not registered and inherently difficult to sell prior to the conversion to common stock.  A 5 percent discount was also applied in the valuation due to the probability that the Series 4 Preferred Stock will never be converted to common stock.  After giving effect to the conversion of the Series 4 Preferred Stock to common stock, which is wholly dependent upon future shareholder approval, the former APP stockholders will own 23,870,240 shares of the Company’s common stock in total, constituting approximately 45% of the outstanding shares of the Company’s common stock as of October 31, 2016.



The results of operations and the provisional fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financial statements since the acquisition date.



The Company incurred $1,396 and $935,781 in acquisition-related costs which were recorded within operating expenses for the three and nine months ended June 30, 2017, respectively, compared to $833,739 and $1,014,037 for the three and nine months ended June 30, 2016, respectively.



The following table summarizes the fair value of assets acquired and liabilities assumed on October 31, 2016:



 



 

 



 

 

14


 

Recognized amounts of identifiable assets acquired:

 

 

Cash

$

43,118 

Accounts receivable

 

6,975 

Inventory

 

141,041 

Prepaid expenses and other

 

339 

Equipment, furniture, and fixtures

 

1,290 

Intangible assets:

 

 

In-process research and development

 

18,000,000 

Developed technology - PREBOOST®

 

2,400,000 

Covenants not-to-compete

 

500,000 

Total intangible assets

 

20,900,000 



 

21,092,763 

Recognized amounts of identifiable liabilities assumed:

 

 

Accounts payable

 

(1,087,212)

Accrued expenses

 

(276,503)

Deferred tax liabilities

 

(6,800,000)



 

(8,163,715)

Total identifiable net assets acquired

 

12,929,048 

Goodwill

 

6,878,932 



$

19,807,980 

APP has a developed technology in PREBOOST®. In-process research and development represents incomplete research and development projects at APP. The fair value of the developed technology and in-process research and development were determined using the income approach, which was prepared based on forecasts by management.

Purchase price in excess of assets acquired and liabilities assumed is recorded as goodwill.  Goodwill is not deductible for tax purposes.



Pro Forma Financial Information



The amounts of pro forma, unaudited net revenues and net (loss) income of the combined entity had the acquisition date been October 1, 2015 are as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Net revenues

$

4,314,068 

 

$

5,565,805 

 

$

9,964,330 

 

$

18,577,061 

Net (loss) income

$

(789,889)

 

$

(304,565)

 

$

(4,500,067)

 

$

283,884 



In connection with the APP Merger, a consolidated complaint has been filed against the Company and its directors alleging breach of fiduciary duty. The Company intends to vigorously defend this lawsuit.



NOTE 4 - Inventory 



Inventory consists of the following components at June 30, 2017 and September 30, 2016:  







 

 

 

 

 



 

 

 

 

 

15


 



June 30, 2017

 

September 30, 2016

FC2

 

 

 

 

 

Raw material

$

439,104 

 

$

670,802 

Work in process

 

69,164 

 

 

 —

Finished goods

 

2,437,165 

 

 

1,834,958 

Inventory, gross

 

2,945,433 

 

 

2,505,760 

Less: inventory reserves

 

(294,884)

 

 

(13,116)

FC2, net

 

2,650,549 

 

 

2,492,644 

PREBOOST®

 

 

 

 

 

Finished goods

 

114,820 

 

 

 —

Inventory, net

$

2,765,369 

 

$

2,492,644 

 

NOTE 5Line of Credit



On December 29, 2015, the Company entered into a Credit Agreement (the Credit Agreement) with BMO Harris Bank N.A. (BMO Harris Bank).  The Credit Agreement provides the Company with a revolving line of credit of up to $10 million with a term that extends to December 29, 2017.  Borrowings under the Credit Agreement bear interest, at the Company’s option, at a base rate or at LIBOR plus 2.25%.  The Company is also required to pay a commitment fee at the rate of 0.10% per annum on the average daily unused portion of the revolving line of credit.  The Company's obligations under the Credit Agreement are secured by a lien against substantially all of the assets of the Company and a pledge of 65% of the outstanding shares of The Female Health Company Limited and all of the outstanding shares of APP.  In addition to other customary representations, covenants and default provisions, the Company is required to maintain a minimum tangible net worth and to not exceed a maximum total leverage ratio.  Among the non-financial covenants, the Company is restricted in its ability to pay dividends, buy back shares of its common stock, incur additional debt and make acquisitions above certain amounts. 



The completion of the APP Merger (see Note 3,  APP Merger Transaction) resulted in a default in the Company's compliance with certain covenants in the Credit Agreement and constituted an "event of default" under the Credit Agreement.



On November 28, 2016, the Company, Badger Acquisition Sub, Inc., wholly owned subsidiary of the Company, APP and BMO Harris Bank entered into a Third Amendment to the Credit Agreement (the Amendment).  Pursuant to the Amendment, BMO Harris Bank waived the defaults in the Company's compliance with the covenants in the Credit Agreement as a result of the completion of the merger transaction with APP and APP became a co-borrower under the Credit Agreement.  As a result, the revolving line of credit remains in effect under the terms of the Credit Agreement until the end of its term on December 29, 2017. 



No amounts were outstanding under the Credit Agreement at either June 30, 2017 or September 30, 2016.



NOTE 6Share-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 this plan. As of June 30, 2017, a total of 1,824,802 shares had been granted under the plan and not forfeited or are subject to outstanding commitments to issue shares under the plan,  of which 297,500 shares were in the form of stock options and the remainder were in the form of restricted stock or other share grants.  On July 28, 2017, the Company's shareholders approved the 2017 Equity Incentive Plan, which replaces the 2008 Stock Incentive Plan.  No further awards will be made under the 2008 Stock Incentive Plan.  A total of 4.7 million shares are available for issuance under the 2017 Equity Incentive Plan.



16


 

Stock Options



The Company granted 190,000 options at an exercise price of $0.95 to an outside director and an employee under the 2008 Stock Incentive Plan during the nine months ended June 30, 2017.  The Company did not grant any options during the three months ended June 30, 2017.  Options issued under this plan expire in 10 years with vesting over a one-year period from the grant date.  The Company granted 17,500 options to certain employees under the 2008 Stock Incentive Plan during the three and nine months ended June 30, 2016Options issued under this plan expire in 10 years with vesting over a two-year period with one-half vesting on the first anniversary of the grant date and one-half vesting on the second anniversary of the grant date.    Based on the Company’s history of prior forfeitures and future expectations it was determined that there would be no forfeiture rate used for these grants.



Compensation expense is recognized only for share-based payments expected to vest. Stock compensation expense related to options was approximately $20,509 and $58,356 for the three and nine months ended June 30, 2017, respectively.    No stock compensation expense related to options was recognized for the three and nine months ended June 30, 2016.



During the nine months ended June 30, 2017, the Company used historical volatility of our common stock over a period equal to the expected life of the options to estimate their fair value.  The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock.  The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.



The expected term of the options represents the estimated period of time until exercise and is based on the simplified method.  To value options granted for actual stock-based compensation, the Company used the Black-Scholes option valuation model.  When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments. 



There were 90,000 stock options granted under the 1997 Stock Option Plan that expired during the nine months ended June 30, 2017.  The 1997 Stock Option Plan expired on December 31, 2006, and no more options are outstanding under the plan.



No stock options were exercised during the three and nine months ended June 30, 2017 or 2016.



The following table summarizes the stock options outstanding and exercisable at June 30, 2017:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Options

Weighted

 

 

 

 

 

Options

Weighted

 

 

 

 

 



Outstanding

Average

 

Weighted

 

Aggregate

Exercisable

Average

 

Weighted

 

Aggregate



at June

Remaining

 

Average

 

Intrinsic

at June

Remaining

 

Average

 

Intrinsic



30, 2017

Life (years)

 

Exercise Price

 

Value

30, 2017

Life (years)

 

Exercise Price

 

Value

Total

297,500 

7.06

 

$

1.90 

 

$

19,000 

90,000 

1.92

 

$

3.92 

 

$

 —



The aggregate intrinsic value in the table above is before income taxes, based on the closing price of the Company’s common stock of $1.05 per share as of the last business day of the period ended June 30, 2017.  As of June 30, 2017, the Company had unrecognized compensation expense  of $29,085 related to unvested stock options.  These expenses will be recognized over approximately 0.76 years



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 that provide for future issuance contingent on continued employment for periods that range from one to three years.

 

17


 

During the nine months ended June 30, 2017, the Company granted a total of 190,000 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock. The fair value of the awards granted was approximately $181,000. 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.  There were zero and 26,500 shares of restricted stock forfeited during the three and nine months ended June 30, 2017, respectively.    



On October 31, 2016, vesting was accelerated in connection with the closing of the APP Merger as to 152,717 restricted shares and the right to receive 68,832 shares, or at the holder’s election cash based on the fair market value of the shares, held by employees and directors.  Holders elected to receive 42,332 shares in common stock and the value of 26,500 shares in cash based on the stock price at the time of vesting of $0.95 per share.



The Company granted a total of 101,250 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the nine months ended June 30, 2016.  The stock granted during the nine months ended June 30, 2016 includes rights to receive a total of 13,498 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 $153,000. All such shares of restricted stock vest and all such shares must be issued at the end of the applicable period, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date.  There were no shares of restricted stock forfeited during the three and nine months ended June 30, 2016.    



The Company recognized share-based compensation expense for restricted stock or promises to issue shares of common stock of approximately $49,000 and $352,000 for the three and nine months ended June 30, 2017, respectively.  Share-based compensation expense for restricted stock or promises to issue shares of common stock for the three and nine months ended June 30, 2016 was approximately $107,000 and $362,000, respectively, of which $81,000 was included in accrued expenses at June 30, 2016.  This compensation expense was included in operating expenses on the accompanying Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016.  As of June 30, 2017, there was approximately $72,000, representing approximately 71,000 unvested shares, of total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the Company’s equity compensation plans. This unrecognized cost will be recognized over the weighted average period of the next 0.38 years.



Common Stock Purchase Warrants



In connection with the closing of the APP Merger, the Company issued a warrant to purchase up to 2,585,379 shares of the Company's common stock to Torreya Capital, the Company's financial advisor (the Financial Advisor Warrant).  The Financial Advisor Warrant has a five-year term, a cashless exercise feature and a strike price equal to $1.93 per share, the average price of the Company's common stock for the ten-day period preceding the original announcement of the APP Merger on April 6, 2016. The fair value of the Financial Advisor Warrant is based on the closing price of the Company's common stock on October 31, 2016 of $0.95. The fair value of the Financial Advisor Warrant of $542,930 was estimated at the date of grant using the Black-Scholes option pricing model assuming expected volatility of 47.2 percent, risk-free interest rate of 1.31 percent, expected life of five years, and no dividend yield. The Financial Advisor Warrant vested upon issuance. Half of the shares subject to the Financial Advisor Warrant, or 1,292,690 shares, are locked-up for  a period of 18 months from the issuance date. The Financial Advisor Warrant is recorded as a component of additional paid-in-capital and the Financial Advisor Warrant expense is included in operating expenses for the nine months ended June 30, 2017.



18


 

Restricted Stock Units



In connection with the closing of the APP Merger, the Company issued 50,000 and 140,000 restricted stock units to an employee and an outside director, respectively, that vest on October 31, 2018. The restricted stock units will be settled in the Company’s common stock if, prior to the vesting date, the Company receives shareholder approval under NASDAQ Rule 5635(c) to increase the number of authorized shares under the 2008 Stock Incentive Plan sufficient to issue such shares or adopt a new plan under which such shares would be issued. With the approval of the 2017 Equity Incentive Plan by shareholders on July 28, 2017, such restricted stock units will be settled in common stock issued under the 2017 Equity Incentive Plan. The restricted stock units will be revalued monthly using the Company’s current stock price on the last business day of the month during the vesting period of two years.  Stock compensation expense related to the restricted stock units was approximately $26,415 and $66,318 for the three and nine months ended June 30, 2017, respectively, and is recorded as a component of accrued expenses and other current liabilities.  The fair value of the restricted stock units is approximately $199,500 as of June 30, 2017.



Stock Appreciation Rights



In connection with the closing of the APP Merger, the Company issued stock appreciation rights based on 50,000 and 140,000 shares of the Company’s common stock to an employee and an outside director, respectively, that vest on October 31, 2018. The stock appreciations rights have a ten-year term.  Exercise price per share was $0.95, which was the closing price of a share of the Company’s common stock as quoted on NASDAQ on the trading day immediately preceding the date of the completion of the APP Merger. The stock appreciation rights will be settled in the Company’s common stock if, prior to the exercise date, the Company receives shareholder approval under NASDAQ Rule 5635(c) to increase the number of authorized shares under the 2008 Stock Incentive Plan sufficient to issue such shares or adopt a new plan under which such shares would be issued.  With the approval of the 2017 Equity Incentive Plan by shareholders on July 28, 2017, such stock appreciation rights will be settled in common stock issued under the 2017 Equity Incentive Plan. The stock appreciation rights will be measured using the option-pricing model (Black-Scholes) to estimate the fair value.  The fair value will be updated monthly based on current information over the vesting period of two years.  Stock compensation expense related to the stock appreciation rights was approximately $9,542 and $26,229 for the three and nine months ended June 30, 2017, respectively, and is recorded as a component of accrued expenses and other current liabilities.  The fair value of the stock appreciation rights is approximately $78,900 as of June 30, 2017. 

















NOTE 7 - 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.



The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

19


 



Net Revenues to External Customers for

 

Long-Lived Asset As Of

   

the Nine Months Ended June 30,

 

June 30,

 

September 30,

   

2017

 

2016

 

2017

 

2016

Mozambique

$

1,430 

(1)

$

*

 

$

 —

 

$

 —

Zimbabwe

 

1,271 

(1)

 

2,478 

(1)

 

 —

 

 

 —

South Africa

 

955 

 

 

*

 

 

 —

 

 

 —

Cameroon

 

891 

 

 

*

 

 

 —

 

 

 —

United States

 

790 

 

 

1,847 

 

 

35,721 

 

 

7,963 

Nigeria

 

696 

 

 

*

 

 

 —

 

 

 —

Brazil

 

*

 

 

6,008 

(1)

 

 —

 

 

 —

Malaysia

 

*

 

 

*

 

 

567 

 

 

796 

United Kingdom

 

*

 

 

*

 

 

77 

 

 

93 

Other

 

3,930 

 

 

8,231 

 

 

 —

 

 

 —

Total

$

9,963 

 

$

18,564 

 

$

36,365 

 

$

8,852 



*  Countries with less than 5 percent of total net revenues.

(1) Countries exceeding 10 percent of total net revenues.

 

At June 30, 2017 the Company had two customers whose current accounts receivable balance represented 25 percent and 15 percent of current assets, respectively.  At September 30, 2016 the Company had one customer whose current accounts receivable balance represented 49 percent of current assets.    No other single customer’s current accounts receivable balance accounted for more than 10 percent of current assets as of June 30, 2017 or September 30, 2016There was one customer whose accounts receivable and other long-term receivables balance represented 80 percent and 85 percent of accounts receivable and other long-term receivables at June 30, 2017 and September 30, 2016, respectively. There were two and three customers who each exceeded 10 percent of net revenues for the nine months ended June 30, 2017 and 2016, respectively.



NOTE 8Contingent 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 FC2 and PREBOOST®



NOTE 9  – Income Taxes



The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of its assets and liabilities, and for net operating loss and tax credit carryforwards.



The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to our attention that would indicate that a revision to our 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, forecast of future taxable income, and the potential Section 382 limitation on the net operating loss carryforwards due to a change in control.  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 annually 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.



20


 

As of June 30, 2017, the Company had U.S. federal and state net operating loss carryforwards of approximately $11,705,000 and $11,425,000, respectively, for income tax purposes expiring in years 2021 to 2034.  The Company’s U.K. subsidiary has U.K. net operating loss carryforwards of approximately $60,863,000 as of June 30, 2017, which can be carried forward indefinitely to be used to offset future U.K. taxable income.  With the demand for FC2, the Company expects utilization of its net operating losses in both the U.K. and the U.S. will continue.    



A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:













 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Income tax (benefit) expense at statutory rates

$

(442,000)

 

$

273,000 

 

$

(1,971,000)

 

$

1,064,000 

State income tax (benefit) expense, net of federal benefits

 

(66,000)

 

 

46,000 

 

 

(295,000)

 

 

165,000 

Non-deductible business acquisition expenses

 

29,000 

 

 

1,000 

 

 

182,000 

 

 

4,000 

Non-deductible expenses - other

 

10,000 

 

 

 —

 

 

14,000 

 

 

 —

Effect of AMT expense

 

 —

 

 

(7,000)

 

 

 —

 

 

20,000 

Effect of lower foreign income tax rates

 

(12,955)

 

 

(103,442)

 

 

189,422 

 

 

(258,215)

Other

 

(27,758)

 

 

21,653 

 

 

16,763 

 

 

38,055 

Income tax (benefit) expense

$

(509,713)

 

$

231,211 

 

$

(1,863,815)

 

$

1,032,840 



Significant components of the Company’s deferred tax assets and liabilities are as follows:  







 

 

 

 

 



 

 

 

 

 



June 30,

 

September 30,

Deferred Tax Assets

2017

 

2016

Federal net operating loss carryforwards

$

5,453,454 

 

$

2,756,000 

State net operating loss carryforwards

 

594,777 

 

 

400,000 

AMT credit carryforward

 

489,000 

 

 

489,000 

Foreign net operating loss carryforwards – U.K.

 

11,213,096 

 

 

10,955,000 

Foreign capital allowance – U.K.

 

112,000 

 

 

112,000 

Other, net - Malaysia

 

9,850 

 

 

9,850 

Restricted stock – U.K.

 

1,000 

 

 

1,000 

Share-based compensation

 

127,402 

 

 

101,000 

Warrants

 

212,367 

 

 

 —

Deemed dividend - Malaysia

 

942,000 

 

 

942,000 

Other, net - U.S.

 

25,000 

 

 

25,000 

Gross deferred tax assets

 

19,179,946 

 

 

15,790,850 

Valuation allowance for deferred tax assets

 

(2,299,000)

 

 

(2,299,000)

Net deferred tax assets

 

16,880,946 

 

 

13,491,850 

Deferred Tax Liabilities:

 

 

 

 

 

Intangible assets

 

(8,204,000)

 

 

 —

Foreign capital allowance – Malaysia

 

(115,616)

 

 

(119,919)

Gross deferred tax liabilities

 

(8,319,616)

 

 

(119,919)

Net deferred tax assets

$

8,561,330 

 

$

13,371,931 



The deferred tax amounts have been classified in the accompanying consolidated balance sheets as follows: