Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Veru Inc. 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 utilizes the U.S. Food and Drug Administrations (FDA) 505(b)(2) regulatory approval pathway to develop and commercialize drug candidates. The
FDAs 505(b)(2) regulatory approval pathway is designed to allow for potentially expedited, lower cost and lower risk regulatory approval based on previously established safety, efficacy, and manufacturing information on a drug that has been
already approved by FDA for the same or a different indication. Veru is developing drug candidates under the 505(b)(1) pathway as well, which is the traditional full new drug application (NDA) pathway that requires a complete preclinical, clinical,
and manufacturing application. The Company is currently developing drug product candidates for benign prostatic hyperplasia (BPH or enlarged prostate), overactive bladder (urge incontinence, urgency, or frequency of urination), hot flashes in men
associated with prostate cancer hormone treatment, erectile dysfunction, male infertility and novel oral therapy (alpha & beta tubulin inhibitor) for a variety of malignancies, including metastatic prostate, breast, endometrial, ovarian,
and other cancers.
To help support these clinical development programs, the Company markets and sells the FC2 Female Condom
®
(FC2) into the U.S. market by prescription and other sales channels and through The Female Health Company Division in the global public health sector (ministries of health, government health
agencies, U.N. agencies, and nonprofit organizations). In addition, the Company markets and sells the PREBOOST
®
(4% benzocaine medicated individual wipes) which is a male genital desensitizing
drug product for the prevention of premature ejaculation (PE) that is being
co-promoted
and distributed with Timm Medical Technologies, Inc.
On October 31, 2016, as part of the Companys strategy to diversify its product line to mitigate the risks of being a single product company, the
Company completed its acquisition (APP Acquisition) of Aspen Park Pharmaceuticals, Inc. (APP) through the merger of a wholly owned subsidiary of the Company into APP. The completion of the APP Acquisition transitioned us from a single product
company selling only the FC2 Female Condom
®
to a biopharmaceutical company with multiple drug products under clinical development and commercialization.
On August 12, 2016, the FDA agreed that the Companys Tamsulosin DRS (tamsulosin HCl delayed release sachet) medication, a proprietary slow release
granule formulation for the treatment of lower urinary tract symptoms of an enlarged prostate called benign prostatic hyperplasia (BPH), a $3.5 billion market, qualifies for the expedited 505(b)(2) regulatory approval pathway. In March 2017,
the Company initiated a bioequivalence clinical study for Tamsulosin DRS and in April 2017 announced the successful completion of Stage 1 of the bioequivalence clinical study, which selected the optimal formulation of our proprietary Tamsulosin DRS
product. In October 2017, the Company initiated Stage 2 of the bioequivalence clinical study of Tamsulosin DRS and in November 2017 announced the results of Stage 2 of the bioequivalence clinical study. During the Stage 2 bioequivalence clinical
study, dosing with Tamsulosin DRS fasted and Tamsulosin DRS fed were successfully shown to be bioequivalent with FLOMAX fed based on AUC, which is the key determinant of drug exposure over time. The Tamsulosin DRS formulation still needs to meet the
remaining bioequivalence criterion for peak value (Cmax). The Company intends to initiate a new bioequivalence study after adjusting the formulation to address Cmax and expects this study to be completed in the first quarter of 2018. The Company
plans to develop Tamsulosin XR (extended release) capsules (tamsulosin HCl extended release capsules) as well. The Company does not believe that the new bioequivalence study and capsule formulation development will affect the timing of its planned
submission of an NDA for Tamsulosin DRS granules and Tamsulosin XR capsules and, if the new bioequivalence study is successful, plans to submit the NDA in the first half of 2018.
On December 6, 2016, the Company presented an overview of its drug candidate for male infertility,
VERU-722,
at
the meeting of the Bone, Reproductive and Urologic Drugs (BRUD) FDA Advisory Committee at the invitation of the FDA. At the meeting, the committee discussed appropriate clinical trial design features, including acceptable endpoints for demonstrating
clinical benefit, for drugs intended to treat secondary hypogonadism (low testosterone levels) while preserving or improving testicular function, including spermatogenesis. At the meeting, the FDA Advisory Committee provided guidance for clinical
trial design and endpoints, and agreed with the intended patient population to treat, recommended a short-term study, and supported the use of improvement of semen quality for such clinical endpoints as avoidance of aggressive assisted reproductive
procedures such as
in vitro
fertilization or pregnancy. Based on this advice, the Company is considering advancing
VERU-722
into Phase 2 clinical trial in men with testicular dysfunction [oligospermia
(low sperm count) and secondary hypogonadism] as a cause of male factor infertility.
On May 13, 2017, the Company announced positive results of a
clinical study of its novel PREBOOST
®
product. The PREBOOST
®
clinical study enrolled 26 men aged 18 years or older in a heterosexual,
monogamous relationship, with PE, defined as reported poor control over ejaculation, personal distress related to ejaculation and average IELT of two minutes or less on stopwatch measurement. After treatment with PREBOOST
®
, 82 percent of men were no longer considered to have premature ejaculation with an increase on average of 5 minutes. Results showed that treatment was well tolerated. Therefore, the results
of the study showed that PREBOOST
®
prolonged time to ejaculation, supporting the clinical validity of PREBOOST
®
for the prevention of premature ejaculation. The Company launched the product in the United States in January 2017 and in October 2017 entered into a
co-promotion
and distribution agreement with Timm Medical Technologies, Inc.
3
On May 24, 2017, the Company announced that, following a
Pre-IND
meeting with FDA, it plans to advance
VERU-944
(cis-clomiphene
citrate), oral agent being evaluated for the treatment of hot flashes in men receiving hormone therapy,
androgen deprivation therapy (ADT), for advanced prostate cancer into Phase 2 clinical trial utilizing the 505(b)(2) regulatory pathway. Approximately 80% of men receiving one of the common forms of ADT, including LUPRON
®
(Leuprolide), ELIGARD
®
(Leuprolide), and FIRMAGON
®
(degarelix), experience hot
flashes and
30-40%
will suffer from moderate to severe hot flashes. An investigational new drug application (IND) is expected to be filed with FDA in the first quarter of 2018.
On December 11, 2017, the Company announced that it has acquired world-wide rights to a novel, proprietary oral granule formulation for solifenacin from
Camargo Pharmaceuticals Services, LLC. Solifenacin is the active ingredient in a leading drug VESIcare
®
for the treatment of overactive bladder in men and women. Solifenacin Delayed Release
Granule (DRG) formulation addresses the large population of men and women who have overactive bladder (OAB) and who have dysphagia, or difficulty swallowing tablets. In PreIND meeting, FDA confirmed that a single bioequivalence study and that no
additional nonclinical, clinical efficacy and/or safety studies will be required to support the approval of Solifenacin DRG product for the treatment of overactive bladder. The Company plans to complete the Solifenacin DRG bioequivalence study in
2018 and to file the NDA in 2019.
On December 15, 2017, the Company acquired world-wide rights to Tadalafil-Finasteride combination capsules
formulation from Camargo Pharmaceuticals Services, LLC. Tadalafil-Finasteride combination capsules (tadalafil 5mg and finasteride 5mg) is a new, proprietary formulation that addresses the large population of men who have lower urinary tract symptoms
and restricted urinary stream because of an enlarged prostate. Tadalafil 5mg is a phosphodiesterase 5 (PDE5) inhibitor marketed under CIALIS
®
for benign prostatic hyperplasia and erectile
dysfunction and finasteride 5mg is a Type 2,
5-alpha
reductase inhibitor marketed under PROSCAR
®
to decrease size the prostate, prevent urinary
retention and the need for prostate surgery in men who have an enlarged prostate. In PreIND meeting held in November 2017, FDA agreed that a single a bioequivalence study and no additional nonclinical, clinical efficacy and safety studies will be
required to support the approval of Tadalafil-Finasteride combination capsules via a 505(b)(2) regulatory pathway. The Company plans to complete the bioequivalence study in 2018 and to file the NDA in 2019.
Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling the Female
Condom (FC2). FC2 is the only currently available female-controlled product approved for market by the FDA and cleared by the World Health Organization (WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy
and sexually transmitted infections (STIs), including HIV/AIDS and the Zika virus. Nearly all of the Companys net revenues for fiscal 2017 were derived from sales of FC2.
FC2s primary use is for disease prevention and family planning, and the public health sector is the Companys main market. Within the public health
sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.
FC2 has been distributed in 144 countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of
HIV/AIDS, other STIs and unwanted pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the worlds most underprivileged people. However, conditions in these countries can be
volatile and result in unpredictable delays in program development, tender applications and processing orders.
FC2 has a relatively small customer base,
with a limited number of customers who generally purchase in large quantities. Over the past few years, major customers have included large global agencies, such as UNFPA and USAID. Other customers include ministries of health or other governmental
agencies, which either purchase directly or via
in-country
distributors, and NGOs.
Purchasing patterns for FC2
vary significantly from one customer to another, and may reflect factors other than simple demand. For example, some governmental agencies purchase FC2 through a formal procurement process in which a tender (request for bid) is issued for either a
specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited
period of time in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful bidder. The entire tender process, from publication to award, may take many months to complete. A
tender award indicates acceptance of the bidders price rather than an order or guarantee of the purchase of any minimum number of units. Many governmental tenders are stated to be up to the maximum number of units, which gives the
applicable government agency discretion to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for orders in the tender and there are no guarantees as to the timing or amount
of actual orders or shipments. Orders received may vary from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections and changes in demand. Administrative issues, politics, bureaucracy,
process errors, changes in leadership, funding priorities and/or other pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may experience significant
quarter-to-quarter
sales variations due to the timing and shipment of large orders of FC2.
4
In October 2014, the Company announced that Semina was awarded an exclusive contract under a public tender. The
contract was valid through August 20, 2015, allowing the Brazil Ministry of Health to place orders against this tender at its discretion. Through the end of the contract, the Company received orders for 40 million units of FC2 in
fulfillment of the tender, 28 million of which were shipped during the year ended September 30, 2015 and 12 million of which were shipped during the year ended September 30, 2016.
In April 2017, the Company launched a small scale marketing and sales program to support the promotion of FC2 in the US market. The commercial team developed
a plan to confirm the proof of concept that FC2 represented a significant business opportunity. This required changes in the distribution process for FC2 in the US. As part of this reorganization the company announced new distribution
agreements with three of the countrys largest distributors that support the pharmaceutical industry. This newly developed network now allows up to 98% of major retail pharmacies the ability to make FC2 available to their customers. In addition
to the distribution system, the Company expanded sales and market access efforts that resulted in FC2 now being available through the following access points: community based organizations, by prescription, utilizing the telemedicine
HeyDoctor App, through 340B covered entities, college and universities and our patient assistance program. We continue to increase healthcare provider awareness, education and acceptance which has resulted in more women utilizing FC2 in
the U.S. We believe that the initial results from these efforts support the U.S. market opportunity and that we will continue to see increased utilization of FC2.
Details of the quarterly unit sales of FC2 for the last five fiscal years are as follows:
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Period
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2017
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2016
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2015
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2014
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2013
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October 1 December 31
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6,389,320
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15,380,240
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12,154,570
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11,832,666
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17,114,630
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January 1 March 31
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4,549,020
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9,163,855
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20,760,519
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7,298,968
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16,675,035
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April 1 June 30
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8,466,004
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10,749,860
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14,413,032
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13,693,652
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12,583,460
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July 1 September 30
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6,854,868
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6,690,080
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13,687,462
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9,697,341
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8,386,800
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Total
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26,259,212
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41,984,035
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61,015,583
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42,522,627
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54,759,925
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Revenues
. The Companys revenues are primarily derived from sales of FC2 in the public sector and are recognized
upon shipment of the product to its customers. Other revenues include the sales from FC2 into the prescription channel in the U.S. and sales of PREBOOST; however these sales were not material to our fiscal 2017 results.
The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with public health sector groups and
completing partnership arrangements with companies with the necessary marketing and financial resources and local market expertise.
The Companys
most significant customers have been either global public health sector agencies or those who facilitate their purchases and/or distribution of FC2 for use in HIV/AIDS prevention and/or family planning. USAID accounted for 44 percent of unit
sales in fiscal 2017, 24 percent of unit sales in fiscal 2016, and 16 percent of unit sales in fiscal 2015. UNFPA accounted for 25 percent of unit sales in fiscal 2017, 25 percent of unit sales in fiscal 2016, and 18 percent
of unit sales in fiscal 2015. Semina accounted for 27 percent of unit sales in fiscal 2016 and 47 percent of unit sales in fiscal 2015. No other single customer accounted for more than 10 percent of unit sales in fiscal 2017, 2016, or
2015. We sell to the Brazil Ministry of Health either through UNFPA or Semina. In the U.S., FC2 is sold to city and state public health clinics as well as to
not-for-profit
organizations such as Planned Parenthood.
Because the
Company manufactures FC2 in a leased facility located in Malaysia, a portion of the Companys operating costs are denominated in foreign currencies. While a material portion of the Companys future sales are likely to be in foreign
markets, all sales are denominated in the U.S. dollar. Effective October 1, 2009, the Companys U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currency, further reducing the Companys foreign currency risk.
Expenses
. The Company manufactures FC2 at its facility located in Selangor D.E., Malaysia. The Companys cost of sales consists primarily of
direct material costs, direct labor costs and indirect production and distribution costs. Direct material costs include raw materials used to make FC2, principally a nitrile polymer. Indirect production costs include logistics, quality control and
maintenance expenses, as well as costs for electricity and other utilities. All of the key components for the manufacture of FC2 are essentially available from either multiple sources or multiple locations within a source.
On April 1, 2015, a tariff exemption in Brazil for condoms was eliminated subjecting all shipments of FC2 clearing customs in Brazil on or after that
date to a tariff. The Company agreed to share 50 percent of these tariff costs with Semina and recognized the expense as the units were shipped.
Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016.
5
Results of Operations
. The Company had net revenues of $13,655,592 and net loss attributable to common
shareholders of $8,602,818, or $(0.25) per diluted share, in fiscal 2017, compared to net revenues of $22,127,342 and net income attributable to common shareholders of $344,725, or $0.01 per diluted share, in fiscal 2016. Net revenues decreased
$8,471,750, or 38 percent, in fiscal 2017 compared to the prior fiscal year. The Companys fiscal 2017 unit sales were 15.7 million units, or 37 percent, lower than fiscal 2016. The decrease in unit sales and net revenues is
primarily due to 11.5 million units shipped during fiscal 2016 under the 2014 Brazilian tender, with no comparable sales in the fiscal 2017 period.
Cost of sales decreased $2,141,778, or 24 percent, to $6,636,080 in fiscal 2017 from $8,777,858 in fiscal 2016, and cost per unit increased
20 percent from $0.21 per unit in fiscal 2016 to $0.25 per unit in fiscal 2017. The reduction in cost of sales is due to the lower unit sales, reduction of certain costs, and the favorable impact of currency exchange rates. The increase in cost
per unit was most heavily impacted by reduced unit sales, which results in higher
per-unit
allocations of fixed overhead costs.
Gross profit decreased $6,329,972, or 47 percent, to $7,019,512 in fiscal 2017 from $13,349,484 in fiscal 2016. Gross profit as a percentage of net
revenues decreased to 51 percent in fiscal 2017 from 60 percent in fiscal 2016. The decrease in the gross profit margin is primarily due to higher cost of sales on a
per-unit
basis as noted above.
Overall, total operating expenses increased $5,182,652, or 50 percent, to $15,513,624 in fiscal 2017 from $10,330,972 in fiscal 2016.
Selling, general and administrative expenses increased $2,358,917, or 27 percent, to $11,019,091 in fiscal 2017 from $8,660,174 in fiscal 2016. The
increase was a result of $1.2 million in costs related to additional headcount from the APP Acquisition, $1.2 million related to the prescription launch of FC2 in the US which includes additional personnel and other selling and marketing
costs, and $1.3 million related to increased administrative costs such as litigation fees, investor relations, and general office costs. The increases are net of a reduction in expenses of $1.5 million related to marketing and management
fees incurred for fiscal 2016, deliveries on the Brazil tender, and lower business development costs. No diversification expenses were incurred in fiscal 2017 compared to $548,077 of diversification expenses in fiscal 2016.
Business acquisition expenses decreased $546,758, or 37 percent, to $935,781 in fiscal 2017 from $1,482,539 in fiscal 2016. These expenses represent
costs related to the APP Acquisition.
Research and development expenses increased $3,405,089 to $3,504,482 in fiscal 2017 from $99,393 in fiscal 2016.
Research and development expenses were primarily due to development of Tamsulosin DRS as well as the advancement of other drug candidates.
The
Companys operating loss was $8,494,112 in fiscal 2017 compared to operating income of $3,018,512 in fiscal 2016 due to the factors noted above.
Income tax benefit was $1,990,443 in fiscal 2017 compared to income tax expense of $2,469,191 in fiscal 2016. The effective tax rate for fiscal 2017 and 2016
was 23.1 percent and 87.7 percent, respectively. The $1.9 million tax benefit in fiscal 2017 is primarily due to losses of $8.6 million generating a tax benefit of $3.1 million at a 40% effective US tax rate, net of
$0.9 million related to a deemed dividend from Malaysia, $0.6 million reduction in UK deferred tax assets due to a 1% tax rate decrease from 18% to 17% on $60 million of net operating losses, and $0.5 million of disallowed
acquisition expenses at 40%. The 87% effective rate in fiscal 2016 is due to the mix of tax jurisdictions in which the Company recognized income before income taxes, the
non-deductible
business acquisition
expenses related to the APP Acquisition, and the reduction in the UK income tax rate from 20% to 18%. The Companys 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 Companys consolidated statements of cash flows.
Fiscal Year
Ended September 30, 2016 Compared to Fiscal Year Ended September 30, 2015
Operating Highlights.
The Company had net revenues of
$22,127,342 during fiscal 2016, compared to $32,604,865 in fiscal 2015. The Companys fiscal 2016 unit sales were 19 million units, or 31 percent, lower than fiscal 2015. The decrease in unit sales and net revenues is primarily due to
28 million units shipped during fiscal 2015 under the 2014 Brazilian tender, versus 12 million units shipped during fiscal 2016. The average sales price of FC2 decreased 1.4 percent in fiscal 2016 from fiscal 2015. Effective
April 1, 2016, the unit price has been reduced for major public sector purchasers.
The Company used cash in operations of $1,714,358 in fiscal 2016
compared to $1,548,697 in fiscal 2015. The Company had net income attributable to common shareholders of $344,725, or $0.01 per diluted share, in fiscal 2016 compared to net income attributable to common shareholders of $4,346,036, or $0.15 per
diluted share, in fiscal 2015.
Results of Operations
. The Company had net revenues of $22,127,342 and net income attributable to common
shareholders of $344,725, or $0.01 per diluted share, in fiscal 2016, compared to net revenues of $32,604,865 and net income attributable to common shareholders of $4,346,036, or $0.15 per diluted share, in fiscal 2015. Net revenues decreased
$10,477,523, or 32 percent, in fiscal 2016 compared to the prior fiscal year. The reduction in net revenues is due to the lower unit sales, change in sales mix, and public sector price adjustment.
6
Cost of sales decreased $4,857,048, or 36 percent, to $8,777,858 in fiscal 2016 from $13,634,906 in fiscal
2015. The reduction in cost of sales is due to the lower unit sales, reduction of certain costs, and the favorable impact of currency exchange rates.
Gross profit decreased $5,620,475, or 30 percent, to $13,349,484 in fiscal 2016 from $18,969,959 in fiscal 2015. Gross profit as a percentage of net
revenues increased to 60 percent in fiscal 2016 from 58 percent in fiscal 2015. The increase in the gross profit margin is primarily due to the reduction of certain costs and the favorable impact of currency exchange rates on cost of
sales.
Selling, general and administrative expenses decreased $3,471,563, or 29 percent, to $8,660,174 in fiscal 2016 from $12,131,737 in fiscal
2015. The decrease was a result of a reduction in payments due to our Brazilian distributor for marketing and management fees for the 2014 tender, a reduction in employee compensation expense, a reduction in expenses related to a study regarding a
potential FC2 consumer program in the U.S., and a reduction in diversification expenses. The diversification expenses were $548,077 in fiscal 2016 compared to $709,462 in fiscal 2015.
Business acquisition expense of $1,482,539 in fiscal 2016 represents costs related to the APP Acquisition.
Research and development expenses decreased $120,422 to $99,393 in fiscal 2016 from $219,815 in fiscal 2015.
Total operating expenses decreased $2,020,580 to $10,330,972 in fiscal 2016 from $12,351,552 in fiscal 2015.
The Companys operating income decreased $3,599,895 to $3,018,512 in fiscal 2016 from $6,618,407 in fiscal 2015. The decrease is primarily due to
decreased net revenues, partially offset by lower operating expenses and improved gross margins.
The Company recorded
non-operating
expense of $204,596 in fiscal 2016 compared to
non-operating
income of $68,633 in fiscal 2015. The impact of the foreign currency transactions was a loss
of $147,540 in fiscal 2016 compared to a gain of $58,483 in fiscal 2015.
Income tax expense increased $128,187 to $2,469,191 in fiscal 2016 compared to
income tax expense of $2,341,004 in fiscal 2015. The effective tax rate for fiscal 2016 and 2015 was 87.7 percent and 35.0 percent, respectively. The increase in the effective tax rate is due to the mix of tax jurisdictions in which the
Company recognized income before income taxes, the
non-deductible
business acquisition expenses related to the APP Acquisition, and the reduction in the UK income tax rate from 20% to 18%. The Companys
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 Companys consolidated
statements of cash flows. In fiscal 2016 the Company recorded income tax expense of $2,469,191, while due to the use of NOL carryforwards the Company made cash payments of $352,856 for income taxes.
Liquidity and Sources of Capital
We have generally funded our
operations and working capital needs through cash generated from operations. Our operating activities generated cash of $1.0 million in fiscal 2017, used cash of $1.7 million in fiscal 2016, and used cash of $1.5 million in
fiscal 2015. Accounts receivable and long-term other receivables decreased from $18.6 million at September 30, 2016 to $11.4 million at September 30, 2017. Seminas accounts receivable and long-term other receivables balance
represents 78 percent of the Companys accounts receivable and long-term other receivables balance at September 30, 2017. Semina normally pays upon payment from the Brazilian Government; however due to economic issues in Brazil the
government has been slower in paying vendors. In addition, total current liabilities increased $2.1 million, primarily due to $1.0 million of unearned revenue related to prescription sales of FC2, and timing related to the recurring vendor
payments.
On December 27, 2017, we entered into a settlement agreement with Semina pursuant to which Semina has made a payment of $2.25 million
and is obligated to make a second payment of $1.5 million by February 28, 2018, to settle net amounts due to us totaling $7.5 million relating to outstanding receivables for sales to Semina for the 2014 Brazil Tender. The settlement
is not related to our belief in the ultimate collectability of the receivables or in the creditworthiness of Semina. We elected to settle these amounts due to uncertainty regarding the timing of payment by the Brazilian Government and, ultimately to
us, on the remaining amounts due. In connection with the settlement agreement with Semina, on December 27, 2017, the Companys management concluded that a material impairment charge of $3.75 million will be required to the receivables
for sales to Semina relating to the 2014 Brazil Tender, which will be reflected in our results for the fiscal quarter ending December 31, 2017.
At
September 30, 2017, the Company had working capital of $4.8 million and stockholders equity of $48.5 million compared to working capital of $12.9 million and stockholders equity of $33.9 million as of
September 30, 2016.
In connection with the Companys acquisition of intellectual property rights associated with Solifenacin DRG and Tadalafil/
Finasteride combination capsules, the Company will be obligated to make upfront payments totaling $500,000 by March 2018, as well as future installment payments and milestone payments.
7
The Companys Credit Agreement with BMO Harris Bank N.A. will expire on December 29, 2017 and will not
be renewed. No amounts were outstanding under the Credit Agreement at September 30, 2017 and none will be outstanding when the Credit Agreement expires.
As described in more detail in Item 9B below, on December 29, 2017, the Company entered into a common stock purchase agreement (the Purchase
Agreement) with Aspire Capital Fund, LLC, an Illinois limited liability company (Aspire Capital) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time
and in its sole discretion during the
36-month
term of the Purchase Agreement, to direct Aspire Capital to purchase up to $15.0 million of the Companys common stock in the aggregate. Other than
304,457 shares of common stock issued to Aspire Capital in consideration for entering into the Purchase Agreement, the Company has no obligation to sell any shares of common stock pursuant to the Purchase Agreement and the timing and amount of any
such sales are in the Companys sole discretion subject to the conditions and terms set forth in the Purchase Agreement.
The Company believes that
its current cash position and its ability to secure other financing alternatives to equity financing are expected to be adequate to fund operations of the Company for the next 12 months. Such financing alternatives may include debt financing,
convertible debt or other equity-linked securities, under the Companys current registration statement on Form
S-3
(File
No. 333-221120).
The Companys
intention is to be opportunistic when pursuing equity financing which could include selling equity under the Aspire Capital Purchase and/or a marketed deal through an investment bank. See Item 1A., Risk FactorsRisks Related to Our
Financial Position and Need for Capital for a description of certain risks relating to our ability to raise capital on acceptable terms.
As of
December 6, 2017, the Company had approximately $2.0 million in cash, net trade accounts receivable of $10.1 million and current trade accounts payable of $1.9 million. Presently, the Company has no required debt service
obligations.
Critical Accounting Estimates
The preparation
of financial statements requires management to make estimates and use assumptions that affect certain reported amounts and disclosures. Critical accounting estimates include the deferred income tax valuation allowance. Actual results may differ from
those estimates.
The Company files separate income tax returns for its foreign subsidiaries. ASC Topic 740 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the
financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also provided for carryforwards for income tax purposes. In
addition, the amount of any future tax benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized.
The
Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the
tax-effected
temporary differences between the financial reporting and
tax bases of assets and liabilities, and for net operating loss and tax credit carryforwards.
The Company completes a detailed analysis of its deferred
income tax valuation allowance on an annual basis or more frequently if information comes to our attention that would indicate that a revision to its estimates is necessary. In evaluating the Companys ability to realize its deferred tax
assets, management considers all available positive and negative evidence on a country by country basis, including past operating results and forecast of future taxable income. In determining future taxable income, management makes assumptions to
forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the
forecasts of the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Companys business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis.
Since fiscal 2006, the Company has consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the Company can reasonably expect to generate taxable income. In managements analysis to determine
the amount of the deferred tax asset to recognize, management projected future taxable income for each tax jurisdiction.
Although management uses the
best information available, it is reasonably possible that the estimates used by the Company will be materially different from the actual results. These differences could have a material effect on the Companys future results of operations and
financial condition.
Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes and
reversal of the valuation allowance against the NOL carryforwards. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in
countries where we have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, and accounting principles. In addition, we are subject to the continuous examination of our
income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
8
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of inflation, the Company has experienced increased costs of product, supplies, salaries
and benefits, and increased general and administrative expenses. The Company has, where possible, increased selling prices to offset such increases in costs.
Off-Balance
Sheet Arrangements
The Company has no
off-balance
sheet arrangements as defined in Item 303(a)(4) of
Regulation S-K.