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 months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 201 7 . 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, 201 6 .  



Principles of Consolidation and Nature of Operations



The Female Health Company is a pharmaceutical and medical device company, with an initial focus on the development and commercialization of pharmaceuticals for men’s and women’s health and oncology that qualify for the U.S. Food and Drug Administration's (FDA) 505(b)(2) accelerated regulatory approval pathway as well as the 505 (b)(1) pathway .  The Company also has a Consumer Health and Medical Devices Division and Global Public Health Sector Division.  The Company does business as both "Veru Healthcare" and "The Female Health Company."



The consolidated financial statements include the accounts of The Female Health Company (FHC or the Company) and its wholly owned subsidiar ies , 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 merger transaction with APP (the APP Merger) (see Note 3 , APP Merger Transaction), t he Company had been a single product company engaged in the marketing, manufactur ing and distributi ng a consumer health care product, the FC2 female condom (FC2).  The Female Health Company Limited , is the holding company of The Female Health Company ( UK ) plc, which is located in a 6,400 sq. ft. leased office facility located in London, England (collectively the U.K. subsidiary). The Female Health Company (M) SDN.BHD leases a 45,800 sq. ft. manufacturing facility located in Selangor D.E., Malaysia (the Malaysia subsidiary).  The Company headquarters is located in Miami, Florida in a 2,600 sq. ft. leased office facility .



The Company is organized as follows:







FC2 has been distributed in either or both commercial (private sector) and public health sector markets in 144 countries. It is marketed to consumers through distributors, public health programs and retailers in 16 countries.



The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable is affected by the mix of purchasers within the period.  As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion or for certain sales.  The Company has agreed to credit terms of up to 150 days with our distributor in the Republic of South Africa.  For the most recent order of 15 million units under the Brazil tender, the Company has agreed to up to 360 day credit terms with our distributor in Brazil subject to earlier payment upon receipt of payment by the distributor from the Brazilian Government.  For the past twelve months, the Company's average days’ sales outstanding has averaged approximately 385 days. Over the past five years, the Company’s bad debt expense has been less than 0.02 percent of product sales.  The balance in the allowance for doubtful accounts was $ 38,000  a t both   December 31, 2016 and September 30, 2016 .



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 $ 127,782 and $ 134,443 at December 31, 2016 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 $ 11,939 for the three months ended December 31, 2016 , compared to a loss of  $ 44,944 for the three months ended December 31, 2015 .  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.



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-pr ocess 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   C onvertible P referred S tock – 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 20 th anniversary of the date of issuance of the Series 4 Preferred Stock . The carrying values of the Series 4 P referred S tock 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   P referred S tock will be automatically converted into shares of the Company’s common stock upon receipt of the shareholder approvals described in Note 3 ,   APP Merger Transaction .



Recently Issued Accounting Pronouncement



In November 2015, the Financial Accounting Standards Board (FASB) issued A ccounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , which require s 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 current reporting period 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.  The se 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.



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.   







Options to purchase 297,500 shares of common stock , warrants to purchase 2,585,379 shares of common stock , and   207,500 unvested restricted shares that were outstanding during the three months ended December 31, 2016 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 are not sufficient common shares for conversion and therefore the Series 4 Preferred Stock is not included in the calculation.  Options to purchase approximately 90,000 shares of common stock at an exercise price of $3.92 that were outstanding during the three months ended December 31, 2015 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 in come per share for the three months ended December 31, 2015 .



Note 3 – APP 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 a merger transaction (the APP Merger) with APP. 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 merger transaction with APP , a Delaware corporation, 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 FHC 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 FHC’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   c ommon s tock and 546,756 shares of Series 4 Preferred Stock.



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





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 FHC which generally prohibits each such holder from transferring 75% of the shares of the Company’s   c ommon s tock 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.



The shares of the Company’s   c ommon s tock and Series 4 Preferred Stock that are subject to the Lock-Up Agreements will be held in escrow for a period of one -year after 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, FHC 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. FHC 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:







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 share s of the Company’s   c ommon s tock 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 c ommon s tock, which is wholly dependent upon future shareholder approval, the former APP s tockholders will own 23,870,240 shares of the Company’s c ommon s tock in total, constituting approximately 45% of the outstanding shares of the Company’s c ommon s tock 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 $826,370 in acquisition-related costs which were recorded within operating expenses for the three months ended December 31, 2016 compared to $15,245 for the three months ended December 31, 2015 .



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



APP has a developed technology in PREBOOST ® . I n-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 income (loss) of the combined entity had the acquisition date been October 1, 2015 are as follows:







In connection with the APP Merger, two complaints have been filed against the Company and its directors alleging breach of fiduciary duty and/or wasting of corporate assets. The Company intends to vigorously defend these lawsuits.



NOTE 4 - Inventory  



Inventory consists of the following components at December 31, 2016 and   September 30, 2016 :  





NOTE 5 – Line 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 M erger (see Note 3 ,   APP Merger Transaction ) resulted in a default in FHC's compliance with certain covenants in the Credit Agreement and constitute d an "event of default" under the Credit Agreement.



On November 28, 2016, FHC, Badger Acquisition Sub, Inc., wholly owned subsidiary of FHC, 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 FHC'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 December 31, 2016 or   September 30, 2016 .



NOTE 6 – Share-Based Payments



In March 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which is utilized to provide equity opportunities and performance–based incentives to attract, retain and motivate those persons who make (or are expected to make) important contributions to the Company.  A total of 2 million shares are available for issuance under this plan. As of December 31, 2016 , a total of   1,824,802 shares had been granted under the plan and not forfeited or are subject to outstanding commitm ents to issue shares under the p lan ,   of which 29 7,500 shares were in the form of stock options and the remainder were in the form of restricted stock or other share grants.



Stock Options



T he Company granted 190,000 options at an exercise price of $0.95   to an outside director and a n employee   under the 2008 Stock Incentive Plan during the three months ended December 31, 2016 .  Options issued under this plan expire in 10 years with vesting over a one -year period from the grant date.  The Company did not grant any options during the three months ended December 31 , 2015.  Based on the Company’s history of prior forfeitures and future expectations it was determined that there would be no forfeiture rate used.



Compensation expense is recognized only for share-based payments expected to vest. S tock compensation expense related to options was approximately $ 15 , 936 for the three months ended December 31, 2016 .  No stock compensation expense related to options was recognized for the three months ended December 31, 2015 .



The following table outlines the weighted average assumptions for options granted during the three months ended December 31, 2016 :





During the three months ended December 31, 2016 , 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 three months ended December 31, 2016.  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 months ended December 31, 2016 or 2015 .



The following table summarizes the stock options outstanding and exercisable at December 31, 2016 :







The aggregate intrinsic value in the table above is before income taxes, based on the closing price of the Company’s common stock of $ 0.91 per share as of the last business day of the period ended December 31, 2016 .  As of December 31, 2016 , the Company had unrecognized compensation expense of $ 71 , 506 relat ed to unvested stock options .  These   expenses will be recognized over approximately 1. 2 5 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.

The Company granted a total of 190,000 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the three months ended December 31, 2016 . 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 no shares of restricted stock forfeited during the three months ended December 31, 2016 . 



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 c ash based on the fair market value of the shares, h eld 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 43,250 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the three months ended December 31, 2015 . The fair value of the awards granted was approximately $ 71,000 . 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 months ended December 31, 2015 .    



The Company recognized share-based compensation expense for restricted stock or promises to issue shares of common stock of approximately   $ 255,000 and  $ 123,000   f or the three months ended December 31, 2016 and 2015 , respectively, $ 0   and $ 26,000   of which was included in accrued expenses at the three months then ended since the related shares had not yet been issued at   December 31, 2016 and 2015 , respectively.  This compensation expense was included in operating expenses on the accompanying Unaudited Condensed Consolidated Statements of Operations   for the three months ended December 31, 2016 and 2015 . As of December 31, 2016 , there was approximately $ 170,000 , representing approximately 169,000 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 0.86 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 selling, general and administrative expenses.



At December 31, 2016, the warrant detail s were as follows:







Restricted Stock Units



In connection with the closing of the APP Merger, t he Company issued 50,000 and 140,000 restricted stock units to a n employee and an outside director , respectively, that vest on October 31, 2018. The restricted stock units w ill be settled in the Company’s   c ommon s tock 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 P lan sufficient to issue such shares or adopt a new plan under which such shares would be issued. If approval is not received by the vesting date, such awards will be settled in cash based on the fair market value of the Company’s   c ommon s tock on the vesting date . 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 $15,000 for the three months ended December 31, 2016 and is recorded as a component of accrued expenses and other current liabilities .  The fair value of the restricted stock units is approximately $173,000 as of December 31, 2016. 



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   c ommon s tock to a n 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 c ommon s tock 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   c ommon s tock 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 P lan sufficient to issue such shares or adopt a new plan under which such shares would be issued .   If approval is not received by the exercise   date, such awards will be settled in cash based on the fair market value of the Company’s   c ommon s tock on the exercise   date . 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 $7,000 for the three months ended December 31, 2016 and is recorded as a component of accrued expenses and other current liabilities .  The fair value of the stock appreciation rights is approximately $82,000 as of December 31, 2016.



NOTE 7 - Stock Repurchase Program



The Company’s Stock Repurchase Program was announced on January 17, 2007.  At initiation, the program’s terms specified that up to 1,000,000 shares of its common stock could be purchased during the subsequent twelve months. Subsequently, the Board has amended the program a number of times to both extend its term and increase the maximum number of shares which could be repurchased.  The program allowed for a maximum repurchase of up to 3,000,000 shares through the period ending December 31, 2016.  The Company did not extend the Stock Repurchase Program , and as a result it terminated as of December 31, 2016 .  From the program’s onset through December 31, 2016 , the total number of shares repurchased by the Company was   2,183,704 with an average price paid per share of $3.57 and a total cost of treasury stock of $7,806,605 .     The Stock Repurchase Program authorize d purchases in privately negotiated transactions as well as in the open market.  In October 2008, the Company's Board of Directors authorized repurchases in private transactions under the Stock Repurchase Program of shares issued under the Company's equity compensation plans to directors, employees and other service providers at the market price on the effective date of the repurchase request. Total repurchases under this provision were limited to an aggregate of 450,000 shares per calendar year and to a maximum of 50,000 shares annually per individual. There were no repurchases of any kind under the program for the   three months ended December 31, 2016 or 2015 .

















NOTE 8 - 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):





*   Countries with l ess than 5 percent of total net revenues.

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

At December 31, 2016 the Company had one customer whose current accounts receivable balance represented   3 5 percent of current assets.  At September 30, 2016 the Company had one customer whose current accounts receivable balance represented   4 9 percent of current assets.  No other single customer’s current accounts receivable balance accounted for more than 10 percent of current assets as of December 31, 2016   or September 30, 2016 .  There was one customer whose accounts receivable and other long-term receivables balance represented 81 percent and 85 percent of accounts receivable and other long-term receivables at December 31, 2016 and September 30, 2016, respectively. There were   three customers who each exceeded 10 percent of net revenues for the three months ended December 31, 2016 and 2015 .



NOTE 9 – Contingent Liabilities  



The testing, manufacturing and marketing of consumer products by the Company entail an inherent risk that product liability claims will be asserted against the Company. The Company maintains product liability insurance coverage for claims arising from the use of its products. The coverage amount is currently $ 10 million for FHC's consumer health care product.



NOTE 10  – 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 consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the Company can reasonably expect to generate taxable income.  In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for each tax jurisdiction.



As of December 31, 2016 , 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 202 1 to 20 34 .  The Company’s U.K. subsidiary has U.K. net operating loss carryforwards of approximately $ 60,863,000 as of December 31, 2016 , which can be carried forward indefinitely to be used to offset future U.K. taxable income.  With the demand for and profitability of FC2, the Company expects utilization of its net operating losses in both the U.K. and the U.S. will continue.  The Company’s net operating loss carryforwards will be utilized to reduce cash payments for income taxes based on the statutory rate in effect at the time of such utilization.



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 :













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







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





















  Intangible assets

The gross carrying amounts and net book value of intangible assets a re as follows at December 31, 2016 :





Intangible assets are carried at cost less accumulated amortization. Amortization is over the projected related revenue stream   for the PREBOOST ® developed technology over the next 10 years and 7 years for the covenants not - to - compete ,   and the amortization expense is recorded in operating expenses.



Amortization expense was $ 26,729   for the three months ended December 31, 2016 and $0 for the three months ended December 31, 2015. Based on finite-lived intangible assets recorded as of December 31, 2016 , the estimated future amortization expense is as follows: