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 DecemberMarch 31, 20172020



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

For the transition period from             to             



Commission file numberFile Number 1-13602





Veru Inc.

(Exact Name of registrantRegistrant as specifiedSpecified in its charter)Charter)





 

 

 

 

 

Wisconsin

 

39-1144397

(State of Incorporation)

 

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

 

 

4400 Biscayne Boulevard,48 NW 25th Street, Suite 888

102, Miami, FL

 

3313733127

(Address of principal executive offices)Principal Executive Offices)

 

(Zip Code)



305-509-6897

(Registrant’s telephone number, including area code)Telephone Number, Including Area Code)



N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

VERU

NASDAQ Capital Market



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 (§232.405 of this chapter) 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, a 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 February 13, 2018,May 11, 2020, the registrant had 53,512,94666,095,538 shares of $0.01 par value common stock outstanding.

 

 


 

Table of Contents

VERU INC.

INDEX





 



 

                      

PAGE



 

Forward Looking Statements

3



 

PART I.          FINANCIAL INFORMATION

 



 

Item 1.  Financial Statements

5



 

Unaudited Condensed Consolidated Balance Sheets -

December 31, 2017 and September 30, 2017 

5



 

Unaudited Condensed Consolidated Statements of Operations -

6

Three Months Ended December 31, 2017 and 2016



 

Unaudited Condensed Consolidated StatementStatements of Stockholders’ Equity -

7

Three Months Ended December 31, 2017



 

Unaudited Condensed Consolidated Statements of Cash Flows -

8

Three Months Ended December 31, 2017 and 2016



 

     Notes to Unaudited Condensed Consolidated Financial Statements

9



 

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

25 

27



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

31 

38



 

Item 4.  Controls and Procedures

31 

38



 

PART II.          OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

32 

39



 

Item 1A.  Risk Factors

32 

40



 

���Item 6.  Exhibits

33 

44

 



 

2


 

Table of Contents

 

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. Such statements include, but are not limited to, statements about the anticipated or potential impact of COVID-19 and the global response thereto on our financial statements or business, future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, debt repayments, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, clinical trial timing and plans, the achievement of clinical and commercial milestones, the advancement of our technologies and our products and drug candidates, and other statements that are not historical facts. Forward-looking statements can be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect, " "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "should, " "will," "would" or the negative of these terms or other words of similar meaning. These statements are based upon the Company's current plans and strategies and reflect the Company's current assessment of the risks and uncertainties related to its business and are made as of the date of this report. The Company cautions readers that forward-lookingThese statements involveare inherently subject to known and unknown risks uncertainties and uncertainties. You should read these statements carefully because they discuss our future expectations or state other factors“forward-looking” information. There may be events in the future that may cause thewe are not able to accurately predict or control and our actual results performance or achievements ofmay differ materially from the Company to be materially different from any future results, performance or achievement expressed or implied by suchexpectations we describe in our forward-looking statements. Such factorsFactors that could cause actual results to differ materially from those currently anticipated include among others, the following:



·

potential delays in the Company'stiming of and results from clinical trials and studies, including potential delays in the recruitment of patients and their ability to secure adequate capitaleffectively participate in such trials and studies due to COVID‑19, and the risk that such results will not support marketing approval and commercialization;

·

potential delays in the timing of any submission to the U.S. Food and Drug Administration (the “FDA”) and in regulatory approval of products under development;

·

risks related to our ability to obtain sufficient financing on acceptable terms when needed to fund product development working capital requirements, advertising and promotional expenditures and strategic initiatives;our operations, including our ability to secure timely grant or other funding to develop VERU-111 as a potential COVID-19 treatment;

·

risks related to the development of the Company'sour product portfolio, including clinical trials, regulatory approvals and time and cost to bring to market;

·

risks related to the impact of the COVID-19 pandemic on our business, the nature and extent of which is highly uncertain and unpredictable;

·

our pursuit of a COVID-19 treatment candidate is at an early stage and we may be unable to develop a drug that successfully treats the virus in a timely manner, if at all;

·

risks related to our commitment of financial resources and personnel to the development of a COVID-19 treatment which may cause delays in or otherwise negatively impact our other development programs, despite uncertainties about the longevity and extent of COVID-19 as a global health concern;  

·

government entities may take actions that directly or indirectly have the effect of limiting opportunities for VERU-111 as a COVID-19 treatment, including favoring other treatment alternatives or imposing price controls on COVID-19 treatments;

·

product demand and market acceptance;

·

manysome of the Company'sour products are at an early stage ofin development and the Companywe may fail to successfully commercialize such products;

·

risks related to intellectual property, including the uncertainty of obtaining intellectual property protections and in enforcing them, the possibility of infringing a third party’s intellectual property, and licensing risks;

·

increased competition from existing and new competitors including the potential for reduced sales, pressure on pricing and increased spending on marketing;

·

risks related to compliance and regulatory matters, including costs and delays resulting from extensive government regulation and reimbursement and coverage under healthcare insurance and regulation;

·

the risk that we will be affected by regulatory developments, including a reclassification of products;

·

risks inherent in doing business on an international level;level, including currency risks, regulatory requirements, political risks, export restrictions and other trade barriers;

·

the disruption of production at the Company'sour manufacturing facilities and/or of our ability to supply product due to raw material shortages, labor shortages, and/or physical damage to our facilities, COVID-19 (including the Company's facilities;impact of COVID-19 on suppliers of key raw materials), product testing, transportation delays or regulatory actions;

·

the Company’sour reliance on its major customers and risks relatingrelated to delays in payment of accounts receivable by major customers;

3


Table of Contents

·

the Company'srisks related to our growth strategy;

·

our 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;

·

government contracting risks;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, restructuring or substantial delayed payments;

·

a governmental tender award, including our 2018 South Africa tender award, indicates acceptance of the Company’sbidder’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;

·

our 2018 South Africa tender award could be subject in the future to reallocation for potential local manufacturing initiatives, which could reduce the size of the award to us;

·

our ability to identify, successfully negotiate and complete suitable acquisitions or other strategic initiatives; and

·

the Company’sour ability to successfully integrate acquired businesses, technologies or products.



Such uncertaintiesAll forward-looking statements in this report should be considered in the context of the risks and other risks that may affect the Company's performance are discussed furtherfactors described above and in Part I, Item 1A, "Risk Factors," in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended September 30, 20172019 and Part II, Item 1A of this Form 10-Q. 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.

report except as required by applicable law.

34


 

Table of Contents

 

PART I.FINANCIAL INFORMATION

Item 1.  Financial Statements

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS







 

 

 

 

 



 

 

 

 

 



December 31, 2017

 

September 30, 2017

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

$

3,572,350 

 

$

3,277,602 

Accounts receivable, net

 

3,000,308 

 

 

3,555,350 

Inventory, net

 

3,067,036 

 

 

2,767,924 

Prepaid expenses and other current assets

 

625,497 

 

 

697,097 

TOTAL CURRENT ASSETS

 

10,265,191 

 

 

10,297,973 



 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

PLANT AND EQUIPMENT

 

 

 

 

 

Equipment, furniture and fixtures

 

4,069,810 

 

 

4,067,896 

Leasehold improvements

 

287,686 

 

 

287,686 

Less: accumulated depreciation and amortization

 

(3,844,272)

 

 

(3,800,043)

Plant and equipment, net

 

513,224 

 

 

555,539 

Other trade receivables  (Note 5)

 

 —

 

 

7,837,500 

Other assets

 

159,662 

 

 

156,431 

Deferred assets

 

423,001 

 

 

 —

Deferred income taxes

 

12,124,000 

 

 

8,827,000 

Intangible assets, net

 

20,684,175 

 

 

20,752,991 

Goodwill

 

6,878,932 

 

 

6,878,932 

TOTAL ASSETS

$

51,048,185 

 

$

55,306,366 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

2,517,371 

 

$

2,685,718 

Accrued expenses and other current liabilities

 

2,383,628 

 

 

1,441,359 

Unearned revenue

 

990,016 

 

 

1,014,517 

Accrued compensation

 

338,136 

 

 

345,987 

TOTAL CURRENT LIABILITIES

 

6,229,151 

 

 

5,487,581 



 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Other liabilities  (Note 5)

 

 —

 

 

1,233,750 

Deferred rent

 

68,446 

 

 

131,830 

TOTAL LIABILITIES

 

6,297,597 

 

 

6,853,161 



 

 

 

 

 

Commitments and contingencies  (Note 10)

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

Preferred stock

 

 —

 

 

 —

Common stock

 

556,967 

 

 

553,922 

Additional paid-in-capital

 

91,102,159 

 

 

90,550,669 

Accumulated other comprehensive loss

 

(581,519)

 

 

(581,519)

Accumulated deficit

 

(38,520,414)

 

 

(34,263,262)

Treasury stock, at cost

 

(7,806,605)

 

 

(7,806,605)

TOTAL STOCKHOLDERS' EQUITY

 

44,750,588 

 

 

48,453,205 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

51,048,185 

 

$

55,306,366 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



 

 

 

 

 



March 31,

 

September 30,



2020

 

2019

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

2,557,514 

 

$

6,295,152 

Accounts receivable, net

 

5,802,016 

 

 

5,021,057 

Inventory, net

 

6,016,323 

 

 

3,647,406 

Prepaid expenses and other current assets

 

3,084,037 

 

 

1,843,297 

Total current assets

 

17,459,890 

 

 

16,806,912 

Plant and equipment, net

 

332,362 

 

 

351,895 

Operating lease right-of-use assets

 

1,075,601 

 

 

 —

Deferred income taxes

 

8,632,613 

 

 

8,433,669 

Intangible assets, net

 

20,010,311 

 

 

20,168,495 

Goodwill

 

6,878,932 

 

 

6,878,932 

Other assets

 

1,486,446 

 

 

988,867 

Total assets

$

55,876,155 

 

$

53,628,770 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

4,235,679 

 

$

3,124,751 

Accrued research and development costs

 

2,204,196 

 

 

2,475,490 

Accrued compensation

 

1,537,483 

 

 

1,597,197 

Accrued expenses and other current liabilities

 

1,781,446 

 

 

1,436,888 

Credit agreement, short-term portion

 

6,662,842 

 

 

5,385,649 

Operating lease liability, short-term portion

 

398,513 

 

 

 —

Total current liabilities

 

16,820,159 

 

 

14,019,975 

Credit agreement, long-term portion

 

2,333,267 

 

 

2,886,382 

Residual royalty agreement

 

4,408,215 

 

 

3,845,518 

Operating lease liability, long-term portion

 

871,572 

 

 

 —

Deferred income taxes

 

296,605 

 

 

296,605 

Other liabilities

 

31,760 

 

 

247,154 

Total liabilities

 

24,761,578 

 

 

21,295,634 



 

 

 

 

 

Commitments and contingencies  (Note 12)

 

 

 

 

 



 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock; no shares issued and outstanding at March 31, 2020 and September 30, 2019

 

 —

 

 

 —

Common stock, par value $0.01 per share; 154,000,000 shares authorized, 67,879,242 and 67,221,951 shares issued and 65,695,538 and 65,038,247 shares outstanding at March 31, 2020 and September 30, 2019, respectively

 

678,792 

 

 

672,220 

Additional paid-in-capital

 

113,158,536 

 

 

110,268,057 

Accumulated other comprehensive loss

 

(581,519)

 

 

(581,519)

Accumulated deficit

 

(74,334,627)

 

 

(70,219,017)

Treasury stock, 2,183,704 shares, at cost

 

(7,806,605)

 

 

(7,806,605)

Total stockholders' equity

 

31,114,577 

 

 

32,333,136 

Total liabilities and stockholders' equity

$

55,876,155 

 

$

53,628,770 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

45


 

Table of Contents

 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 



Three Months Ended



December 31,



2017

 

2016



 

 

 

 

 

Net revenues

$

2,586,613 

 

$

3,243,599 

   

 

 

 

 

 

Cost of sales

 

1,272,574 

 

 

1,591,315 

   

 

 

 

 

 

Gross profit

 

1,314,039 

 

 

1,652,284 

   

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

2,038,786 

 

 

171,100 

Selling, general and administrative

 

2,947,697 

 

 

2,529,504 

Loss on settlement of accounts receivable

 

3,764,137 

 

 

Business acquisition

 

 —

 

 

826,370 

Total operating expenses

 

8,750,620 

 

 

3,526,974 

   

 

 

 

 

 

Operating loss

 

(7,436,581)

 

 

(1,874,690)

   

 

 

 

 

 

Non-operating expenses:

 

 

 

 

 

Interest and other expense, net

 

(13,169)

 

 

(9,621)

Foreign currency transaction loss

 

(53,455)

 

 

(11,939)

Total non-operating expenses

 

(66,624)

 

 

(21,560)

   

 

 

 

 

 

Loss before income taxes

 

(7,503,205)

 

 

(1,896,250)

   

 

 

 

 

 

Income tax benefit

 

(3,246,053)

 

 

(530,069)



 

 

 

 

 

Net loss

$

(4,257,152)

 

$

(1,366,181)

   

 

 

 

 

 

Net loss per basic and diluted common share outstanding

$

(0.08)

 

$

(0.04)

   

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

53,154,076 

 

 

30,976,140 

   

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



 

 

 

 

 





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

9,943,104 

 

$

6,976,115 

 

$

20,521,120 

 

$

13,347,924 

   

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

2,506,606 

 

 

2,367,264 

 

 

5,815,527 

 

 

4,094,993 

   

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

7,436,498 

 

 

4,608,851 

 

 

14,705,593 

 

 

9,252,931 

   

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

3,930,260 

 

 

2,910,587 

 

 

9,230,234 

 

 

5,272,410 

Selling, general and administrative

 

3,805,916 

 

 

3,822,854 

 

 

7,559,430 

 

 

7,116,838 

Total operating expenses

 

7,736,176 

 

 

6,733,441 

 

 

16,789,664 

 

 

12,389,248 

   

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(299,678)

 

 

(2,124,590)

 

 

(2,084,071)

 

 

(3,136,317)

   

 

 

 

 

 

 

 

 

 

 

 

Non-operating (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,164,962)

 

 

(1,258,272)

 

 

(2,306,387)

 

 

(2,536,695)

Change in fair value of derivative liabilities

 

469,000 

 

 

(628,000)

 

 

75,000 

 

 

(403,000)

Other income (expense), net

 

51,991 

 

 

1,994 

 

 

(10,035)

 

 

10,844 

Total non-operating expenses

 

(643,971)

 

 

(1,884,278)

 

 

(2,241,422)

 

 

(2,928,851)

   

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(943,649)

 

 

(4,008,868)

 

 

(4,325,493)

 

 

(6,065,168)

   

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(133,140)

 

 

25,167 

 

 

(209,883)

 

 

117,665 



 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(810,509)

 

$

(4,034,035)

 

$

(4,115,610)

 

$

(6,182,833)

   

 

 

 

 

 

 

 

 

 

 

 

Net loss per basic and diluted common share outstanding

$

(0.01)

 

$

(0.06)

 

$

(0.06)

 

$

(0.10)

   

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

65,367,493 

 

 

62,767,258 

 

 

65,202,103 

 

 

62,659,352 

   

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

5


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, 2017

$

 —

 

55,392,193 

 

$

553,922 

 

$

90,550,669 

 

$

(581,519)

 

$

(34,263,262)

 

$

(7,806,605)

 

$

48,453,205 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 —

 

 —

 

 

 —

 

 

207,454 

 

 

 —

 

 

 —

 

 

 —

 

 

207,454 

Shares issued in connection with common stock purchase agreement

 

 —

 

304,457 

 

 

3,045 

 

 

344,036 

 

 

 —

 

 

 —

 

 

 —

 

 

347,081 

Net loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,257,152)

 

 

 —

 

 

(4,257,152)

Balance at December 31, 2017

$

 —

 

55,696,650 

 

$

556,967 

 

$

91,102,159 

 

$

(581,519)

 

$

(38,520,414)

 

$

(7,806,605)

 

$

44,750,588 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 



 

6


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

Additional

 

Other

 

 

 

 

Treasury

 

 

 

   

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stock,

 

 

 

   

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

at Cost

 

Total

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2019

67,221,951 

 

$

672,220 

 

$

110,268,057 

 

$

(581,519)

 

$

(70,219,017)

 

$

(7,806,605)

 

$

32,333,136 

Share-based compensation

 —

 

 

 —

 

 

614,498 

 

 

 —

 

 

 —

 

 

 —

 

 

614,498 

Issuance of shares pursuant to share-based awards

867 

 

 

 

 

(8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,305,101)

 

 

 —

 

 

(3,305,101)

Balance at December 31, 2019

67,222,818 

 

 

672,228 

 

 

110,882,547 

 

 

(581,519)

 

 

(73,524,118)

 

 

(7,806,605)

 

 

29,642,533 

Share-based compensation

 —

 

 

 —

 

 

681,680 

 

 

 —

 

 

 —

 

 

 —

 

 

681,680 

Issuance of shares pursuant to share-based awards

356,424 

 

 

3,564 

 

 

405,068 

 

 

 —

 

 

 —

 

 

 —

 

 

408,632 

Shares issued in connection with common stock purchase agreement

300,000 

 

 

3,000 

 

 

1,224,000 

 

 

 —

 

 

 —

 

 

 —

 

 

1,227,000 

Amortization of deferred costs

 —

 

 

 —

 

 

(34,759)

 

 

 —

 

 

 —

 

 

 —

 

 

(34,759)

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(810,509)

 

 

 —

 

 

(810,509)

Balance at March 31, 2020

67,879,242 

 

$

678,792 

 

$

113,158,536 

 

$

(581,519)

 

$

(74,334,627)

 

$

(7,806,605)

 

$

31,114,577 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

57,468,660 

 

$

574,687 

 

$

95,496,506 

 

$

(581,519)

 

$

(58,201,651)

 

$

(7,806,605)

 

$

29,481,418 

Share-based compensation

 —

 

 

 —

 

 

417,256 

 

 

 —

 

 

 —

 

 

 —

 

 

417,256 

Shares issued in connection with public offering of common stock, net of fees and costs

7,142,857 

 

 

71,428 

 

 

9,060,539 

 

 

 —

 

 

 —

 

 

 —

 

 

9,131,967 

Issuance of shares pursuant to share-based awards

190,000 

 

 

1,900 

 

 

(1,900)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,148,798)

 

 

 —

 

 

(2,148,798)

Balance at December 31, 2018

64,801,517 

 

 

648,015 

 

 

104,972,401 

 

 

(581,519)

 

 

(60,350,449)

 

 

(7,806,605)

 

 

36,881,843 

Share-based compensation

 —

 

 

 —

 

 

496,209 

 

 

 —

 

 

 —

 

 

 —

 

 

496,209 

Issuance of shares pursuant to share-based awards

166,667 

 

 

1,667 

 

 

198,333 

 

 

 —

 

 

 —

 

 

 —

 

 

200,000 

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,034,035)

 

 

 —

 

 

(4,034,035)

Balance at March 31, 2019

64,968,184 

 

$

649,682 

 

$

105,666,943 

 

$

(581,519)

 

$

(64,384,484)

 

$

(7,806,605)

 

$

33,544,017 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

7


VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS







 

 

 

 

 



 

 

 

 

 



Three Months Ended



December 31,



2017

 

2016



 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

$

(4,257,152)

 

$

(1,366,181)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

44,229 

 

 

89,284 

Amortization of intangible assets

 

68,816 

 

 

26,729 

Share-based compensation

 

207,454 

 

 

317,311 

Warrants issued

 

 —

 

 

542,930 

Deferred income taxes

 

(3,297,000)

 

 

(591,573)

Loss on settlement of accounts receivable

 

3,764,137 

 

 

 —

Other

 

(5,000)

 

 

4,469 

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

Decrease in accounts receivable

 

3,226,930 

 

 

2,391,226 

Decrease in income tax receivable

 

 —

 

 

191 

(Increase) decrease in inventory

 

(299,112)

 

 

111,404 

Decrease (increase) in prepaid expenses and other assets

 

68,369 

 

 

(75,378)

Decrease in accounts payable

 

(168,347)

 

 

(522,125)

Decrease in unearned revenue

 

(24,501)

 

 

 —

Increase in accrued expenses and other current liabilities

 

967,839 

 

 

237,678 

Net cash provided by operating activities

 

296,662 

 

 

1,165,965 



 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(1,914)

 

 

(65,623)

Net cash used in investing activities

 

(1,914)

 

 

(65,623)



 

 

 

 

 

Net increase in cash

 

294,748 

 

 

1,100,342 

CASH AT BEGINNING OF PERIOD

 

3,277,602 

 

 

2,385,082 

CASH AT END OF PERIOD

$

3,572,350 

 

$

3,485,424 



 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

Issuance of common stock in connection with the APP Acquisition

$

 —

 

$

1,826,097 

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

$

 —

 

$

17,981,883 

Reduction of accrued expense upon issuance of shares

$

 —

 

$

22,176 

Shares issued in connection with common stock purchase agreement

$

347,081 

 

$

 —

Increase in deferred assets from accrued expenses

$

75,920 

 

$

 —



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



 

 

 

 

 



Six Months Ended



March 31,



2020

 

2019

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

$

(4,115,610)

 

$

(6,182,833)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

74,213 

 

 

84,394 

Amortization of intangible assets

 

158,184 

 

 

154,617 

Noncash change in right-of-use assets

 

154,325 

 

 

 —

Noncash interest expense

 

2,306,387 

 

 

2,536,695 

Share-based compensation

 

1,296,178 

 

 

913,465 

Deferred income taxes

 

(198,944)

 

 

24,710 

Provision for obsolete inventory

 

229,047 

 

 

51,924 

Change in fair value of derivative liabilities

 

(75,000)

 

 

403,000 

Other

 

7,500 

 

 

122,433 

Changes in current assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(1,837,178)

 

 

(54,603)

Increase in inventory

 

(2,597,964)

 

 

(748,095)

Increase in prepaid expenses and other assets

 

(962,470)

 

 

(73,589)

Increase (decrease) in accounts payable

 

1,110,928 

 

 

(656,527)

Decrease in unearned revenue

 

 —

 

 

(187,159)

Decrease in accrued expenses and other current liabilities

 

(293,429)

 

 

(391,011)

Decrease in operating lease liabilities

 

(183,658)

 

 

 —

Net cash used in operating activities

 

(4,927,491)

 

 

(4,002,579)



 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(54,680)

 

 

(644)

Net cash used in investing activities

 

(54,680)

 

 

(644)



 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from sale of shares in public offering, net of fees

 

 —

 

 

9,400,000 

Payment of costs related to public offering

 

 —

 

 

(268,033)

Proceeds from sale of shares under common stock purchase agreement

 

1,227,000 

 

 

 —

Installment payments on SWK credit agreement

 

(944,612)

 

 

(3,191,717)

Proceeds from stock option exercises

 

408,632 

 

 

200,000 

Proceeds from premium finance agreement

 

836,780 

 

 

 —

Installment payments on premium finance agreement

 

(277,965)

 

 

 —

Cash paid for debt portion of finance lease

 

(5,302)

 

 

 —

Net cash provided by financing activities

 

1,244,533 

 

 

6,140,250 



 

 

 

 

 

Net (decrease) increase in cash

 

(3,737,638)

 

 

2,137,027 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

6,295,152 

 

 

3,759,509 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

2,557,514 

 

$

5,896,536 



 

 

 

 

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

Right-of-use assets recorded in exchange for lease liabilities

$

1,229,926 

 

$

 —

Amortization of deferred costs related to common stock purchase agreement

$

34,759 

 

$

 —



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



78


 

VERU INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Basis of Presentation



The accompanying unaudited interim condensed consolidated financial statements for Veru Inc. (“we,” “our,” “us,” “Veru” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting of interim financial information. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2019. The accompanying condensed consolidated balance sheet as of September 30, 20172019 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations for the three and six months ended March 31, 2020 and cash flows for the threesix months ended DecemberMarch 31, 20172020 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2018.2020.



The preparation of our unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.



In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of only normally recurring adjustments) necessary to present fairly the financial position and results of operations as of the dates and for the periods presented.



Principles of Consolidationconsolidation and Naturenature of Operations

operations:  Veru Inc. is referred to in these notes collectively with its subsidiaries as “we,” “our,” “us,” “Veru” or the “Company.” The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Aspen Park Pharmaceuticals, Inc. (APP)(“APP”) and The Female Health Company Limited, and The Female Health Company Limited’s wholly owned subsidiaries,subsidiary, The Female Health Company (UK) plc (The Female Health Company Limited and The Female Health Company (UK) plc, collectively, the “U.K. subsidiary”), and The Female Health Company (UK) plc’s wholly owned subsidiary, The Female Health Company (M) SDN.BHD.SDN.BHD (the “Malaysia subsidiary”). All significant intercompany transactions and accounts have been eliminated in consolidation. Prior to the completion of the October 31, 2016 acquisition (the APP Acquisition)“APP Acquisition”) of APP through the merger of a wholly owned subsidiary of the Company into APP, the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer health carehealthcare product, the FC2 female condom.Female Condom/FC2 Internal Condom® (“FC2”). The completion of the APP Acquisition transitioned the Company into a biopharmaceutical company focused on oncology and urology with multiple drug products under clinical development and commercialization focused in urology and oncology.  Nearly alldevelopment. Most of the Company’s net revenues during the three and six months ended DecemberMarch 31, 20172020 and 20162019 were derived from sales of FC2.  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 in a leased office facility.

FC2 has been distributed in either or both commercial (private sector) and public health sector markets in 144 countries.  It is marketed to consumers in 25 countries through distributors, public health programs, and/or retailers and in the U.S. by prescription.

Cash concentration: The Company’s cash is maintained primarily in three financial institutions, located in Chicago, Illinois, London, England and Kuala Lumpur, Malaysia, respectively.



Accounts receivable and concentration of credit riskReclassificationsAccounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstandingCertain prior period amounts on a periodic basis. the accompanying unaudited interim condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations or financial position for any period presented.



Leases:  Leases are classified as either operating or finance leases at inception. A right-of-use (“ROU”) asset and corresponding lease liability are established at an amount equal to the present value of fixed lease payments over the lease term at the commencement date. The Company's standardROU asset includes any initial direct costs incurred and lease payments made at or before the commencement date and is reduced by lease incentive payments. The Company has elected not to separate the lease and nonlease components for all classes of underlying assets. The Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases that do not have a readily determinable implicit discount rate. The incremental borrowing rate is the rate of interest that the Company would be charged to borrow on a collateralized basis over a similar term and amount in a similar economic environment. The Company determines the incremental borrowing rates for its leases by adjusting the risk-free interest rate with a credit terms vary from 30risk premium corresponding 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 theCompany’s credit rating.

89


 

Company's business, extended credit terms may occasionally be offered as

Operating lease costs are recognized for fixed lease payments on a sales promotionstraight-line basis over the term of the lease. Finance lease costs are a combination of the amortization expense for the ROU asset and interest expense for the outstanding lease liability using the applicable discount rate. Variable lease payments are recognized when incurred based on occurrence or usage. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for certain sales.  The Company has agreed to credit terms of up to 150 days with our distributor inshort-term leases on a straight-line basis over 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.  See discussion of receivables from our distributor in Brazil in Note 5.  For the past twelve months, the Company's average days’ sales outstanding was approximately 303 days. lease term.



InventoryOther comprehensive loss:  Inventories are valued at the lower of cost orAccounting principles generally require that recognized revenue, expenses, gains and losses be included in net realizable value.  The cost is determined using the first-in, first-out (FIFO) method.  Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date.  Write-downs of inventories establish a new cost basis which is not increased for future increases in the net realizable value of inventories orloss. Although certain changes in estimated obsolescence.assets and liabilities, such as foreign currency translation adjustments, are reported as a separate component of the equity section of the accompanying unaudited condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss. For the three and six months ended March 31, 2020 and 2019, comprehensive loss is equivalent to the reported net loss.



Foreign currency translation and operationsRecently Issued Accounting PronouncementsEffective October 1, 2009,In February 2016, the Company determined that there were significant changes in facts and circumstances, triggering an evaluation of its subsidiaries’ functional currency.  The evaluation indicated that the U.S. dollar is the currency with the most significant influence upon the subsidiaries.  Because all of the U.K. subsidiary's future sales and cash flows would be denominated in U.S. dollars following the October 2009 cessation of production of the Company’s first generation product, FC1, the U.K. subsidiary adopted the U.S. dollar as its functional currency effective October 1, 2009. As the Malaysia subsidiary is a direct and integral component of the U.K. parent’s operations, it, too, adopted the U.S. dollar as its functional currency as of October 1, 2009. The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. The cumulative foreign currency translation loss included in accumulated other comprehensive loss was $581,519 as of December 31, 2017 and September 30, 2017. Assets located outside of the U.S. totaled approximately $4,640,000 and $5,600,000 at December 31, 2017 and September 30, 2017, respectively.

Equipment, furniture and fixtures:  Depreciation and amortization are computed using primarily the straight-line method.  Depreciation and amortization are computed over the estimated useful lives of the respective assets which range as follows:

Manufacturing equipment

5 – 10 years

Office equipment

3 – 5 years

Furniture and fixtures

7 – 10 years

Depreciation on leased assets is computed over the lesser of the remaining lease term or the estimated useful lives of the assets.  Depreciation on leased assets is included with depreciation on owned assets.

Patents and trademarks:   The costs for patents and trademarks are expensed when incurred. 

Financial instruments: Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, Leases (Topic 842),  which requires that lessees recognize an ROU asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. ASU 2016-02 distinguishes leases as either a finance lease or an operating lease, which affects how the leases are measured and presented in the statement of operations and statement of cash flows, and requires disclosure of key information about leasing arrangements. A modified retrospective transition approach is required upon adoption.  In July 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 842, Leases to clarify the implementation guidance and ASU No. 2018‑11, Leases (Topic 842) Targeted Improvements. This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors to address certain implementation issues facing lessors when adopting ASU 2016‑02. In March 2019, the FASB issued ASU 2019‑01, Leases (Topic 842): Codification Improvements to address, among other things, certain transition disclosure requirements subsequent to the adoption of ASU 2016‑02.

The Company adopted the new lease accounting standard using the modified retrospective approach on October 1, 2019 and elected certain practical expedients, including the optional transition method that allows for the application of the new standard at its adoption date with no restatement of prior period amounts. We elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess our prior conclusions about lease identification, lease classification, and initial direct costs. Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $1.2 million and $1.5 million, respectively, and the derecognition of prepaid expenses and operating lease deferred rent liabilities of $23,000 and $247,000, respectively, as of October 1, 2019 with zero cumulative-effect adjustment to retained earnings. The new standard did not materially impact our consolidated statement of operations or cash flows.

In June 2018, the FASB issued ASU 2018‑07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The purpose of ASU 2018-07 is to expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The Company has issued share-based payments to nonemployees in the past but is not able to predict the amount of future share-based payments to nonemployees, if any. We adopted ASU 2018-07 effective October 1, 2019. The adoption of ASU 2018‑07 did not have a material impact on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). Simplifying the Accounting for Income Taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The adoption of ASU 2019-12 is not expected to have a material effect on our consolidated financial statements and related disclosures.

10


Note 2 – Liquidity

The Company has incurred quarterly operating losses since the fourth quarter of fiscal 2016 and anticipates that it will continue to consume cash and incur substantial net losses as it develops its drug candidates. Because of the numerous risks and uncertainties associated with the development of pharmaceutical products, the Company is unable to estimate the exact amounts of capital outlays and operating expenditures necessary to fund development of its drug candidates and obtain regulatory approvals. The Company’s future capital requirements will depend on many factors.

The Company believes its current cash position, cash expected to be generated from sales of the Company’s commercial products, and its ability to secure equity financing or other financing alternatives are adequate to fund planned operations of the Company for the next 12 months. Such financing alternatives may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company's effective shelf registration statement on Form S-3 (File No. 333-221120) (the “Shelf Registration Statement”). The Company intends to be opportunistic when pursuing equity or debt financing which could include selling common stock under its common stock purchase agreement with Aspire Capital Fund, LLC (see Note 9).

Note 3 – Fair Value Measurements

FASB Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us as of the reporting dates. Accordingly, the estimates presented in the accompanying unaudited condensed consolidated financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

FASB ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The Company currently doesthree levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not have any assetsactive; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments with primarily unobservable value drivers.

We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the six months ended March 31, 2020 and 2019.

As of March 31, 2020 and September 30, 2019, the Company’s financial liabilities measured at fair value on a recurring basis, aswhich consisted of December 31, 2017. Substantially allembedded derivatives, were classified within Level 3 of the Company’s cash, as well as restricted cash, are held in demand deposits with three financial institutions. The Company has no financial instruments for which the carrying value is materially different than fair value.

9


Non-financial assets such as intangible assets, goodwill and property, plant, and equipment are evaluated for impairment annually or when indicators of impairment exist and are measured at fair value only if an impairment charge is recorded. Non-financial assets such as identified intangible assets acquired in connection with the APP Acquisition are measured at fair value using Level 3 inputs, which include discounted cash flow methodologies, or similar techniques, when there is limited market activity and the determination of fair value requires significant judgment or estimation.

Research and development costs:  Research and development expenses include salaries and benefits, clinical trials costs and contract services.  Research and development expenses are charged to operations as they are incurred.hierarchy. 



The Company records 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.  Research and development costs are expensed as incurred.

The Company follows the provisions of FASB ASC Topic 730, Research and Development, which requires the Company to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, the Company would be required to expense the related capitalized advance payments. The Company had no capitalized nonrefundable advance payments as of December 31, 2017 or September 30, 2017, and had no refundable advance payments as of December 31, 2017 and September 30, 2017.

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 customer or its provider of funds. 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 approximately $140,000 at December 31, 2017 and September 30, 2017, and is included in cash on the accompanying unaudited condensed consolidated balance sheets.

Revenue recognition:  The Company recognizes revenue from product sales when each of the following conditions has been met: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured. 

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 December 31, 2017 and September 30, 2017 was $990,016 and $1,014,517, respectively, and was comprised mainly of sales made to wholesalers. We lack the experiential data which would allow us to estimate returns; therefore, as of December 31, 2017 and September 30, 2017, we determined that we do not yet meet the criteria for the recognition of revenue at the time of shipment to certain 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. 

Intangible Assets:  Our intangible assets arose from the APP Acquisition on October 31, 2016.  These intangible assets are carried at cost less accumulated amortization and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

10


Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. We determineddetermines the fair value of intangible assets, including in-process researchhybrid instruments based on available market data using appropriate valuation models, considering all of the rights and development ("IPR&D”),obligations of each instrument. The Company estimates the fair value of hybrid instruments using the “income method.” This method starts with a forecast of net cash flows, risk adjusted for estimated probabilities of technical and regulatory success and adjustedvarious techniques (and combinations thereof) that are considered to present value using an appropriate discount rate that reflects the risk associatedbe consistent with the cash flow streams. All assetsobjective of measuring fair value. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating the fair value of derivative financial instruments requires the development of significant and subjective estimates that may, and are valued from a market participant view which might be different than our specific views. The valuation process is very complex and requires significant input and judgment usinglikely to, change over the duration of the instrument with related changes in internal and external sources. Althoughmarket factors. Increases in fair value during a valuation is required to be finalized withingiven financial quarter result in the recognition of non-cash derivative expense. Conversely, decreases in fair value during a one-year period, it must consider all and only those facts and evidence which existed atgiven financial quarter would result in the acquisition date. The most complex and judgmental matters applicable to the valuation process are summarized below:

·

Unit of account – Most intangible assets are valued as single global assets rather than multiple assets for each jurisdiction or indication after considering the development stage, expected levels of incremental costs to obtain additional approvals, risks associated with further development, amount and timing of benefits expected to be derived in the future, expected patent lives in various jurisdictions and the intention to promote the asset as a global brand.

·

Estimated useful life – The asset life expected to contribute meaningful cash flows is determined after considering all pertinent matters associated with the asset, including expected regulatory approval dates (if unapproved), exclusivity periods and other legal, regulatory or contractual provisions as well as the effects of any obsolescence, demand, competition, and other economic factors, including barriers to entry.

·

Probability of Technical and Regulatory Success (“PTRS”) Rate – PTRS rates are determined based upon industry averages considering the respective program’s development stage and disease indication and adjusted for specific information or data known at the acquisition date. Subsequent clinical results or other internal or external data obtained could alter the PTRS rate and materially impact the estimated fair value of the intangible asset in subsequent periods leading to impairment charges.

·

Projections – Future revenues are estimated after considering many factors such as initial market opportunity, pricing, sales trajectories to peak sales levels, competitive environment and product evolution. Future costs and expenses are estimated after considering historical market trends, market participant synergies and the timing and level of additional development costs to obtain the initial or additional regulatory approvals, maintain or further enhance the product. We generally assume initial positive cash flows to commence shortly after the receipt of expected regulatory approvals which typically may not occur for a number of years. Actual cash flows attributed to the project are likely to be different than those assumed since projections are subjected to multiple factors including trial results and regulatory matters which could materially change the ultimate commercial success of the asset as well as significantly alter the costs to develop the respective asset into commercially viable products.

·

Tax rates – The expected future income is tax effected using a market participant tax rate. In determining the tax rate, we consider the jurisdiction in which the intellectual property is held and location of research and manufacturing infrastructure. We also consider that any repatriation of earnings would likely have U.S. tax consequences.

·

Discount rate – Discount rates are selected after considering the risks inherent in the future cash flows; the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry, as well as expected changes in standards of practice for indications addressed by the asset.

Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amountrecognition of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.non-cash derivative income. 



Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development costs,

11


 

inability to achieve expected synergies, higher operating costs, changes in tax lawsThe following table provides a reconciliation of the beginning and other macro-economic changes. The complexity in estimating theending liability balance associated with embedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of intangible assets in connection with an impairment test is similar to the initial valuation.March 31, 2020 and 2019:



Considering the high risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. IPR&D is closely monitored and assessed each period for impairment.



 

 

 

 

 



Six Months Ended



March 31,



2020

 

2019



 

 

 

 

 

Beginning balance

$

3,625,000 

 

$

2,426,000 

Change in fair value of derivative liabilities

 

(75,000)

 

 

403,000 

Ending balance

$

3,550,000 

 

$

2,829,000 



GoodwillGoodwill representsThe expense associated with the difference between the purchase price and the estimatedchange in fair value of the net assets acquired in connection withembedded derivatives is included as a separate line item on the APP Acquisition.  All goodwill resides in the Company’s Research and Development reporting unit.

Goodwill is tested at least annually for impairment or when events or changes in circumstances indicate that the carrying amountaccompanying unaudited condensed consolidated statements of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors include our share price, our financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test previously performed.operations.



The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and causeliabilities associated with embedded derivatives represent the fair value of the reporting unitchange of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 8 for additional information. There is no current observable market for these types of derivatives. The Company determined the fair value of the embedded derivatives using a Monte Carlo simulation model to be belowvalue the financial liabilities at inception and on subsequent valuation dates. This valuation model incorporates transaction details such as the contractual terms, expected cash outflows, expected repayment dates, probability of a change of control, expected volatility, and risk-free interest rates. A significant acceleration of the estimated repayment date or a significant decrease in the probability of a change of control event prior to repayment of the Credit Agreement, in isolation, would result in a significantly lower fair value measurement of the liabilities associated with the embedded derivatives.

The following table presents quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 of the fair value hierarchy as of March 31, 2020 and September 30, 2019:

Weighted Average (range, if applicable)

Valuation Methodology

Significant Unobservable Input

March 31, 2020

September 30, 2019

Monte Carlo Simulation

Estimated change of control dates

December 2020 to December 2021

September 2020 to December 2021

Discount rate

16.7% to 21.0%

14.4% to 16.8%

Probability of change of control

10% to 90%

10% to 90%

Note 4 – Revenue from Contracts with Customers

The Company generates nearly all its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would userevenue from direct product sales. Revenue from direct product sales is generally recognized when the customer obtains control of the product, which occurs at a point in their estimates of fair value; however, if actual results are not consistent with our estimatestime, and assumptions, we may be exposed to an impairment charge that could be material.

Share-based compensation: The Company accounts for share-based compensation expense for equity awards exchanged for services over the vesting periodupon shipment or upon delivery based on the grant-date fair value. In many instances,contractual shipping terms of a contract. Sales taxes and other similar taxes that the equity awardsCompany collects concurrent with revenue-producing activities are issued upon the grant date subject to vesting periods. In certain instances, the equity awards provide for future issuance contingent on future continued employment or performance of services as of the issuance date.excluded from revenue.



Advertising:  The Company's policy is to expense advertising costsamount of consideration the Company ultimately receives varies depending upon sales discounts, and other incentives that the Company may offer, which are accounted for as incurred. Advertising costs were $23,640 and $17,941 for the three months ended December 31, 2017 and 2016, respectively. 

Income taxes:  The Company files separate income tax returns for its foreign subsidiaries. FASB 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,variable consideration when estimating the amount of any future tax benefits is reduced by a valuation allowancerevenue to recognize. The estimate of variable consideration requires significant judgment. The Company includes estimated amounts in the transaction price to the extent such benefitsit is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are not expected to be realized.based largely upon an assessment of current contract sales terms and historical payment experience.



Other comprehensive loss:  Accounting principlesProduct returns are typically not significant because returns are generally require that recognized revenue, expenses, gains and losses be included in net loss.  Although certain changes in assets and liabilities, such as foreign currency translation adjustments, are reported as a separate componentnot allowed unless the product is damaged at time of the equity section of the accompanying condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss.receipt.



12


 

The U.S. parent company and its U.K. subsidiary routinely purchase inventory produced by its Malaysia subsidiary for sale to their respective customers. These intercompany trade accounts are eliminated in consolidation. The Company’s policy and intentrevenue is to settlefrom direct product sales of FC2 in the intercompany trade account on a current basis.  Since the U.K. and Malaysia subsidiaries adoptedglobal public sector, sales of FC2 in the U.S. dollar as their functional currencies effective October 1, 2009, no foreign currency gains or losses from intercompany trade are recognized.  In the three months ended December 31, 2017prescription channel, and 2016, comprehensive loss is equivalent to the reported net loss.  

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606).  This new accounting guidance on revenue recognition provides for a single five-step model to be applied to all revenue contracts with customers.  The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertaintysales of revenue and cash flows relating to customer contracts.  ASU 2014-09 will be effective for the Company beginning on October 1, 2018.  ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We have not yet selected a transition method, and we are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.  This new accounting guidance more clearly articulates the requirements for the measurement and disclosure of inventory.  Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market.  Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin.  This new accounting guidance requires the measurement of inventory at the lower of cost or net realizable value.  ASU 2015-11 was effective for the Company beginning on October 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  ASU 2016-02 will be effective for the Company beginning on October 1, 2019.  Early adoption is permitted. We are currently evaluating the effect of the new guidance on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  The amendments in this Update simplify the income tax effects, minimum statutory tax withholding requirements and impact of forfeitures related to how share-based payments are accounted for and presented in the financial statements.  ASU 2016-09 was effective for the Company beginning on October 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The purpose of ASU 2016-18 is to clarify guidance and presentation related to restricted cash in the statements of cash flows as well as increased disclosure requirements. It requires beginning-of-period and end-of-period total amounts shown on the statements of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. ASU 2016-18 will be effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual periods. Early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of ASU 2017-04 is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect Update No. 2017-04 to have a material effect on our financial position or results of operations.

13


In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Update No. 2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material effect on our financial position or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The purpose of ASU 2017-09 is to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 will be effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of ASU 2017-09 is not expected to have a material effect on our financial position or results of operations. 

Note 2 - APP Acquisition

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 the APP Acquisition 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.

The Company incurred $826,370 in acquisition-related costs in the three months ended December 31, 2016, which are presented on a separate line item in the accompanying unaudited condensed consolidated statement of operations.

As of the date of the APP Acquisition, APP had developed technology consisting of PREBOOST®PREBOOST® medicated wipes for prevention of premature ejaculation. IPR&D represents incomplete research and development projects at APP as of the date of the APP Acquisition. The fair value of the developed technology and IPR&D were determined using the income approach, which was prepared based on forecasts by management.

Purchase price in excess of assets acquired and liabilities assumed was recorded as goodwill.  Goodwillfollowing table presents net revenues from the APP Acquisition principally relates to intangible assets that do not qualify for separate recognition, our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction.  Goodwill is not tax deductible for income tax purposes and was assigned to the Research and Development reporting segment.

In connection with the APP Acquisition, 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.  See Note 10 for additional detail.

Note  3 - Earnings per Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss 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, stock appreciation rights and warrants,  and the vesting of unvested restricted stock and restricted stock units.  Due to our net loss for the periods presented, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Notes 7  and 8 for a discussion of our dilutive potential common shares.

14


Note 4 - Inventory

Inventory consists of the following components at December 31, 2017 and September 30, 2017:  these three categories:







 

 

 

 

 



 

 

 

 

 



December 31, 2017

 

September 30, 2017

FC2

 

 

 

 

 

Raw material

$

554,737 

 

$

530,384 

Work in process

 

121,137 

 

 

90,164 

Finished goods

 

2,631,155 

 

 

2,427,386 

Inventory, gross

 

3,307,029 

 

 

3,047,934 

Less: inventory reserves

 

(272,980)

 

 

(312,997)

FC2, net

 

3,034,049 

 

 

2,734,937 

PREBOOST®

 

 

 

 

 

Finished goods

 

32,987 

 

 

32,987 

Inventory, net

$

3,067,036 

 

$

2,767,924 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019

FC2

 

 

 

 

 

 

 

 

 

 

 

Public sector

$

2,569,644 

 

$

4,249,652 

 

$

6,943,438 

 

$

8,134,004 

U.S. prescription channel

 

6,952,627 

 

 

2,594,271 

 

 

13,003,757 

 

 

5,034,316 

Total FC2

 

9,522,271 

 

 

6,843,923 

 

 

19,947,195 

 

 

13,168,320 

PREBOOST®

 

420,833 

 

 

132,192 

 

 

573,925 

 

 

179,604 

Net revenues

$

9,943,104 

 

$

6,976,115 

 

$

20,521,120 

 

$

13,347,924 

The following table presents net revenue by geographic area:



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

United States

$

7,674,849 

 

$

2,596,281 

 

$

14,166,003 

 

$

5,645,884 

Zimbabwe

 

 —

 

 

*

 

 

 —

 

 

1,948,304 

Brazil

 

*

 

 

1,098,000 

 

 

*

 

 

*

Other

 

2,268,255 

 

 

3,281,834 

 

 

6,355,117 

 

 

5,753,736 

Net revenues

$

9,943,104 

 

$

6,976,115 

 

$

20,521,120 

 

$

13,347,924 

*Less than 10% of total net revenues

The Company’s performance obligations consist mainly of transferring control of products identified in the contracts which occurs either when: i) the product is made available to the customer for shipment; ii) the product is shipped via common carrier; or iii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. Some of the Company’s contracts require the customer to make advanced payments prior to transferring control of the products. These advanced payments create a contract liability for the Company. The balances of the Company’s contract liability, included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balances sheets, was approximately $508,000 and $249,000 at March 31, 2020 and September 30, 2019, respectively.

The Company records an unearned revenue liability if a customer pays consideration for product that was shipped by the Company but revenue recognition criteria have not been met under the terms of a contract. Unearned revenue is recognized as revenue after control of the product is transferred to the customer and all revenue recognition criteria have been met. The Company had no unearned revenue at March 31, 2020 or September 30, 2019.

The Company recognized revenue of $299,000 and $221,000 during the six months ended March 31, 2020 and 2019, respectively, after satisfying its contract obligations and transferring control for previously recorded contract liabilities or unearned revenue.

 

Note 5 - Accounts Receivable and Concentration of Credit Risk

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. For sales to the Company’s distributor in Brazil, the Company has agreed to credit terms of up to 180 days subsequent to clearance of the product by the Ministry of Health in Brazil. The Company classified approximately $1.1 million and $300,000 of trade receivables with its distributor in Brazil as long-term as of March 31, 2020 and September 30, 2019, respectively, because payment was expected in greater than one year. The long-term portion of trade receivables is included in other assets on the accompanying unaudited condensed consolidated balance sheets.

13




The components of accounts receivable consist of the following at DecemberMarch 31, 20172020 and September 30, 2017: 2019:









 

 

 

 

 

 



 

December 31, 2017

 

September 30, 2017



 

 

 

 

 

 

Trade receivables

 

$

2,905,094 

 

$

11,330,814 

Other receivables

 

 

128,317 

 

 

100,139 

Accounts receivable, gross

 

 

3,033,411 

 

 

11,430,953 

Less: allowance for doubtful accounts

 

 

(33,103)

 

 

(38,103)

Accounts receivable, net

 

 

3,000,308 

 

 

11,392,850 

Less: long-term trade receivables

 

 

 —

 

 

(7,837,500)

Current accounts receivable, net

 

$

3,000,308 

 

$

3,555,350 



 

 

 

 

 



March 31,

 

September 30,



2020

 

2019



 

 

 

 

 

Trade receivables, gross

$

7,013,027 

 

$

5,410,165 

Less: allowance for doubtful accounts

 

(25,643)

 

 

(33,143)

Less: allowance for sales and payment term discounts

 

(84,743)

 

 

(49,623)

Less: long-term trade receivables*

 

(1,100,625)

 

 

(306,342)

Accounts receivable, net

$

5,802,016 

 

$

5,021,057 

On December 27, 2017, we entered into a settlement agreement with Semina, our distributor*Included in Brazil, 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. The amounts owed to us relate to outstanding accounts receivable for sales to Semina for the 2014 Brazil Tender totaling $8.9 million,  $7.8 million of which was classified as a long term trade receivable and $1.1 million as a current account receivableother assets on the accompanying condensed consolidated balance sheet as of September 30, 2017. These receivables were net of payables owed to Semina by us totaling $1.4 million,  $1.2 million of which was classified as a long term liability and $0.2 million classified as a current liability on the accompanying condensed consolidated balance sheet as of September 30, 2017. The settlement was not related to our belief in the ultimate collectability of the receivables or in the creditworthiness of Semina. The result of the settlement was a net loss of approximately $3.76 million, which is presented as a separate line item in the accompanying unaudited condensed consolidated statement of operations for the three months ended December 31, 2017.balance sheets



At DecemberMarch 31, 20172020 and at September 30, 2017, Semina’s2019, no customers had a current accounts receivable balance that represented 15 percent and 11 percentgreater than 10% of current assets, respectively. No other single customer’sassets.

At March 31, 2020, three customers had an accounts receivable balance accounted for moregreater than 10 percent10% of current assets at the end of those periods. At December 31, 2017,  Semina’s accounts receivable balance represented 50 percent of the Company’s accounts receivable balance. At September 30, 2017, Semina’snet accounts receivable and long-term othertrade receivables, balance represented 78 percentrepresenting 81% of the Company’snet accounts receivable and long-term othertrade receivables balance. in the aggregate. At September 30, 2019, two customers had an accounts receivable balance greater than 10% of net accounts receivable and long-term trade receivables, representing 66% of net accounts receivable and long-term trade receivables in the aggregate. 

For the three months ended DecemberMarch 31, 2017 and 2016,2020, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 80% of the Company’s net revenues in the aggregate. For the three months ended March 31, 2019, there were four andcustomers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 82% of the Company’s net revenues in the aggregate.

For the six months ended March 31, 2020, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 71% of the Company’s net revenues in the aggregate. For the six months ended March 31, 2019, there were three customers who eachwhose individual net revenue to the Company exceeded 10 percent10% of the Company’s net revenues, respectively.representing 66% of the Company’s net revenues in the aggregate.



15


The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments on accounts receivable. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Management also periodically evaluates individual customer receivables and considers a customer’s financial condition, credit history, and the current economic conditions. Accounts receivable are written-offcharged-off when deemed uncollectible.

The table below sets forthsummarizes the components ofchange in the allowance for doubtful accounts at Decemberfor the six months ended March 31, 20172020 and 2016:

2019:







 

 

 

 

 

 

 

 

 

 

 

Fiscal

Balance at

 

Provision Charges

 

Write offs/

 

Balance at

Year

October 1

 

 to Expenses

 

Recoveries

 

December 31

2017

$

38,103 

 

$

 —

 

$

 —

 

$

38,103 

2018

$

38,103 

 

$

 —

 

$

(5,000)

 

$

33,103 



 

 

 

 

 



Six Months Ended March 31,



2020

 

2019



 

 

 

 

 

Beginning balance

$

33,143 

 

$

36,201 

Charges to expense

 

 —

 

 

 —

Charge-offs

 

(7,500)

 

 

 —

Ending balance

$

25,643 

 

$

36,201 

 

Recoveries of accounts receivable previously written-offcharged off are recorded when received. The Company’s customers are primarily large global agencies, non-government organizations, ministries of health and other governmental agencies,  which purchase and distribute the female condomFC2 for use in HIV/AIDS prevention and family planning programs. In the U.S., the Company’s customers include telemedicine providers who sell into the prescription channel.

14


Note 6 – Balance Sheet Information

Inventory

Inventories are valued at the lower of cost or net realizable value. The cost is determined using the first-in, first-out (“FIFO”) method. Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date. Write-downs of inventories establish a new cost basis which is not increased for future increases in the net realizable value of inventories or changes in estimated obsolescence.

Inventory consisted of the following at March 31, 2020 and September 30, 2019:



 

 

 

 

 



March 31,

 

September 30,



2020

 

2019

FC2:

 

 

 

 

 

Raw material

$

665,134 

 

$

426,590 

Work in process

 

49,684 

 

 

187,970 

Finished goods

 

5,386,041 

 

 

3,157,952 

FC2, gross

 

6,100,859 

 

 

3,772,512 

Less: inventory reserves

 

(84,536)

 

 

(125,106)

Inventory, net

$

6,016,323 

 

$

3,647,406 

Fixed Assets

We record equipment, furniture and fixtures, and leasehold improvements at historical cost. Expenditures for maintenance and repairs are recorded to expense. Depreciation and amortization are primarily computed using the straight-line method. Depreciation and amortization are computed over the estimated useful lives of the respective assets. Leasehold improvements are depreciated on a straight-line basis over the lesser of the remaining lease term or the estimated useful lives of the improvements.

Plant and equipment consisted of the following at March 31, 2020 and September 30, 2019:



 

 

 

 

 

 

 



Estimated

 

March 31,

 

September 30,



Useful Life

 

2020

 

2019

Plant and equipment:

 

 

 

 

 

 

 

Manufacturing equipment

5 - 8 years

 

$

2,748,604 

 

$

2,716,647 

Office equipment, furniture and fixtures

3 - 10 years

 

 

817,951 

 

 

795,228 

Leasehold improvements

3 - 8 years

 

 

298,886 

 

 

298,886 

Total plant and equipment

 

 

 

3,865,441 

 

 

3,810,761 

Less: accumulated depreciation and amortization

 

 

 

(3,533,079)

 

 

(3,458,866)

Plant and equipment, net

 

 

$

332,362 

 

$

351,895 

Note 7 – Intangible Assets and Goodwill

Intangible Assets

The gross carrying amounts and net book value of intangible assets are as follows at March 31, 2020:



 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

645,641 

 

$

1,754,359 

Covenants not-to-compete

 

500,000 

 

 

244,048 

 

 

255,952 

Total intangible assets with finite lives

 

2,900,000 

 

 

889,689 

 

 

2,010,311 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

889,689 

 

$

20,010,311 

15


The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2019:



 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

523,172 

 

$

1,876,828 

Covenants not-to-compete

 

500,000 

 

 

208,333 

 

 

291,667 

Total intangible assets with finite lives

 

2,900,000 

 

 

731,505 

 

 

2,168,495 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

731,505 

 

$

20,168,495 

For the three months ended March 31, 2020 and 2019, amortization expense was approximately $79,000 and $77,000,  respectively. For the six months ended March 31, 2020 and 2019, amortization expense was approximately $158,000 and $155,000, respectively.

Goodwill

The carrying amount of goodwill at March 31, 2020 and September 30, 2019 was $6.9 million. There was no change in the balance during the six months ended March 31, 2020 and 2019.

 

Note 6 - Revolving Line of Credit 8 – Debt



The Company’sSWK Credit Agreement

On March 5, 2018, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with BMO Harris Bank N.A. expired the financial institutions party thereto from time to time (the “Lenders”) and SWK Funding LLC, as agent for the Lenders (the “Agent”), for a synthetic royalty financing transaction. On and subject to the terms of the Credit Agreement, the Lenders provided the Company with a term loan of $10.0 million, which was advanced to the Company on December 29, 2017.  No amounts were outstandingthe date of the Credit Agreement. After payment by the Company of certain fees and expenses of the Agent and the Lenders as required in the Credit Agreement, the Company received net proceeds of approximately $9.9 million from the $10.0 million loan under the Credit Agreement.

The Lenders will be entitled to receive quarterly payments on the term loan based on the Company’s product revenue from net sales of FC2 as provided in the Credit Agreement until the Company has paid 176.5% of the aggregate amount advanced to the Company under the Credit Agreement. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is less than $10.0 million, the quarterly payments will be 32.5% of product revenue from net sales of FC2 during the quarterly period. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is equal to or greater than $10.0 million, the quarterly payments are calculated as follows: (i) as it relates to each quarter during the 2019 calendar year, the sum of 12.5% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period (as defined in the Credit Agreement), plus 5% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period, (ii) as it relates to each quarter during the 2020 calendar year, the sum of 25% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period, plus 10% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period, and (iii) as it relates to each quarter during the 2021 calendar year and thereafter, the sum of 30% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period, plus 20% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period. Upon the Credit Agreement’s termination date of March 5, 2025, the Company must pay 176.5% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue. The payment requirements described above reflect an amendment to the Credit Agreement dated May 13, 2019 (the “Second Amendment”) which included a reduction to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar 2019, a return to the original percentages to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar 2020 and an increase to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar 2021 and thereafter until the loan has been repaid.

16


Upon a change of control of the Company or sale of the FC2 business, the Company must pay off the loan by making a payment to the Lenders equal to (i) 176.5% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue, plus (ii) the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five. A “change of control” under the Credit Agreement includes (i) an acquisition by any person of direct or indirect ownership of more than 50% of the Company’s issued and outstanding voting equity, (ii) a change of control or similar event in the Company’s articles of incorporation or bylaws, (iii) certain Key Persons as defined in the Credit Agreement cease to serve in their current executive capacities unless replaced within 90 days by a person reasonably acceptable to the Agent, which acceptance not to be unreasonably withheld, or (iv) the sale of all or substantially all of the Company’s assets.

The Credit Agreement contains customary representations and warranties in favor of the Agent and the Lenders and certain covenants, including financial covenants addressing minimum quarterly marketing and distribution expenses for FC2 and a requirement to maintain minimum unencumbered liquid assets of $1.0 million. The Credit Agreement also restricts the payment of dividends and share repurchases. The recourse of the Lenders and the Agent for obligations under the Credit Agreement is limited to assets relating to FC2.

In connection with the Credit Agreement, the Company and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing after the Company would have paid 175% of the aggregate amount advanced to the Company under the Credit Agreement based on a calculation of revenue-based payments under the Credit Agreement without taking into account the amendments to the payment requirements under the Credit Agreement effected by the Second Amendment. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties. If a change of control or sale of the FC2 business occurs prior to payment in full of the Credit Agreement, there will be no further payment due with respect to the Residual Royalty Agreement. If a change of control or sale of the FC2 business occurs after payment in full of the Credit Agreement, the Agent will receive a payment that is the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five.  

Pursuant to a Guarantee and Collateral Agreement dated as of March 5, 2018 (the “Collateral Agreement”) and an Intellectual Property Security Agreement dated as of March 5, 2018 (the “IP Security Agreement”), the Company’s obligations under the Credit Agreement are secured by a lien against substantially all of the assets of the Company that relate to or arise from FC2. In addition, pursuant to a Pledge Agreement dated as of March 5, 2018 (the “Pledge Agreement”), the Company’s obligations under the Credit Agreement are secured by a pledge of up to 65% of the outstanding shares of The Female Health Company Limited, a wholly owned U.K. subsidiary.

For accounting purposes, the $10.0 million advance under the Credit Agreement was allocated between the Credit Agreement and the Residual Royalty Agreement on a relative fair value basis. A portion of the amount allocated to the Credit Agreement and a portion of the amount allocated to the Residual Royalty Agreement, in both cases equal to the fair value of the respective change of control provisions, was allocated to the embedded derivative liabilities. The derivative liabilities will be adjusted to fair market value at each subsequent reporting period. For financial statement presentation, the embedded derivative liabilities have been included with their respective host instruments as noted in the following tables. The debt discounts are being amortized to interest expense over the expected term of the loan using the effective interest method. Additionally, the Company recorded deferred loan issuance costs of approximately $267,000 for legal fees incurred in connection with the Credit Agreement. The deferred loan issuance costs are presented as a reduction in the Credit Agreement obligation and are being amortized to interest expense over the expected term of the loan using the effective interest method. The Second Amendment was accounted for as a debt modification, which resulted in prospective adjustment to the effective interest rate.

17


At March 31, 2020 and September 30, 2017 or when it expired2019, the Credit Agreement liability consisted of the following:



 

 

 

 

 



March 31,

 

September 30,



2020

 

2019



 

 

 

 

 

Aggregate repayment obligation

$

17,650,000 

 

$

17,650,000 

Less: cumulative payments

 

(6,522,697)

 

 

(5,578,085)

Less: unamortized discounts

 

(2,884,396)

 

 

(4,590,974)

Less: unamortized deferred issuance costs

 

(67,798)

 

 

(107,910)

Credit agreement, excluding embedded derivative liability, net

 

8,175,109 

 

 

7,373,031 

Add: embedded derivative liability at fair value (see Note 3)

 

821,000 

 

 

899,000 

Credit agreement, net

 

8,996,109 

 

 

8,272,031 

Credit agreement, short-term portion

 

(6,662,842)

 

 

(5,385,649)

Credit agreement, long-term portion

$

2,333,267 

 

$

2,886,382 

The short-term portion of the Credit Agreement represents the aggregate of the estimated quarterly revenue-based payments payable during the 12-month periods subsequent to March 31, 2020 and September 30, 2019, respectively.

At March 31, 2020 and September 30, 2019, the Residual Royalty Agreement liability consisted of the following:



 

 

 

 

 



March 31,

 

September 30,



2020

 

2019



 

 

 

 

 

Residual royalty agreement liability, fair value at inception

$

346,000 

 

$

346,000 

Add: accretion of liability using effective interest rate

 

1,333,215 

 

 

773,518 

Residual royalty agreement liability, excluding embedded derivative liability

 

1,679,215 

 

 

1,119,518 

Add: embedded derivative liability at fair value (see Note 3)

 

2,729,000 

 

 

2,726,000 

Residual royalty agreement liability

$

4,408,215 

 

$

3,845,518 

Interest expense related to the Credit Agreement and the Residual Royalty Agreement consisted of amortization of the discounts, accretion of the liability for the Residual Royalty Agreement and amortization of the deferred issuance costs. For the three and six months ended March 31, 2020 and 2019, interest expense related to the Credit Agreement and Residual Royalty Agreement was as follows:



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Amortization of discounts

$

844,592 

 

$

1,107,622 

 

$

1,706,578 

 

$

2,265,828 

Accretion of residual royalty agreement

 

300,519 

 

 

123,946 

 

 

559,697 

 

 

216,297 

Amortization of deferred issuance costs

 

19,851 

 

 

26,704 

 

 

40,112 

 

 

54,570 

Interest expense

$

1,164,962 

 

$

1,258,272 

 

$

2,306,387 

 

$

2,536,695 

Premium Finance Agreement

On November 1, 2019, the Company entered into a Premium Finance Agreement to finance $837,000 of its directors and officers liability insurance premium at an annual percentage rate of 4.18%. The financing is payable in three quarterly installments of principal and interest, which began on December 29, 2017.January 1, 2020. The balance of the insurance premium liability is $559,000 as of March 31, 2020 and is included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheet.

18


Note 7 -9 – Stockholders’ Equity



Preferred Stock



The Company has 5,000,000 shares designated as Class A Preferred Stock with a par value of $.01$0.01 per share. There are 1,040,000 shares of Class A Preferred Stock - Series 1 authorized; 1,500,000 shares of Class A Preferred Stock-Stock – Series 2 authorized; 700,000 shares of Class A Preferred Stock - Series 3 authorized; and 548,000 shares of Class A Preferred Stock-Stock – Series 4 (the Series“Series 4 Preferred Stock)Stock”) authorized. In connection with the completion of the APP Acquisition (see Note 2), a total of 546,756 shares of Series 4 Preferred Stock were issued to the former APP stockholders as of October 31, 2016, and all of the outstanding shares of Series 4 Preferred automatically converted into shares of the Company’s common stock effective July 31, 2017. There were no other shares of Class A Preferred Stock of any series issued and outstanding at DecemberMarch 31, 2017 or2020 and September 30, 2017.2019. The Company has 15,000 shares designated as Class B Preferred Stock with a par value of $0.50 per share. There were no shares of Class B Preferred Stock issued and outstanding at DecemberMarch 31, 2017 or2020 and September 30, 2017.2019.

Common Stock Offering

On October 1, 2018, we completed an underwritten public offering of 7,142,857 shares of our common stock, at a public offering price of $1.40 per share. Net proceeds to the Company from this offering were $9.1 million after deducting underwriting discounts and commissions and costs paid by the Company. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Shelf Registration Statement.



Common Stock Purchase Warrants



In connection with the closing of the APP Acquisition, 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“Financial Advisor Warrant)Warrant”). The Financial Advisor Warrant has a five-year term expiring October 31, 2021, 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 Acquisition on April 6, 2016. The fair value of the Financial Advisor Warrant of $542,930 was estimated at the October 31, 2016 date of grant using the Black-Scholes option pricing model assuming expected volatility of 47.2 percent, a risk-free interest rate of 1.31 percent, an expected life of five years, no dividend yield, and the closing price of the Company's common stock on October 31, 2016 of $0.95.share. 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 related expense is included in business acquisition expenses in the accompanying unaudited condensed consolidated statement of operations for the three months ended Decemberremains outstanding at March 31, 2016.2020.



16


Aspire Capital Purchase Agreement    



On December 29, 2017, the Company entered into a common stock purchase agreement (the Purchase Agreement)“Purchase Agreement”) with Aspire Capital Fund, LLC (“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 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 Company’s common stock in the aggregate. Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the Registration“Registration Rights Agreement)Agreement”), in which the Company agreed to prepare and file under the Securities Act of 1933 and under its current registration statement on Form S-3 (File No. 333-221120),the Shelf Registration Statement, a prospectus supplement for the sale or potential sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the Purchase Agreement.



Under the Purchase Agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a Purchase Notice)“Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 200,000 shares of the Company’s common stock per business day, up to $15.0 million of the Company’s common stock in the aggregate at a per share price (the "Purchase Price"“Purchase Price”) equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date or the average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date.



In addition, on any date on which the Company submits a Purchase Notice to Aspire Capital in an amount equal to 200,000 shares and the closing sale price of our common stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a VWAP“VWAP Purchase Notice)Notice”) directing Aspire Capital to purchase an amount of common stock equal to up to 30% of the aggregate shares of the common stock traded on its principal market on the next trading day (the VWAP“VWAP Purchase Date)Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the VWAP Purchase Date.



19


During the six months ended March 31, 2020, we sold 300,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.2 million. As a result of these sales, we recorded approximately $35,000 of deferred costs to additional paid-in capital.

Since inception of the Purchase Agreement through March 31, 2020, we sold an aggregate of 4,017,010 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.8 million. As of March 31, 2020, the amount remaining under the Purchase Agreement was $7.2 million. Subsequent to March 31, 2020, we sold 400,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.3 million.

In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 304,457 shares of the Company’s common stock. The shares of common stock issued as consideration were valued at $347,081.approximately $347,000. This amount and related expenses of $75,920 have beenapproximately $78,000, which total approximately $425,000, were recorded as deferred costs. The unamortized amount of deferred costs of approximately $203,000 and $238,000 at March 31, 2020 and September 30, 2019, respectively, is included in deferredother assets on the accompanying unaudited condensed consolidated balance sheet at December 31, 2017. As of the date of filing this Quarterly Report with the SEC, no shares of the Company’s common stock have been sold to Aspire Capital under the Purchase Agreement.sheets.



Note 810 – Share-based Compensation



We allocate share-based compensation expense to cost of sales, selling, general and administrative expense, and research and development expense based on the award holder’s employment function. For the three and six months ended DecemberMarch 31, 20172020 and 2016,2019, we recorded share-based compensation expenses as follows:



 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

March 31,

 

March 31,

 

2017

 

2016

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

2,373 

 

$

$

16,425 

 

$

7,778 

 

$

30,970 

 

$

15,730 

Selling, general and administrative

 

 

176,229 

 

 

317,311 

 

480,628 

 

407,426 

 

952,323 

 

734,435 

Research and development

 

 

28,852 

 

 

 

184,627 

 

 

81,005 

 

 

312,885 

 

 

163,300 

 

$

207,454 

 

$

317,311 

Share-based compensation

$

681,680 

 

$

496,209 

 

$

1,296,178 

 

$

913,465 



Equity Plans

In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (the “2018 Plan”). On March 24, 2020, the Company’s stockholders approved an increase in the number of shares that may be issued under the 2018 Plan to 11.0 million. As of March 31, 2020, 5,876,321 shares remain available for issuance under the 2018 Plan. 



In July 2017, the Company’s stockholders approved the Company's 2017 Equity Incentive Plan.Plan (the “2017 Plan”). A total of 4.7 million shares are authorized for issuance under the 2017 Plan. As of March 31, 2020, 70,181 shares remain available for issuance under the 2017 Equity Incentive Plan. As of December 31, 2017, a total of 4,096,356 shares had been granted under the 2017 Equity Incentive Plan and not forfeited or are subject to outstanding commitments to issue shares under the 2017 Equity Incentive Plan, of which 3,716,356 shares were in the form of stock options, 190,000 shares were in the form of stock appreciation rights and 190,000 shares were in the form of restricted stock units. The 2017 Equity Incentive Plan replaced the Company's 2008 Stock Incentive Plan (the “2008 Plan”), and no further awards will be made under the 2008 Plan.

Stock Incentive Plan.Options

Each option grants the holder the right to purchase from us one share of our common stock at a specified price, which is generally the closing price per share of our common stock on the date the option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance date within three years of the date the option is issued. Options may be exercised after they have vested and prior to the specified expiry date provided applicable exercise conditions are met, if any. The expiry date can be for periods of up to ten years from the date the option is issued. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions established at that time. The Company accounts for forfeitures as they occur and does not estimate forfeitures as of the option grant date.

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Stock Options



The following table outlines the weighted average assumptions for options granted during the three and six months ended DecemberMarch 31, 20172020 and 2016:

2019:





 

 

 

 

 

 

Weighted Average Assumptions:

 

 

2017

 

 

2016

Expected Volatility

 

 

60.60% 

 

 

43.76% 

Expected Dividend Yield

 

 

0.00% 

 

 

0.00% 

Risk-free Interest Rate

 

 

2.24% 

 

 

1.62% 

Expected Term (in years)

 

 

5.7 

 

 

6.0 

Fair Value of Options Granted

 

$

0.65 

 

$

0.41 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019

Weighted Average Assumptions:

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

65.66% 

 

 

65.45% 

 

 

63.13% 

 

 

66.88% 

Expected dividend yield

 

0.00% 

 

 

0.00% 

 

 

0.00% 

 

 

0.00% 

Risk-free interest rate

 

0.62% 

 

 

2.27% 

 

 

1.63% 

 

 

2.59% 

Expected term (in years)

 

6.0 

 

 

5.9 

 

 

5.9 

 

 

5.7 

Fair value of options granted

$

1.84 

 

$

0.90 

 

$

1.14 

 

$

0.85 



During the three and six months ended DecemberMarch 31, 20172020 and 2016,2019, 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 recent 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 share-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.

The following table summarizes the stock options outstanding and exercisable at DecemberMarch 31, 2017:2020: 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

Aggregate

 

 

 

 

Remaining

 

Aggregate

Number of

 

Exercise Price

 

Contractual Term

 

Intrinsic

Number of

 

Exercise Price

 

Contractual Term

 

Intrinsic

Shares

 

Per Share

 

(years)

 

Value

Shares

 

Per Share

 

(years)

 

Value

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

2,830,805 

 

$

1.27 

 

 

 

 

 

Outstanding at September 30, 2019

7,027,989 

 

$

1.58 

 

 

 

 

 

Granted

1,183,051 

 

 

1.15 

 

 

 

 

 

2,228,827 

 

$

1.97 

 

 

 

 

 

Exercised

 

 

 

 

 

 

(436,748)

 

$

1.67 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

(176,028)

 

$

1.51 

 

 

 

 

 

Outstanding at December 31, 2017

4,013,856 

 

$

1.24 

 

9.46 

 

$

76,680 

Exercisable at December 31, 2017

288,750 

 

$

1.90 

 

6.50 

 

$

36,100 

Outstanding at March 31, 2020

8,644,040 

 

$

1.68 

 

8.25

 

$

13,781,911 

Exercisable at March 31, 2020

3,342,581 

 

$

1.48 

 

7.36

 

$

5,973,380 



The aggregate intrinsic valuevalues in the table above isare before income taxes based onand represent the number of in-the-money options outstanding or exercisable multiplied by the closing price per share of the Company’s closingcommon stock price of $1.14 on the last trading day of business for the threequarter ended March 31, 2020 of $3.27, less the respective weighted average exercise price per share at period end.  

The total intrinsic value of options exercised during the six months ended DecemberMarch 31, 2017.  2020 and 2019 was approximately $1.1 million and $48,000, respectively. Cash received from options exercised during the six months ended March 31, 2020 and 2019 was approximately $409,000 and $200,000, respectively.During the six months ended March 31, 2020, 223,415 options were exercised using the cashless exercise feature available under the 2017 Plan and 2018 Plan, which resulted in the issuance of 143,958 shares of common stock.

As of DecemberMarch 31, 2017,2020, the Company had unrecognized compensation expense of approximately $2.0$4.1 million related to unvested stock options. This expense is expected to be recognized over approximately 3 years.

Restricted Stock 

The Company has issued restricted stock to employees, directors and consultants. Such issuances may have vesting periods that range from one to three years. 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 date.

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A summary of the non-vested stock activity for the three months ended December 31, 2017 is presented in the table below:



 

 

 

 

 

 



 

 

 

 

 

 



 

 

Weighted Average

 

 



 

 

Grant Date

 

 



Shares

 

Fair Value

 

Vesting Period

Outstanding at September 30, 2017

198,750 

 

$

0.99 

 

 

Granted

 

 

 

 

 

Vested

(190,000)

 

 

 

 

 

Forfeited

 

 

 

 

 

Outstanding at December 31, 2017

8,750 

 

$

1.82 

 

April 2018

As of December 31, 2017, there was approximately $4,000 of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over the next 0.3 years.

Restricted Stock Units

In connection with the closing of the APP Acquisition, 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 common stock issued under the 2017 Equity Incentive Plan. As of December 31, 2017, there was approximately $100,000 of unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over the next 0.8 years. 



Stock Appreciation Rights



In connection with the closing of the APP Acquisition, 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 vestvested on October 31, 2018. The stock appreciation rights have a ten-year term and an exercise price per share of $0.95, which was the closing price of aper 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 Acquisition. TheUpon exercise, the stock appreciation rights will be settled in common stock issued under the 2017 Equity Incentive Plan. As of DecemberMarch 31, 2017, there was approximately $54,000 of unrecognized compensation cost related to non-vested2020, vested stock appreciation rights which is expected to be recognized over the next 0.8 years.based on 50,000 shares of common stock remain outstanding.



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Note 9 - Industry Segments and Financial Information about Foreign and Domestic Operations11 – Leases



The Company currently operates in two reporting segments: Commercialhas operating leases for its office, manufacturing and Researchwarehouse space, and Development. There are no significant inter-segment sales. We evaluateoffice equipment. The Company has a finance lease for office equipment, furniture, and fixtures. The Company’s leases have remaining lease terms of less than one year to six years, which include the performanceoption to extend a lease when the Company is reasonably certain to exercise that option. The Company does not have any leases that have not yet commenced as of each segmentMarch 31, 2020. Certain of our lease agreements include variable lease payments for common area maintenance, real estate taxes, and insurance or based on usage for certain equipment leases. For one of our office space leases, the Company entered into a sublease, for which it receives sublease income. Sublease income is recognized as a reduction to operating profit or loss. Therelease costs as the sublease is no inter-segment allocationoutside of interest expense andthe Company’s normal business operations. This is consistent with the Company’s recognition of sublease income taxes. Our chief operating decision-maker (CODM) is Mitchell Steiner, M.D., our President and Chief Executive Officer. prior to the adoption of FASB ASC Topic 842.



Information aboutThe components of the Company's operations by segment and geographic area isCompany’s lease cost were as follows (in thousands):

for the three and six months ended March 31, 2020:







 

 

 

 

 

   

For the three months ended December 31,



2017

 

2016

Operating (loss) income:

(In thousands)

Commercial

$

143 

 

$

948 

Research and Development

 

(2,032)

 

 

(159)

Corporate

 

(5,548)

 

 

(2,664)



$

(7,437)

 

$

(1,875)



 

 

 

 

 

Revenues:

 

 

 

 

 

United States

$

994 

 

$

358 

South Africa

 

318 

 

 

636 

Zimbabwe

 

300 

 

 

516 

Peru

 

282 

 

 

 —

Cameroon

 

 —

 

 

891 

Other

 

693 

 

 

843 



$

2,587 

 

$

3,244 



 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31, 2020

 

March 31, 2020

Finance lease cost:

 

 

 

 

 

Amortization of right-of-use assets

$

2,179 

 

$

4,357 

Interest on lease liabilities

 

1,379 

 

 

2,859 

Operating lease cost

 

121,106 

 

 

253,680 

Short-term lease cost

 

1,863 

 

 

3,726 

Variable lease cost

 

33,671 

 

 

67,136 

Sublease income

 

(44,845)

 

 

(89,689)

Total lease cost

$

115,353 

 

$

242,069 



AllThe Company paid cash of our revenues$244,000 for amounts included in the measurement of operating lease liabilities during the six months ended March 31, 2020.

The Company’s operating lease ROU assets and the related lease liabilities are attributed to our Commercial reporting segment. Amountspresented as separate line items on the accompanying unaudited condensed consolidated balance sheet as of March 31, 2020. The Company’s finance lease ROU asset was $39,000 as of March 31, 2020 and is included in property and equipment, net on the accompanying unaudited condensed consolidated balance sheet. The current and long-term finance lease liabilities were $20,000 and $17,000, respectively, and are included in accrued expenses and other current liabilities and other liabilities, respectively, on the accompanying unaudited condensed consolidated balance sheet as of March 31, 2020.

Other information related to long-livedthe Company’s leases as of March 31, 2020 was as follows:

March 31, 2020

Operating Leases

Weighted-average remaining lease term

4.3

Weighted-average discount rate

12.01%

Finance Leases

Weighted-average remaining lease term

1.9

Weighted average discount rate

13.86%

The Company’s lease agreements do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value.

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Table of Contents

As of March 31, 2020, maturities of lease liabilities were as follows:



 

 

 

 

 

 

 

 



Operating

 

Finance

 

Sublease



Leases

 

Leases

 

Income

Fiscal year ended September 30,

 

 

 

 

 

 

 

 

2020

$

211,163 

 

$

10,812 

 

$

97,081 

2021

 

428,848 

 

 

22,199 

 

 

198,668 

2022

 

347,841 

 

 

9,496 

 

 

203,584 

2023

 

293,045 

 

 

 —

 

 

190,749 

2024

 

189,335 

 

 

 —

 

 

 —

Thereafter

 

162,672 

 

 

 —

 

 

 —

Total lease payments

 

1,632,904 

 

 

42,507 

 

$

690,082 

Less imputed interest

 

(362,819)

 

 

(5,498)

 

 

 

Total lease liabilities

$

1,270,085 

 

$

37,009 

 

 

 

Under FASB ASC 840, the lease accounting guidance prior to the Company’s adoption of FASB ASC 842, the Company had net capital lease assets depreciationof $43,000 included in property and amortization,equipment, net and income taxes are not reporteda related capital lease obligation of $42,000 included in accrued expenses and other current liabilities and other liabilities on the accompanying unaudited condensed consolidated balance sheet as partof September 30, 2019.

Under FASB ASC 840, future minimum payments under operating leases consisted of the reporting segmentsfollowing as of September 30, 2019:



 

 

 

 

 

 

 

 



Operating

 

Sublease

 

 



Leases

 

Income

 

Net Total

Fiscal year ended September 30,

 

 

 

 

 

 

 

 

2020

$

469,002 

 

$

193,753 

 

$

275,249 

2021

 

433,751 

 

 

198,668 

 

 

235,083 

2022

 

337,456 

 

 

203,584 

 

 

133,872 

2023

 

114,493 

 

 

190,749 

 

 

(76,256)

2024

 

11,238 

 

 

 —

 

 

11,238 

Total minimum lease payments

$

1,365,940 

 

$

786,754 

 

$

579,186 

The minimum lease payments presented above do not include real estate taxes, common area maintenance charges or reviewed byinsurance charges payable under the CODM.Company’s operating leases for office and manufacturing facility space. These amounts are included in Corporate in the reconciliations above.generally not fixed and can fluctuate from year to year.

 

Note 10 -12 – Contingent Liabilities



The testing, manufacturing and marketing of consumer products by the Company and the clinical testing of our product candidates 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$10.0 million.



Litigation



In connection with the APP Acquisition, two purported derivative and class action lawsuits were filed against the CompanyFrom time to time we may be involved in litigation or other contingencies arising in the Circuit Courtordinary course of Cook County, Illinois,business. Based on the information presently available, management believes there are no contingencies, claims or actions, pending or threatened, the ultimate resolution of which were captioned Glotzer v. The Female Health Company, et al., Case No. 2016-CH-13815,will have a material adverse effect on our financial position, liquidity or results of operations.

In accordance with FASB ASC 450, Contingencies, we accrue loss contingencies including costs of settlement, damages and Schartz v. Parrish, et al., Case No. 2016-CH-14488.  On January 9, 2017 these two lawsuits were consolidated.  On March 31, 2017, the plaintiffs filed a consolidated complaint.  The consolidated complaint named as defendants Veru, the members of our board of directors priordefense related to litigation to the closingextent they are probable and reasonably estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the APP Acquisition and the members of our board of directors after the closing of the APP Acquisition.  The consolidated complaint alleges, among other things, that our directors breached their fiduciary duties, or aided and abetted such breaches, by consummating the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements and by causing us to issue the shares of our common stock and Series 4 Preferred Stock to the former stockholders of APP pursuant to the APP Acquisition in order to evade the voting requirements of the Wisconsin Business Corporation Law. The consolidated complaint also alleges that Mitchell S. Steiner, a director and the President and Chief Executive Officer of Veru and a co-founder of APP, and Harry Fisch, a director of Veru and a co-founder of APP, were unjustly enriched in receiving shares of our common stock and Series 4 Preferred Stock in the APP Acquisition.  Based on these allegations, the consolidated complaint seeks equitable relief, including rescission of the APP Acquisition, money damages, disgorgement of the shares of our common stock and Series 4 Preferred Stock issued to Dr. Steiner and Dr. Fisch, and costs and expenses of the litigation, including attorneys' fees.  On May 5, 2017, the defendants filed a motion to dismiss the consolidatedrange.

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complaint.  On August 15, 2017, the court entered an order dismissing without prejudice the claims that the post-acquisition directors aided and abetted the alleged breaches of fiduciary duties by the pre-acquisition directors and that Dr. Steiner and Dr. Fisch were unjustly enriched.  The court did not dismiss the claims that the pre-acquisition directors breached their fiduciary duties and the claims that Veru consummated the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements, and the action is continuing as to those claims.  Veru believes that this action is without merit and is vigorously defending itself.    No amount has been accrued for possible losses relating to this litigation as any such losses are not both probable and reasonably estimable.

License and Purchase Agreements



From time to time, we license or purchase rights to technology or intellectual property from third parties. These licenses and purchase agreements require us to pay upfront payments as well as development or other payments upon successful completion of preclinical, clinical, regulatory or revenue milestones. In addition, these agreements may require us to pay royalties on sales of products arising from the licensed or acquired technology or intellectual property. Because the achievement of thesefuture milestones is not reasonably estimable, we have not recorded a liability inon the accompanying unaudited condensed consolidated financial statements for any of these contingencies.



In connection with the Company's acquisition of intellectual property rights associated with Solifenacin DRG and Tadalafil/Finasteride combination capsules in December 2017, the Company will be obligated to make upfront payments totaling $500,000 by March 2018, as well as future installment payments and milestone payments. The $500,000 is included in accrued expenses on the accompanying condensed consolidated balance sheet as of December 31, 2017.

Note 11 -13 – 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.



On December 22, 2017, significant changes were enacted to the U.S. tax law pursuant to H.R.1. “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Tax Act included a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income, deductions, credits and business-related exclusions.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.  118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) repealed the alternative minimum tax (“SAB 118”AMT”) for corporations. The law provides that AMT carryovers can be utilized to reduce or eliminate the tax liability in subsequent years or to obtain a tax refund. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), directing registrantswhich was enacted on March 27, 2020, accelerates the ability to consider the impactclaim a refund of the Tax Act as “provisional”entire refundable credit to 2018 with an election when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.

In accordance with SAB 118, the Company’s income tax provision as of December 31, 2017 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discreet items resulting directly from the enactment of the Tax Act based on the information available, prepared or analyzed (including computations) in reasonable detail.

(i)

The Tax Act reduces the federal corporate tax rate from 35% to 21%.  The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”).  When a U.S. federal tax rate change occurs during a fiscal year, tax payers are required to compute a weighted daily average rate for the fiscal year of enactment.  However, as the Company is in a net loss carry forward position, it is using the U.S. federal statutory income tax rate of 21% that will be in effect when the net loss is utilized. 

(ii)

The Company determined the impact of the U.S. federal corporate income tax rate change, net of the related state income tax impact on the U.S. deferred tax assets and liabilities, to be a benefit of $1,162,000 as of October 1, 2017.

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Table of Contents

filing. The Tax Act imposespreviously allowed a one-time transition50% refundable credit for tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings.  The one-time transition tax is based on total post-1986 foreign earnings and profits (“E&P”) whichyears beginning in 2018 through 2020, with a tax payer has previously deferred from U.S. income taxes.  The Company has no post-1986 foreign E&P which it has previously deferred. 

Within the calculation of the Company’s annual effective tax rate100% credit refund in 2021. At March 31, 2020, the Company has used assumptions$0.5 million of AMT credit carryovers in prepaid expenses and estimates that may changeother current assets due to the expectation, as a result of future guidance, interpretations, and rule-making from the Internal Revenue Service, the SEC, the FASB and/or various other taxing jurisdictions.  For example, the Company anticipates that state jurisdictions will continue to determine and announce their conformity to the TaxCARES Act, which would have an impact on the annual effective tax rate.

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.  From fiscal year 2006 through fiscal year 2016,AMT credits will be refundable over the Company has annually generated taxable income on a consolidated basis.  In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for each tax jurisdiction.next year.



As of December 31, 2017,September 30, 2019, the Company had U.S. federal and state net operating loss carryforwards of approximately $12,100,000$42.7 million and $15,351,000,$25.4 million, respectively, for income tax purposes with $14.4 million and $20.5 million, respectively, expiring in years 2022 to 2037.2038 and $28.3 million and $4.9 million, respectively, which can be carried forward indefinitely. The Company’s U.K. subsidiary has U.K. net operating loss carryforwards of approximately $62,223,000$61.7 million as of December 31, 2017,September 30, 2019, which can be carried forward indefinitely to be used to offset future U.K. taxable income.



A reconciliation of income tax (benefit) expense and the amount computed by applying the statutory federal income tax rate of 21% to income before income taxes is as follows:





 

 

 

 

 



 

 

 

 

 



Three Months Ended



December 31,



2017

 

2016

Income tax benefit at statutory rates

$

(2,551,000)

 

$

(645,000)

Effect of change in U.S. tax rate

 

(187,000)

 

 

 —

State income tax benefit, net of federal benefits

 

(563,000)

 

 

(96,000)

Non-deductible business acquisition expenses

 

 —

 

 

111,000 

Non-deductible expenses - other

 

4,000 

 

 

1,000 

Effect of lower foreign income tax rates

 

29,405 

 

 

81,736 

Other

 

21,542 

 

 

17,195 

Income tax benefit

$

(3,246,053)

 

$

(530,069)



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Income tax benefit at U.S. federal statutory rates

$

(198,166)

 

$

(841,862)

 

$

(908,354)

 

$

(1,273,685)

State income tax benefit, net of federal benefits

 

(15,347)

 

 

(199,521)

 

 

(70,347)

 

 

(301,863)

Effect of foreign income tax rates

 

23,832 

 

 

4,830 

 

 

66,386 

 

 

(3,527)

Effect of deemed dividend and repatriation tax

 

(34,331)

 

 

32,318 

 

 

16,120 

 

 

63,627 

Change in valuation allowance

 

89,741 

 

 

1,028,063 

 

 

682,451 

 

 

1,651,193 

Other, net

 

1,131 

 

 

1,339 

 

 

3,861 

 

 

(18,080)

Income tax (benefit) expense

$

(133,140)

 

$

25,167 

 

$

(209,883)

 

$

117,665 



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

September 30,

December 31,

 

September 30,

2020

 

2019

Deferred tax assets:

2017

 

2017

 

 

 

 

 

Federal net operating loss carryforwards

$

4,063,000 

 

$

4,075,000 

$

8,966,965 

 

$

8,971,569 

State net operating loss carryforwards

 

1,703,000 

 

 

963,000 

 

1,690,205 

 

 

1,689,536 

AMT credit carryforward

 

533,000 

 

 

533,000 

Foreign net operating loss carryforwards – U.K.

 

10,578,000 

 

 

10,578,000 

 

10,622,504 

 

 

10,486,476 

Foreign capital allowance – U.K.

 

108,000 

 

 

108,000 

 

103,400 

 

 

103,400 

UK bad debts

 

2,000 

 

 

2,000 

Restricted stock – U.K.

 

1,000 

 

 

1,000 

US unearned revenue

 

282,000 

 

 

409,000 

US deferred rent

 

20,000 

 

 

76,000 

Share-based compensation

 

335,000 

 

 

447,000 

 

1,007,166 

 

 

804,378 

Foreign tax credits

 

1,820,000 

 

 

1,797,000 

Other, net - U.S.

 

71,000 

 

 

82,000 

Interest expense

 

524,852 

 

 

 —

Other, net – U.K.

 

50,781 

 

 

50,781 

Other, net – U.S.

 

420,636 

 

 

434,764 

Gross deferred tax assets

 

19,516,000 

 

 

19,071,000 

 

23,386,509 

 

 

22,540,904 

Valuation allowance for deferred tax assets

 

(2,144,000)

 

 

(2,144,000)

 

(10,512,660)

 

 

(9,830,209)

Net deferred tax assets

 

17,372,000 

 

 

16,927,000 

 

12,873,849 

 

 

12,710,695 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

In process research and development

 

(4,562,000)

 

 

(7,000,000)

In-process research and development

 

(4,072,740)

 

 

(4,072,740)

Developed technology

 

(575,000)

 

 

(900,000)

 

(396,947)

 

 

(424,657)

Covenant not-to-compete

 

(106,000)

 

 

(200,000)

 

(57,913)

 

 

(65,993)

Other

 

(5,000)

 

 

 

Other, net – Malaysia

 

(3,865)

 

 

(3,865)

Other, net – U.S.

 

(6,376)

 

 

(6,376)

Net deferred tax liabilities

 

(5,248,000)

 

 

(8,100,000)

 

(4,537,841)

 

 

(4,573,631)

Net deferred tax asset

$

12,124,000 

 

$

8,827,000 

$

8,336,008 

 

$

8,137,064 



The deferred tax amounts have been classified inon the accompanying unaudited condensed consolidated balance sheets as follows:







 

 

 

 

 



 

 

 

 

 



December 31,

 

September 30,



2017

 

2017

Long-term deferred tax asset - U.S.

$

3,579,000 

 

$

282,000 

Long-term deferred tax asset - U.K.

 

8,545,000 

 

 

8,545,000 

Total long-term deferred tax asset

$

12,124,000 

 

$

8,827,000 





 

 

 

 

 



March 31,

 

September 30,



2020

 

2019



 

 

 

 

 

Deferred tax asset – U.K.

$

8,632,613 

 

$

8,433,669 

Total deferred tax asset

$

8,632,613 

 

$

8,433,669 



 

 

 

 

 

Deferred tax liability – U.S.

$

(292,740)

 

$

(292,740)

Deferred tax liability – Malaysia

 

(3,865)

 

 

(3,865)

Total deferred tax liability

$

(296,605)

 

$

(296,605)

 

Note 12 - Intangible Assets

Intangible assets acquired in the APP Acquisition included IPR&D, developed technology consisting of PREBOOST®  medicated wipes for prevention of premature ejaculation and covenants not-to-compete.

The gross carrying amounts and net book value of intangible assets are as follows at December 31, 2017:14 – Net Loss Per Share



Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss 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, stock appreciation rights and warrants, and the vesting of unvested restricted stock and restricted stock units. Due to our net loss for the periods presented, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Notes 9 and 10 for a discussion of our dilutive potential common shares.



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

132,492 

 

$

2,267,508 

Covenants not-to-compete

 

500,000 

 

 

83,333 

 

 

416,667 

Total intangible assets with finite lives

 

2,900,000 

 

 

215,825 

 

 

2,684,175 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

215,825 

 

$

20,684,175 



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The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2017:Note 15 – Industry Segments





 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

81,533 

 

$

2,318,467 

Covenants not-to-compete

 

500,000 

 

 

65,476 

 

 

434,524 

Total intangible assets with finite lives

 

2,900,000 

 

 

147,009 

 

 

2,752,991 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

147,009 

 

$

20,752,991 

Intangible assetsThe Company currently operates in two reporting segments: Commercial and Research and Development.  The Commercial segment consists of FC2 and PREBOOST®. The Research and Development segment consists of multiple drug products under clinical development for oncology and urology. There are carried at cost less accumulated amortization. Amortizationno significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is recorded over the projected related revenue stream for the PREBOOST® developed technology over the next 10 yearsno inter-segment allocation of non-operating expenses and 7 years for the covenants not-to-compete,income taxes. Our chief operating decision-maker (“CODM”) is Mitchell S. Steiner, M.D., our Chairman, President and the amortization expense is recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations. The IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval, the IPR&D assets will then be accounted for as finite-lived intangible assets and amortized on a straight-line basis over their respective estimated useful lives.Chief Executive Officer. 



Amortization expense was $68,816 and $26,729 for the three months ended December 31, 2017 and 2016, respectively. Based on finite-lived intangible assets recorded as of December 31, 2017, the estimated future amortization expenseThe Company's operating income (loss) by segment is as follows:







 

 



 

 



Estimated

Year Ending September 30,

Amortization Expense

2018

$

206,446 

2019

 

309,234 

2020

 

316,368 

2021

 

323,706 

2022

 

331,316 

Thereafter

 

1,197,105 

Total

$

2,684,175 



 

 

 

 

 

 

 

 

 

 

 

   

Three Months Ended

 

Six Months Ended



March 31,

 

March 31,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Commercial

$

6,186,211 

 

$

2,801,740 

 

$

11,989,804 

 

$

6,160,921 

Research and development

 

(3,866,775)

 

 

(2,888,361)

 

 

(9,113,156)

 

 

(5,250,184)

Corporate

 

(2,619,114)

 

 

(2,037,969)

 

 

(4,960,719)

 

 

(4,047,054)

Operating loss

$

(299,678)

 

$

(2,124,590)

 

$

(2,084,071)

 

$

(3,136,317)

All of our net revenues, which are primarily derived from the sale of FC2, are attributed to our Commercial reporting segment. See Note 4 for additional information regarding our net revenues. Costs related to the office located in London, England are fully dedicated to FC2 and are presented as a component of the Commercial segment. Depreciation and amortization related to long-lived assets that are not utilized in the production of FC2 are not reported as part of the reporting segments or reviewed by the CODM. These amounts are included in Corporate in the reconciliations above. Total assets are not presented by reporting segment as they are not reviewed by the CODM when evaluating the reporting segments’ performance. 



Note 13 -16 – Subsequent Events



There are many uncertainties regarding the current COVID-19 pandemic. The Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and distribution channels. While the pandemic did not materially adversely affect the Company’s financial results and business operations in the three months ended March 31, 2020, significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations; however, we will continue to monitor the COVID-19 situation and its impact on our business closely and expect to reevaluate the timing of our anticipated clinical trials as the impact of COVID-19 on our industry becomes more clear.

The CARES Act established the Paycheck Protection Program (“PPP”), which authorizes forgivable loans to small businesses. Pursuant to the CARES Act, the loan will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. Loans made under the PPP have evaluated eventsa maturity of 2 years and transactions that occurred subsequent to December 31, 2017 throughan interest rate of 1%. Prepayments may be made without penalty. In April 2020, the Company received loan funding of approximately $540,000 under the PPP. As of the date of this report, the financial statements were issued, for potential recognition or disclosureCompany has not terminated any employees in the accompanying unaudited condensed consolidated financial statements. We did not identify any events or transactions that should be recognized or disclosed inU.S. due to the accompanying unaudited condensed consolidated financial statements.COVID-19 pandemic. The Company intends to use the proceeds from the PPP to pay salaries for its U.S.-based employees and to pay rent and utilities.

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



Overview



Veru Inc., The Prostate Cancer Company, is an oncology and urology biopharmaceutical company developing novel medicines for the management of prostate cancer.

The Company’s prostate cancer pipeline includes VERU-111, zuclomiphene citrate, and VERU-100.

VERU-111 is an oral, next-generation, first-in-class small molecule that targets alpha and beta tubulin subunits to disrupt microtubules in cells to treat metastatic prostate cancer patients whose disease is resistant to both castration and novel androgen-blocking agents (e.g., abiraterone or enzalutamide). VERU-111 is being evaluated in men with metastatic castration and androgen-blocking agent resistant prostate cancer in two portions of an ongoing open label clinical trial: the Phase 1b portion and the Phase 2 portion. Recently we announced positive results from the fully enrolled but ongoing Phase 1b portion of the Phase 1b/2 VERU-111 trial for prostate cancer. The Phase 1b portion of the Phase 1b/2 clinical study enrolled 39 men with metastatic castration-resistant prostate cancer who have also become resistant to at least one novel androgen blocking agent from 7 clinical sites in the United States. A standard 3x3 design was used to establish the maximum tolerated dose (MTD), to select a recommended clinical dose for Phase 2 study, and to assess preliminary evidence of antitumor activity of VERU-111. Oral dosing escalated from 4.5mg to 81mg (7 days of dosing followed by 14 days of no drug each 21-day cycle and expanded to 21 days of continuous dosing per cycle). As for safety, the MTD of VERU-111 was determined to be 72mg (3 of 11 men had reversible Grade 3 diarrhea). No Grade 3 diarrhea was observed at doses less than 72 mg per day. At doses of VERU-111 of 63 mg and lower per day, mild to moderate nausea, vomiting, diarrhea and fatigue were the most common adverse events. There were no reports of neurotoxicity and no neutropenia at doses 63 mg and lower oral daily dosing continuous for 21 days per cycle. Preliminary antitumor activity was assessed by serum PSA and standard local imaging with bone and CT scans. In the eight men that received at least four 21-day cycles of oral VERU-111 at any dose, based upon their 21-day cycle baseline PSA levels, 6/8 (75%) had decreases in their PSA levels, 4 patients (50%) demonstrated a greater than or equal to 30% decline, and 2 patients (25%) had a greater than or equal to 50% decline in serum PSA. Based upon PCWG3 and Response Evaluation Criteria in Solid Tumors (RECIST) 1.1 criteria, objective tumor responses were seen in 2 patients (25%) (soft tissue and bone) and 5/8 patients (63%) had stable disease. Objective tumor responses and PSA declines lasted longer than 12 weeks. The primary endpoint used in pivotal efficacy studies for the treatment of metastatic castration-resistant prostate cancer is median time to cancer progression by imaging (bone and CT scans). In the current study, median duration of response, or time to cancer progression, has not been reached since 7 out of 8 of the men are still being treated on the study with an average duration of response of 10 months (range is 6-14 months). There are an additional 3 subjects on study that have not yet completed four 21-day cycles; therefore, a total of 10 men are still on study. The Phase 2 portion of the trial is currently enrolling men who have metastatic castration resistant prostate cancer and who have also become resistant to novel androgen blocking agents, such as abiraterone or enzalutamide, but prior to proceeding to IV chemotherapy, also referred to as the prechemotherapy stage. In addition, based on the Phase 1b safety and efficacy clinical data, the Company plans to meet with the FDA next quarter to reach agreement on the registration Phase 3 design for the treatment of men with metastatic castration resistant prostate cancer who also have failed one androgen blocking agent (enzalutamide or abiraterone). We also plan to present an update of the Phase 1b/2 clinical data at a future major scientific meeting. 

Zuclomiphene citrate is an oral nonsteroidal estrogen receptor agonist that has successfully completed a Phase 2 trial (Stage 1 testing placebo, Zuclomiphene 10mg, and Zuclomiphene 50 mg) to treat hot flashes, a common side effect caused by androgen deprivation therapy (ADT) in men with advanced prostate cancer. Following an End of Phase 2 meeting with the FDA, the Company plans to advance zuclomiphene citrate to a Phase 3 clinical trial in men with advanced prostate cancer who experience moderate to severe hot flashes with a potential start date in late calendar year 2020.

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Table of Contents

VERU-100 is a biopharmaceutical company focused on urologynovel, proprietary peptide formulation for ADT with multiple potential beneficial clinical attributes addressing the shortfalls of current FDA-approved ADT formulations for the treatment of advanced prostate cancer. VERU-100 is a long-acting gonadotropin-releasing hormone (GnRH) antagonist designed to be administered as a small volume subcutaneous 3-month depot injection without a loading dose. VERU-100 will immediately suppress testosterone with no testosterone surge upon initial or repeated administration—a problem which occurs with currently approved luteinizing hormone-releasing hormone (LHRH) agonists used for ADT. There are no GnRH antagonists commercially approved beyond a one-month injection. VERU-100 is anticipated to enter a Phase 2 dose-finding study with a potential start date in the third quarter of calendar year 2020.

Recently the Company announced that it has received FDA permission to initiate a Phase 2 clinical trial to assess the efficacy of VERU-111, a microtubule depolymerization agent, in combating COVID-19, the global pandemic disease caused by the novel coronavirus SARS-CoV-2.VERU-111 is an oral, first-in-class microtubule depolymerization agent that targets the colchicine binding site of alpha and oncology.beta tubulin subunits to inhibit microtubules and is currently under clinical development in prostate cancer. Drugs that target microtubules have broad antiviral activity by disrupting the intracellular transport of viruses such as SARS CoV-2, along microtubules. Microtubule trafficking is critical for viruses to cause infection. Furthermore, microtubule depolymerization agents that target alpha and beta tubulin subunits of microtubules also have strong anti-inflammatory effects including the potential to treat the cytokine release syndrome (cytokine storm) induced by the SARS-CoV-2 viral infection that seems to be associated with high COVID-19 mortality rates. The Company does businessmet with the FDA and received agreement on the clinical development program for VERU-111 as both "Veru"a potential dual antiviral and "The Female Health Company."  On July 31, 2017,anti-inflammatory agent to combat COVID-19 under the new FDA program, Coronavirus Treatment Acceleration Program (CTAP). The Phase 2 clinical trial is a double-blind randomized (1:1) placebo-controlled trial evaluating daily oral doses of VERU-111 versus placebo for 21 days in 40 hospitalized patients (VERU-111 20 subjects and placebo 20 subjects) who tested positive for the SARS-CoV-2 virus and are at high risk for Acute Respiratory Distress Syndrome (ARDS). The primary efficacy endpoint will be the proportion of patients that are alive and without respiratory failure at Day 29.  Secondary endpoints include the measured improvements on the WHO Disease Severity Scale (8-point ordinal scale) which captures COVID-19 disease symptoms and signs including hospitalization to progression of pulmonary symptoms to mechanical ventilation as well as death. The Phase 2 COVID-19 study will evaluate an 18mg oral daily dosing single treatment for 21 days. Because of the urgent need for effective and timely therapeutics to combat COVID-19, the Company changed its corporate name fromhas applied for significant grant funding through both The FemaleBiomedical Advanced Research and Development Authority of the US Department of Health Companyand Human Services (BARDA) and The Defense Advanced Research Projects Agency of the US Department of Defense (DARPA) to Veru Inc.expedite the clinical development program of VERU-111 for COVID-19. There can be no assurances that any such grant funding will be provided.



Veru utilizes the U.S. Food and Drug Administration's (the FDA) 505(b)(2) regulatory approval pathway to develop and commercialize drug candidates. The FDA's 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 the 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 developingalso advancing new drug formulations in its specialty pharmaceutical pipeline addressing unmet medical needs in urology such as TADFIN® for the following drug product candidates:  Tamsulosin DRS slow release granulesadministration of tadalafil 5mg and Tamsulosin XR capsules for lowerfinasteride 5mg combination formulation dosed daily to treat urinary tract symptoms caused by BPH. Tadalafil (CIALIS®) is currently approved for treatment of benign prostatic hyperplasia (BPH(BPH) and erectile dysfunction and finasteride is currently approved for treatment of BPH (finasteride 5mg PROSCAR®) and male pattern hair loss (finasteride 1mg PROPECIA®). The co-administration of tadalafil and finasteride has been shown to be more effective for the treatment of BPH than by finasteride alone. The Company had a successful pre-NDA meeting with the FDA and the expected submission of the NDA for TADFIN® is the fourth quarter of calendar year 2020 or enlarged prostate)early 2021. The Company is also developing a Tamsulosin XR formulation which is a formulation of tamsulosin, the active ingredient in FLOMAX®, Solifenacin DRG, slow release granules,which the Company has designed to avoid the “food effect” inherent in currently marketed versions of the drug, allowing for overactive bladder (urge incontinence, urgency, or frequency of urination), Tadalafil/finasteride combination capsule for restricted urination because of an enlarged prostate; VERU-944 (cis-clomiphene citrate) for hot flashes in men associated with prostate cancer hormone treatment, VERU-722 (fixed ratio clomiphene citrate) for male infertilitypotentially safer administration and VERU-111 a novel oral anti-tubulin cancer therapy targeting alpha & beta tubulin for a variety of malignancies, including metastatic prostate, breast, endometrial and ovarian cancers.improved patient compliance.



To help support these clinical development programs,The Company's commercial products include FC2, an FDA-approved product for the Company marketsdual protection against unintended pregnancy and sellssexually transmitted infections, and the PREBOOST® 4% benzocaine medicated individual wipe which is a male genital desensitizing drug product for the preventiontreatment of premature ejaculation and is being co-promoted with Timm Medical Technologies, Inc., and also markets and sells the FC2 Female Condom® (FC2) in the US market by prescription and other sales channels and throughejaculation. The Company’s Female Health Company Division markets and sells FC2 commercially and in the public health sector both in the U.S. and globally. In the U.S., FC2 is available by prescription through the Company’s multiple telemedicine and internet pharmacy partners and retail pharmacies, as well as OTC through the Company’s website at www.fc2.us.com. In the global public health sector.  The Female Healthsector, the Company Division markets 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. PREBOOST

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 (the 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 Company's Tamsulosin DRS medication 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 completedmarketed online in the first half of calendar 2018. The Company plans to develop Tamsulosin XR (extended release) capsules (tamsulosin HCl extended release capsules) as well. The Company does not believeU.S. through an exclusive marketing arrangement under the Roman® Swipes brand name by Roman Health Ventures Inc. Roman is a leading telemedicine company that sells men’s health products via 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 2018.

internet website www.getroman.com.

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Table of Contents

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.

On May 24, 2017, the Company announced that, following a Pre-IND meeting with the 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 the FDA in the first half of calendar 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 a  Pre-IND meeting, the 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 a  Pre-IND meeting held in November 2017, the 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.

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In October 2016, we completed the APP Acquisition. Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling FC2 in 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 allpublic sector. Most of the Company’s net revenues for the three months ended December 31, 2017 and 2016 wereare currently derived from sales of FC2.FC2 in the public and commercial sectors.



Recent Developments

In December 2019, a novel strain of coronavirus was reported to have emerged in Wuhan, China. COVID-19, the disease caused by the coronavirus, has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to the COVID-19 outbreak.

In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, the United Kingdom and Malaysia, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. In addition and in an attempt to slow the rapid growth of the COVID-19 infection rate, many governments around the world, including in the United States at the federal, state and local levels as well as in the United Kingdom and Malaysia, have imposed mandatory sheltering in place and social distancing restrictions that severely limit the ability of its citizens to travel freely and to conduct activities.

The COVID-19 pandemic has substantially impacted the global healthcare system, including the conduct of clinical trials. Many healthcare systems have restructured operations to prioritize caring for those suffering from COVID-19 and to limit or cease other activities. The severe burden on healthcare systems caused by this pandemic has also impaired the ability of many research sites to start new clinical trials or to enroll new patients in clinical trials. The imposed mandatory sheltering in place and social distancing restrictions may delay the recruitment of patients and impede their ability to effectively participate in such trials. Significant fees may also be owed to contract research organizations associated with starting and stopping clinical trials, typically more so than delaying the start of a clinical trial. For these and other reasons, Veru has decided to postpone initiation of the first Phase 3 trial for zuclomiphene citrate until at least the end of calendar year 2020 or until such time as there is additional clarity and certainty surrounding the impact of the COVID-19 pandemic on the healthcare system.

The Phase 1b portion of our ongoing VERU-111 clinical trial is fully enrolled. As for the Phase 2 portion of the VERU-111 clinical trial, discontinuation would disrupt treatment of patients' advanced prostate cancer. Therefore, the VERU-111 Phase 2 study for metastatic castration resistant prostate cancer is currently enrolling as planned. However, there is a risk that changing circumstances relating to the COVID-19 pandemic may not allow our healthcare clinical trial investigators, their healthcare facilities or other necessary parties to continue to participate in these trials through completion.

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In addition to its impact on our clinical trials, COVID-19 has had, and will likely continue to have, a significant impact on our operations. On March 16, 2020, the Malaysian government issued an order closing non-essential businesses in that country due to the COVID-19 pandemic. As a result, the sole facility where the Company manufactures FC2 was unable to manufacture or ship product starting March 16, 2020. Because FC2 is a health product, the Company received an exemption to reopen the facility with limited staff to ship existing inventory on March 27, 2020, to reopen for manufacturing with 50% of the regular number of workers and social distancing requirements on April 20, 2020 and to return to 100% of the regular number of workers but continued social distancing requirements on May 4, 2020. The Company has had a sufficient quantity of FC2 outside of Malaysia to continue to satisfy customer demand, and with the facility reopening the Company does not expect to have issues with supply of FC2. However, if the Company's Malaysian manufacturing facility encounters labor or raw material shortages, transportation delays or other issues, our ability to supply product to our customers could be disrupted. The sole supplier of the nitrile polymer sheath for FC2 has recently been prioritizing production of surgical gloves during the COVID-19 pandemic and may continue to do so, which could disrupt the Company’s supply of a critical raw material. Malaysian ports are currently open for shipment but at limited capacity, and the Company may also encounter issues shipping product into key markets. The COVID-19 pandemic and related economic disruption may also adversely affect customer demand for FC2 and PREBOOST. For example, sales of FC2 could be impacted in the U.S. prescription market if insurance coverage is affected by job losses and in the Global Public Sector if governments delay future tenders or reduce spending on female condoms due to financial strains or changed spending priorities caused by the COVID-19 pandemic. To protect the health and safety of our workforce, we have closed our offices in the United States and the United Kingdom and our personnel have been working remotely. Travel between our facilities in the United States, the United Kingdom and Malaysia has also been restricted.

Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations; however, we will continue to monitor the COVID-19 situation and its impact on our business closely and expect to reevaluate the timing of our anticipated clinical trials as the impact of COVID-19 on our industry becomes more clear.

Sales of FC2 in the public and commercial sectors

FC2 Public Sector.FC2’s primary use is for diseasethe prevention of HIV/AIDS and other sexually transmitted diseases and family planning, and the global public health sector ishas been the Company’s main market.market for FC2. Within the global 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 144the U.S. and 149 other countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other STIssexually transmitted infections and unwanted pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries can be volatile and result in unpredictable delays in program development, tender applications and processing orders.



FC2The Company currently has a relatively small customer base, with a limited number of customers for FC2 in the global public health sector who generally purchase in large quantities. Over the past few years, majorsignificant customers have included large global agencies, such as UNFPA, USAID, the Brazil Ministry of Health either through UNFPA or Semina Indústria e Comércio Ltda (Semina), the Company's distributor in Brazil, and USAID.the Republic of South Africa health authorities that purchase through the Company's various local distributors. Other customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and NGOs.

 

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Purchasing patterns for FC2 in the public sector 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.complete, including administrative actions or appeals. A tender award indicates acceptance of the bidder’s 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 variationsvariances in the global public sector due to the timing and shipment of large orders of FC2.



On August 27, 2018, the Company announced that through six of its distributors in the Republic of South Africa, the Company had received a tender award to supply 75% of a tender covering up to 120 million female condoms over three years. The Company began shipping units under this tender award in the third quarter of fiscal 2019.

The Company classified approximately $1.1 million and $300,000 of trade receivables with its distributor in Brazil as long-term as of March 31, 2020 and September 30, 2019, respectively, because payment was expected in greater than one year.

FC2 Commercial Sector.In April 2017, the Company launched a small scalesmall-scale marketing and sales program to support the promotion of FC2 in the USU.S. 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.U.S. As part of this reorganizationstrategy the Company announced new distribution agreements with three of the country's largest distributors that support the pharmaceutical industry. This newly developed network now allows up to 98%92% 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 thethrough leading telemedicine “HeyDoctor” App,providers, through 340B covered entities, collegecolleges 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 US. We believe thatU.S. In 2018, we dissolved our small-scale marketing and sales program to focus our efforts in partnering with fast-growing, highly reputable telemedicine firms (telemedicine being the initial results from these efforts support the US market opportunityremote diagnosis and that we will continuetreatment of patients by means of telecommunications technology) to see increased utilization of FC2. bring our much-needed FC2 product to patients in a cost-effective and highly convenient manner.  



27FC2 Unit Sales.


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Details of the quarterly unit sales of FC2 for the last five fiscal years are as follows:





 

 

 

 

 

Period

2018

2017

2016

2015

2014

October 1 – December 31

4,399,932 6,389,320 15,380,240 12,154,570 11,832,666 

January 1 - March 31

 

4,549,020 9,163,855 20,760,519 7,298,968 

April 1 - June 30

 

8,466,004 10,749,860 14,413,032 13,693,652 

July 1 - September 30

 

6,854,868 6,690,080 13,687,462 9,697,341 

Total

4,399,932 26,259,212 41,984,035 61,015,583 42,522,627 



 

 

 

 

 

 

 

 

 

 

Period

 

2020

 

2019

 

2018

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

October 1 — December 31

 

10,070,700 

 

7,382,524 

 

4,399,932 

 

6,389,320 

 

15,380,240 

January 1 — March 31

 

6,884,472 

 

9,792,584 

 

4,125,032 

 

4,549,020 

 

9,163,855 

April 1 — June 30

 

 —

 

10,876,704 

 

10,021,188 

 

8,466,004 

 

10,749,860 

July 1 — September 30

 

 —

 

9,842,020 

 

6,755,124 

 

6,854,868 

 

6,690,080 

Total

 

16,955,172 

 

37,893,832 

 

25,301,276 

 

26,259,212 

 

41,984,035 



Revenues.  The Company's revenues are primarily derived from sales of FC2 in the global public sector and the U.S. prescription channel. Other revenues are from sales of PREBOOST® (Roman® Swipes). These sales are recognized upon shipment or delivery of the product to its customers. Other sales are fromthe customers depending on contract terms.

The Company’s most significant customers have been global public health sector agencies who purchase and/or distribute FC2 for use in preventing the transmission of HIV/AIDS and/or family planning and, in the U.S., telemedicine providers who sell into the prescription channel in the US and saleschannel.

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Table of PREBOOST; however, these sales were not material to our results for the three months ended December 31, 2017.Contents



The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with global public health sector groups and completing partnershipstrategic arrangements with companies with the necessary marketing and financial resources and local market expertise.

The Company’s 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.  The Company's four largest customers currently are UNFPA, USAID, Barrs Medical (PTY) Ltd and Semina.  We sell to the Brazil Ministry of Health either through UNFPA or Semina.



In 2017, the Company began expanding access to FC2 in the U.S. by making it available by prescription. With a prescription, FC2 is covered by most insurance companies with $0 copay.no copay under the Patient Protection and Affordable Care Act (the “ACA”) and the laws of 20+ states prior to enactment of the ACA. The Company also hiredsupplies FC2 to a small sales forceleading telemedicine provider, which has become one of our largest customers. The Company has developed and is working to help educate doctors, pharmacists, clinicsdevelop additional supply and student health centers on the benefits of FC2distributor relationships with telemedicine and how to prescribe it.  In the U.S., FC2 is sold to major distributors and sold direct to city and state public health departments and non-profit organizations.other providers.



Because theThe Company manufactures FC2 in a leased facility located in Selangor D.E., Malaysia, resulting in a portion of the Company's operating costs arebeing denominated in foreign currencies. While a material portion of the Company's future sales are likely to be in foreign markets, all sales are denominated in the U.S. dollar. Effective October 1, 2009, the Company’s U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currency, further reducing the Company’s foreign currency risk.



Operating Expenses.  The Company manufactures FC2 at its facility located in Selangor D.E., Malaysia.Malaysian facility. The Company's 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.



Conducting research and development is central to our business model. Since the completion of the APP Acquisition we have invested and expect to continue to invest significant time and capital in our research and development operations. In fiscal 2018, weOur research and development expenses were $3.9 million and $2.9 million for the three months ended March 31, 2020 and 2019, respectively. Our research and development expenses were $9.2 million and $5.3 million for the six months ended March 31, 2020 and 2019, respectively. We expect to increase ourcontinue this trend of increased expenses relating to research and development due to advancement of multiple drug candidates.

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Results of Operations



THREE MONTHS ENDED DECEMBERMARCH 31, 20172020 COMPARED TO THREE MONTHS ENDEDDECEMBER MARCH 31,, 2016 2019



The Company generated net revenues of $2,586,613$9.9 million and net loss of $4,257,152,$0.8 million, or $(0.08)$(0.01) per basic and diluted common share, for the three months ended DecemberMarch 31, 2017,2020, compared to net revenues of $3,243,599$7.0 million and net loss of $1,366,181,$4.0 million, or $(0.04)$(0.07) per basic and diluted common share, for the three months ended DecemberMarch 31, 2016.   2019. Net revenues increased 43% year over year.



NetFC2 net revenues decreased $656,986, or 20 percent, on a 31 percent decrease in unit salesrepresented 96% of total net revenues for the three months ended DecemberMarch 31, 2017, compared with the same period last2020. FC2 net revenues increased 39% year over year. The principal factorThere was a 30% decrease in the decrease is the period to period impact of the timing of shipments for key customers.  Thetotal FC2 unit sales and an increase in FC2 average sales price per unit increased 16 percent compared withof 98%. The principal factor for the same period last year due to changes in sales mix and unit price increases for customersincrease in the FC2 average sales price per unit compared to prior year was the increase in net revenues in the U.S. prescription channel. The Company experienced an increase of 168% in FC2 net revenues in the U.S. prescription channel and a decrease of 40% in FC2 net revenues in the global public sector.



Cost of sales decreased $318,741increased to $1,272,574$2.5 million in the three months ended DecemberMarch 31, 20172020 from $1,591,315 for$2.4 million in the same period last year.  The reduction isthree months ended March 31, 2019 primarily due to the lower unit sales.an increase in labor, transportation, and equipment maintenance costs.



Gross profit decreased $338,245, or 20 percent,increased to $1,314,039 for$7.4 million in the three months ended DecemberMarch 31, 20172020 from $1,652,284 for$4.6 million in the three months ended DecemberMarch 31, 2016.2019. Gross profit margin for the three months ended December 31, 2017 and2020 period was 75% of net revenues, compared to 66% of net revenues for the same period2019 period. The increase in 2016 was 51 percent of net revenues.the gross profit margin is primarily due to the increase in sales in the U.S. prescription channel, which is at a higher average sales price.



Significant quarter-to-quarter variationsvariances in the Company’s results have historically resulted from the timing and shipment of large orders rather than from any fundamental changes in the business or the underlying demand for female condoms.FC2. The Company is also currently seeing pressure on spendingpricing for FC2 by large global agencies and donor governments in the developed world. As a result, the Company may continue to experience challenges for unitrevenue from sales of FC2 in the global public sector forsector. The Company is experiencing a significant increase in revenue from sales in the remainderU.S. prescription channel, which is helping grow net revenues quarter to quarter and year to year. The Company anticipates that its largest U.S. telemedicine customer may reduce its orders in the third quarter of fiscal 2018.2020, which could adversely affect net revenues and gross profit margin.



Research and development expenses increased $1,867,686 to $2,038,786 for$3.9 million in the three months ended DecemberMarch 31, 20172020 from $171,100$2.9 million in the prior year period.same period in fiscal 2019. The increase is primarily due to increased research and development costs associated with the in-process research and development projects acquired pursuant to the APP Acquisition and increased personnel costs associated with the research and development.costs.



Selling, general and administrative expenses increased $418,193, or 17 percent, to $2,947,697 forremained consistent at $3.8 million in the three months ended DecemberMarch 31, 2017 from $2,529,504 in the prior year period.  The increase primarily relates2020 compared to salaries for our U.S. Commercial team, part of our Commercial reporting segment.

The Company incurred a loss on net accounts receivable of approximately $3.76 million for the three months ended DecemberMarch 31, 2017, as a result of a settlement agreement we entered with Semina, our distributor in Brazil.  This amount is presented as a separate line item in the accompanying unaudited condensed consolidated statement of operations.2019.  



Business acquisition expenses forInterest expense, which consists of items related to the Credit Agreement and Residual Royalty Agreement, was $1.2 million in the three months ended DecemberMarch 31, 2017 decreased to zero from $826,3702020, which is comparable with $1.3 million in the prior year period for expenses representing costs related to the APP Acquisition.

Interest and other expense, net, for the three months ended DecemberMarch 31, 20172019.

Income associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $13,169,$0.5 million in the three months ended March 31, 2020 compared to $9,621 for the same period in fiscal year 2017.  The Company recorded a foreign currency transaction lossexpense of $53,455$0.6 million in the most recent quarter, comparedthree months ended March 31, 2019.  The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to $11,939the financial statements included in this report for the same period last year. additional information.



The income tax benefit forin the three months ended December 31, 2017second quarter of fiscal 2020 was $3,246,053,$133,000, compared to income tax benefitexpense of $530,069 for$25,000 in the same period insecond quarter of fiscal year 2017.2019. The increase in the income tax benefit of $158,000 is primarily due to a decrease in the change in the U.S. federal corporatevaluation allowance of $0.9 million, partially offset by a decrease in the income tax rate from 35%benefit of $0.8 million related to 21% under the Tax Act and the increasedecrease in the loss before income taxes.taxes during the current period.

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SIX MONTHS ENDED MARCH 31, 2020 COMPARED TO SIX MONTHS ENDED MARCH 31, 2019

The Company generated net revenues of $20.5 million and net loss of $4.1 million, or $(0.06) per basic and diluted common share, for the six months ended March 31, 2020, compared to net revenues of $13.3 million and net loss of $6.2 million, or $(0.10) per basic and diluted common share, for the six months ended March 31, 2019. Net revenues increased 54% year over year.

FC2 net revenues represented 97% of total net revenues for the six months ended March 31, 2020. FC2 net revenues increased 51% year over year. There was a 1% decrease in total FC2 unit sales and an increase in FC2 average sales price per unit of 53%. The principal factor for the increase in the FC2 average sales price per unit compared to prior year was the increase in net revenues in the U.S. prescription channel. The Company experienced an increase in FC2 net revenues of 158% in the U.S. prescription channel and a decrease of 15% in FC2 net revenues in the global public sector.

Cost of sales increased to $5.8 million in the six months ended March 31, 2020 from $4.1 million in the six months ended March 31, 2019 primarily due to an increase in labor, transportation, and equipment maintenance costs.

Gross profit increased to $14.7 million in the six months ended March 31, 2020 from $9.3 million in the six months ended March 31, 2019. Gross profit margin for the fiscal 2020 period was 72% of net revenues, compared to 69% of net revenues for the fiscal 2019 period. The increase in the gross profit margin is primarily due to the increase in sales in the U.S. prescription channel, which is at a higher average sales price.

Significant quarter-to-quarter variances in the Company’s results have historically resulted from the timing and shipment of large orders rather than from any fundamental changes in the business or the underlying demand for FC2. The Company is also currently seeing pressure on pricing for FC2 by large global agencies and donor governments in the developed world. As a result, the Company may continue to experience challenges for revenue from sales of FC2 in the global public sector. The Company is experiencing a significant increase in revenue from sales in the U.S. prescription channel, which is helping grow net revenues quarter to quarter and year to year. The Company anticipates that its largest U.S. telemedicine customer may reduce its orders in the third quarter of fiscal 2020, which could adversely affect net revenues and gross profit margin.

Research and development expenses increased to $9.2 million in the six months ended March 31, 2020 from $5.3 million in the same period in fiscal 2019. The increase is primarily due to increased costs associated with the in-process research and development projects and increased personnel costs.

Selling, general and administrative expenses increased to $7.6 million in the six months ended March 31, 2020 from $7.1 million in the six months ended March 31, 2019. The increase is primarily due to increased personnel, personnel costs, and related benefits. 

Interest expense, which consists of items related to the Credit Agreement and Residual Royalty Agreement, was $2.3 million in the six months ended March 31, 2020, which is comparable with $2.5 million in the six months ended March 31, 2019.

Income associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $75,000 in the six months ended March 31, 2020 compared to expense of $0.4 million in the six months ended March 31, 2019.  The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the financial statements included in this report for additional information.

The income tax benefit in the first six months of fiscal 2020 was $0.2 million, compared to income tax expense of $0.1 million in the first six months of fiscal 2019. The increase in the income tax benefit of $0.3 million is primarily due to a decrease in the change in the valuation allowance of $1.0 million, partially offset by a decrease in the income tax benefit of $0.6 million related to the decrease in the loss before income taxes during the current period and a decrease of $70,000 for the effect of lower foreign income tax rates.



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Liquidity and Sources of Capital



Liquidity

Our operating activities generated cash of $296,662 in the first quarter of fiscal 2018.  Accounts receivable and long-term other receivables decreased from $11.4on hand at March 31, 2020 was $2.6 million, compared to $6.3 million at September 30, 2017 to $3.0 million at December2019. At March 31, 2017.  

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 the 2014 Brazil Tender.  The settlement was 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 the uncertainty regarding the timing of payment by the Brazilian Government and, ultimately to us, on the remaining amounts due. The result of the settlement was a net loss of approximately $3.76 million, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2017.

At December 31, 2017,2020, the Company had working capital of $4.0$0.6 million and stockholders’ equity of $44.8$31.1 million compared to working capital of $4.8$2.8 million and stockholders’ equity of $48.5$32.3 million as of DecemberSeptember 30, 2019. The decrease in working capital is primarily due to an increase in the current portion of the Credit Agreement liability and the recognition of a current liability for operating leases as a result of the Company’s adoption of the new lease accounting standard, as described in Note 1 to the financial statements included in this report.

We have incurred quarterly operating losses since the fourth quarter of fiscal 2016 and anticipate that we will continue to consume cash and incur substantial net losses as we develop our drug candidates. Because of the numerous risks and uncertainties associated with the development of pharmaceutical products, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to fund development of our drug candidates and obtain regulatory approvals. Our future capital requirements will depend on many factors. See Part II, Item 1A of this Form 10-Q and Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Need for Capital" in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, for a description of certain risks that will affect our future capital requirements.

The Company believes its current cash position, cash expected to be generated from sales of the Company’s commercial products, and its ability to secure equity financing or other financing alternatives are adequate to fund planned operations of the Company for the next 12 months. Such financing alternatives may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company's effective shelf registration statement on Form S-3 (File No. 333-221120) (the “Shelf Registration Statement”). The Company intends to be opportunistic when pursuing equity or debt financing which could include selling common stock under the Purchase Agreement with Aspire Capital. See Part II, Item 1A of this Form 10-Q and Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Need for Capital" in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, for a description of certain risks related to our ability to raise capital on acceptable terms.

Operating activities

Our operating activities used cash of $4.9 million in the six months ended March 31, 2016.2020. Cash used in operating activities included a net loss of $4.1 million, adjustments for noncash items totaling $4.0 million and changes in operating assets and liabilities of $4.8 million. Adjustments for noncash items primarily consisted of $2.3 million of noncash interest expense, $1.3 million of share-based compensation, and $0.2 million for the write-down of obsolete inventory. The decrease in cash from changes in operating assets and liabilities included an increase in accounts receivable of $1.8 million, an increase in inventories of $2.6 million, an increase in prepaid expenses and other current assets of $1.0 million, and a decrease in accrued expenses and other current liabilities of $0.3 million. These were offset by an increase in accounts payable of $1.1 million. 

Our operating activities used cash of $4.0 million in the six months ended March 31, 2019. Cash used in operating activities included a net loss of $6.2 million, adjustments for noncash items totaling $4.3 million and changes in operating assets and liabilities of $2.1 million. Adjustments for noncash items primarily consisted of $2.5 million of noncash interest expense related to the Credit Agreement and Residual Royalty Agreement, $0.9 million of share-based compensation, and $0.4 million of expense due to the increase in fair value of the derivative liabilities. The decrease in cash from changes in operating assets and liabilities included decreases in accounts payable and accrued expenses of $1.0 million and an increase in inventories of $0.7 million.

Investing activities

Net cash used in investing activities in the six months ended March 31, 2020 was $55,000 and was primarily associated with capital expenditures at our U.K. and Malaysia locations.

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Financing activities

Net cash provided by financing activities in the six months ended March 31, 2020 was $1.2 million and consisted of $1.2 million from the sale of shares under the Purchase Agreement with Aspire Capital (see discussion below), proceeds from the Premium Finance Agreement of $0.8 million, which were used to finance the Company’s directors and officers liability insurance premium, and proceeds from stock option exercises of $0.4 million, less payments on the Credit Agreement (see discussion below) of $0.9 million and payments on the Premium Finance Agreement of $0.3 million.

Net cash provided by financing activities in the six months ended March 31, 2019 was $6.1 million and consisted of net proceeds from the underwritten public offering of the Company’s common stock of $9.1 million (see discussion below) and proceeds from stock option exercises of $0.2 million, less payments on the Credit Agreement totaling $3.2 million. 

Sources of Capital

Common Stock Offering

On October 1, 2018, we completed an underwritten public offering of 7,142,857 shares of our common stock, at a public offering price of $1.40 per share. Net proceeds to the Company from this offering were $9.1 million after deducting underwriting discounts and commissions and costs paid by the Company. All the shares sold in the offering were by the Company. The offering was made pursuant to the Shelf Registration Statement.

SWK Credit Agreement

On March 5, 2018, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with the financial institutions party thereto from time to time (the “Lenders”) and SWK Funding LLC, as agent for the Lenders (the “Agent”), for a synthetic royalty financing transaction. On and subject to the terms of the Credit Agreement, the Lenders provided the Company with a term loan of $10.0 million, which was advanced to the Company on the date of the Credit Agreement. Under the Credit Agreement, the Company is required to make quarterly payments on the term loan based on the Company’s product revenue from net sales of FC2 until the earlier of receipt by the Lenders of a return premium specified in the Credit Agreement or a required payment upon termination of the Credit Agreement on March 5, 2025 or an earlier change of control of the Company or sale of the FC2 business. The recourse of the Lenders and the Agent for obligations under the Credit Agreement is limited to assets relating to FC2. On May 13, 2019, the Company entered into an amendment to the Credit Agreement (the “Second Amendment”) which included a reduction to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar 2019, a return to the original percentages to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2020 and an increase to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2021 and thereafter until the loan has been repaid.



In connection with the Company's 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.

The Company's Credit Agreement, with BMO Harris Bank N.A. expiredVeru and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing after the Lenders would have received their return premium based on December 29, 2017.  No amounts were outstandingthe return premium and calculation of revenue-based payments under the Credit Agreement without taking into account the amendments effected by the Second Amendment. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties.

The Company made total payments under the Credit Agreement of $0.9 million and $3.2 million during the threesix months ended DecemberMarch 31, 2017 or 2016.2020 and 2019, respectively. As a result of the Second Amendment, the Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12-month period subsequent to March 31, 2020 will be approximately $6.7 million.

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Aspire Capital Purchase Agreement



On December 29, 2017, the Company entered into the Purchase Agreement with 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 purchase up to $15.0 million of the Company's common stock in the aggregate. Other than the 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 Company's sole discretion subject to the conditions and terms set forth in the Purchase Agreement. As of

During the date of filing this Quarterly Report with the SEC, nosix months ended March 31, 2020, we sold 300,000 shares of the Company’s common stock have been sold to Aspire Capital under the Purchase Agreement.

TheAgreement resulting in proceeds to the Company believes its current cash position and its ability to secure equity financing or other financing alternatives are adequate to fund operationsof $1.2 million. Since inception of the Company for the next 12 months. Such financing alternatives may include debt financing, convertible debt or other equity-linked securities and may include financings under the Company's current registration statement on Form S-3 (File No. 333-221120).  The Company's intention is to be opportunistic when pursuing equity financing which could include sellingPurchase Agreement through March 31, 2020, we sold 4,017,010 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.8 million. Subsequent to March 31, 2020, we sold 400,000 shares of common stock to Aspire Capital under the Purchase Agreement with Aspire Capital and/orresulting in proceeds to the Company of $1.3 million. As of May 11, 2020, the amount remaining under the Purchase Agreement was $5.9 million.

U.S. Small Business Administration’s Paycheck Protection Program

In April 2020, the Company was approved for a marketed deal with an investment bank.  See Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Need for Capital"loan under the U.S. Small Business Administration’s (the “SBA”) Paycheck Protection Program established by the CARES Act in the Company's Form 10-Kamount of $0.5 million (the “PPP Loan”). The PPP Loan proceeds were received on April 20, 2020. The PPP Loan has a maturity of two years and an interest rate of 1%. Payments on the PPP Loan are deferred for six months. Pursuant to the year endedCARES Act, the PPP Loan will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. As of the date of this report, the Company has not terminated any employees in the U.S. due to the COVID-19 pandemic. The Company intends to use the proceeds of the PPP Loan to pay salaries for its U.S.-based employees and to pay rent and utilities. The amount of the PPP Loan that might be forgiven is not known at this time.

Fair Value Measurements

As of March 31, 2020 and September 30, 2017,2019, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 8 to the financial statements included in this report for additional information.

The fair values of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company determined the fair value of the embedded derivatives at inception and on subsequent valuation dates using a descriptionMonte Carlo simulation model. This valuation model incorporates transaction details such as the contractual terms, expected cash outflows, expected repayment dates, probability of certain risks relateda change of control, expected volatility, and risk-free interest rates. The assumptions used in calculating the fair value of financial instruments represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company’s financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. See Note 3 to our ability to raise capital on acceptable terms.the financial statements included in this report for additional information.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk



The Company's exposure to market risk is limited to fluctuations in raw material commodity prices, particularly the nitrile polymer used to manufacture FC2, and foreign currency exchange rate risk associated with the Company's foreign operations.  The Company does not utilize financial instruments for trading purposes or to hedge risk and holds no derivative financial instruments which would expose it to significant market risk.  Effective October 1, 2009, the Company's U.K. subsidiary and Malaysia subsidiary each adopted the U.S. dollar as its functional currency.  The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results.  The Company’s distributors are subject to exchange rate risk as their orders are denominated in U.S. dollars and they generally sell to their customerswas discussed in the local country currency.  If currency fluctuations“Quantitative and Qualitative Disclosures About Market Risk” section contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019. There have abeen no material impact on a distributor it may ask the Company for pricing concessions or other financial accommodations.  The Company currently has no significant exposurechanges to interest rate risk.  The Company had a line of credit with BMO Harris Bank, consisting of a revolving note for up to $10 million.  The line of credit expired on December 29, 2017.such exposures since September 30, 2019.



Item 44.  Controls and Procedures



Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company'sCompany’s management, including the Company's PrincipalCompany’s Chief Executive Officer and the Company's PrincipalCompany’s Chief Financial Officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company's PrincipalCompany’s Chief Executive Officer and PrincipalChief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures were effective. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, the Company's PrincipalChief Executive Officer and PrincipalChief Financial Officer concluded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Changes in Internal Control over Financial Reporting



There waswere no changechanges in the Company'sCompany’s internal control over financial reporting (as(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company's most recently completed fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II.       OTHER INFORMATION



Item 1.  Legal Proceedings



In connection withNeither the Company nor any of its subsidiaries is a party to any material pending legal proceedings at the APP Acquisition, two purported derivative and class action lawsuits were filed against the Company in the Circuit Courtdate of Cook County, Illinois, which were captioned Glotzer v. The Female Health Company, et al., Case No. 2016-CH-13815, and Schartz v. Parrish, et al., Case No. 2016-CH-14488.  On January 9, 2017 these two lawsuits were consolidated.  On March 31, 2017, the plaintiffs filed a consolidated complaint.  The consolidated complaint named as defendants Veru, the membersfiling of our boardthis Quarterly Report on Form 10-Q.

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Table of directors prior to the closing of the APP Acquisition and the members of our board of directors after the closing of the APP Acquisition.  The consolidated complaint alleges, among other things, that our directors breached their fiduciary duties, or aided and abetted such breaches, by consummating the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements and by causing us to issue the shares of our common stock and Series 4 Preferred Stock to the former stockholders of APP pursuant to the APP Acquisition in order to evade the voting requirements of the Wisconsin Business Corporation Law. The consolidated complaint also alleges that Mitchell S. Steiner, a director and the President and Chief Executive Officer of Veru and a co-founder of APP, and Harry Fisch, a director of Veru and a co-founder of APP, were unjustly enriched in receiving shares of our common stock and Series 4 Preferred Stock in the APP Acquisition.  Based on these allegations, the consolidated complaint seeks equitable relief, including rescission of the APP Acquisition, money damages, disgorgement of the shares of our common stock and Series 4 Preferred Stock issued to Dr. Steiner and Dr. Fisch, and costs and expenses of the litigation, including attorneys' fees.  On May 5, 2017, the defendants filed a motion to dismiss the consolidated complaint.  On August 15, 2017, the court entered an order dismissing without prejudice the claims that the post-acquisition directors aided and abetted the alleged breaches of fiduciary duties by the pre-acquisition directors and that Dr. Steiner and Dr. Fisch were unjustly enriched.  The court did not dismiss the claims that the pre-acquisition directors breached their fiduciary duties and the claims that Veru consummated the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements, and the action is continuing as to those claims.  Veru believes that this action is without merit and is vigorously defending itself.Contents

Item 1A.  Risk Factors



In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties relating to the Company's business disclosed in Part I, Item 1A, "Risk Factors," ofin the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2019. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," ofin the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2019, except for the following additional risk factor:factors. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations, and there is significant uncertainty regarding the COVID-19 pandemic and its impact on the economic environment and our business which could affect the risk factors set forth below and in the Form 10-K.



The recently passed Tax CutsDue to the COVID-19 pandemic, we may find it difficult to effectively recruit new clinical trial patients in a timely manner and Jobs Act may have a significant impact onto partner with clinical trial investigators and sites, which could delay or prevent us from proceeding with, or otherwise adversely affect, clinical trials of our financial condition and results of operations.drug candidates.



On December 22, 2017, significant changes were enactedIdentifying and qualifying patients to participate in, and partnering with investigators and sites to run, clinical trials of our drug candidates is critical to the U.S. tax law pursuanttimely completion of our clinical trials. Patients may be unwilling to H.R.1. “An Act to Provide for Reconciliation Pursuant to Titles II and Vparticipate in our clinical trials because of the Concurrent Resolutionongoing COVID-19 pandemic. The severe burden on healthcare systems caused by the BudgetCOVID-19 pandemic has also impaired the ability of many research sites to start new clinical trials or to enroll new patients in clinical trials. The imposed mandatory sheltering in place and social distancing restrictions may delay the recruitment of patients and impede their ability to effectively participate in such trials. Significant fees may also be owed to contract research organizations associated with starting and stopping clinical trials, typically more so than delaying the start of a clinical trial. For these and other reasons, the Company has made the decision to postpone initiation of the first Phase 3 trial for Fiscal Year 2018” (the “Tax Act”) (previously knownzuclomiphene citrate until at least the end of calendar year 2020 or until such time as “The Tax Cutsthere is additional clarity and Jobs Act”).  The Tax Act makes broad and complex changes to the U.S. tax code that could materially affect us. The Tax Act includes a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries, generally eliminates the corporate alternative minimum tax, adds an anti-base erosion tax and makes other changes to deductions, credits and business-related exclusions. 

While we have reflectedcertainty surrounding the impact of the Tax ActCOVID-19 pandemic on the accountinghealthcare system. We plan to continue the Phase 1b portion of our ongoing VERU-111 clinical trial, which is fully enrolled, and to continue enrolling for the Phase 2 portion of the VERU-111 clinical trial as discontinuation would disrupt treatment of certain discrete items, we are still evaluatingpatients' advanced prostate cancer. Patients enrolling in our VERU-111 clinical trial have not been able to access hospitals for imaging scans due to COVID-19. If they continue to lack such access, our VERU-111 clinical trial could be delayed.

There is a risk that changing circumstances relating to the full potential impactCOVID-19 pandemic may not allow our healthcare clinical trial investigators, their healthcare facilities or other necessary parties to continue to participate in our clinical trials through completion or may delay the initiation of the Tax Act on our tax provision and deferred tax assets. It is possible that the changes contained in the Tax Actplanned clinical trials. Any delays related to clinical trials could result in increased costs, delays in advancing our drug candidates, delays in testing the effectiveness of our drug candidates or termination of the clinical trials altogether.

Disruptions at the FDA caused by the COVID-19 pandemic could delay or prevent new drugs from being developed, approved or commercialized in a write down of deferred tax assetstimely manner or at all, or otherwise prevent the FDA from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

Disruptions at the FDA caused by the COVID-19 pandemic may slow the time necessary for new drugs to be reviewed and/or approved, which would adversely affect our business. In response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products through April 2020. On March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. The FDA has also prioritized the review of submissions relating to COVID-19. The FDA may adopt other restrictions or policy measures in response to the COVID-19 pandemic or issue guidance materially affecting the conduct of clinical trials. If global health concerns continue to prevent the FDA from conducting its regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have ana material adverse impacteffect on our effective tax rate, tax payments, financial condition or results of operations. The Tax Act is complex and additional interpretative guidance may be issued that could affect interpretations and assumptions we have made, as well as actions we may take as a result of the Tax Act.business.

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The COVID-19 pandemic has disrupted, and may continue to disrupt, our operations and the operations of our suppliers and customers.

In December 2019, a novel strain of coronavirus was reported to have emerged in Wuhan, China. COVID-19, the disease caused by the coronavirus, has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to the COVID-19 outbreak. Theoutbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen.

If COVID-19 continues to spread and to affect economic activity in the United States and other markets in which we conduct business, we may experience disruptions that could severely impact our business, including:

·

if our Malaysian manufacturing facility is closed again our ability to supply product to our customers could be disrupted;

·

we may encounter labor or raw material shortages, transportation delays or other issues at our Malaysian manufacturing facility;

·

our personnel may not be able to travel between our facilities in the United States, the United Kingdom and Malaysia, which may impact our ability to effectively oversee our international operations;

·

customer demand for FC2 and PREBOOST may be adversely affected, including with respect to FC2 in the U.S. prescription market if insurance coverage is affected by job losses and in the Global Public Sector if governments delay future tenders or reduce spending on female condoms due to financial strains or changed spending priorities caused by the COVID-19 pandemic;

·

our customers, including in the global public health sector, may reduce orders or delay paying their accounts receivable balances due to liquidity issues, spending priorities or other issues related to the COVID-19 pandemic;

·

there may be limitations in employee resources, potentially including key executives, because of sickness of employees or their families or the desire of employees to avoid contact;

·

we may face delays in receiving approval from the FDA or other applicable regulatory authorities in connection with our clinical trials;

·

there may be delays or difficulties in enrolling patients in our clinical trials or in recruiting clinical site investigators and staff;

·

there may be delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in shipping;

·

there may be changes in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical trials are conducted, to incur unexpected costs, or to discontinue the clinical trials altogether;

·

healthcare resources may be diverted away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

·

key clinical trial activities may be interrupted, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others, or the clinical research organizations or clinical trial sites’ own risks related to the COVID-19 outbreak, which could affect the integrity of clinical data or the conduct of the trial;

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·

participants enrolled in our clinical trials could acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

·

necessary interactions with local regulators, ethics committees and other important agencies and contractors may be delayed due to limitations in employee resources or forced furlough of government employees; and

·

the FDA may refuse to accept data from clinical trials in affected geographies.

Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, and it is possible that its effect on our business and operations will significantly worsen in the future.

COVID-19 and its impact on the economic environment and capital markets could adversely affect our access to capital when needed.

We expect to incur significant expenditures over the next several years to support our preclinical and clinical development activities, particularly with respect to clinical trials for certain of our drug candidates and to commence the commercialization of our drug candidates. Market volatility resulting from the COVID-19 pandemic or other factors could adversely affect our ability to access capital as and when needed and could also adversely affect the terms of a financing. If sales of FC2 decline due to the current economic environment, supply constraints or other issues, we may need additional financing to make up for reduced cash flows from our FC2 business. If adequate funds are not available on commercially acceptable terms when needed, we may be forced to delay, reduce or terminate some of our research and development activities or we may be unable to take advantage of future business opportunities.

Our pursuit of a COVID-19 treatment candidate is at an early stage. We may be unable to produce a drug that successfully treats the virus in a timely manner, if at all.

We recently announced that we have received FDA permission to initiate a Phase 2 clinical trial to assess the efficacy of VERU-111, a microtubule depolymerization agent, in combating COVID-19. Our development of a COVID-19 treatment is in its early stages, and we may be unable to produce a drug that successfully treats the virus in a timely manner, if at all. We are also committing financial resources and personnel to the development of a COVID-19 treatment which may cause delays in or otherwise negatively impact our other development programs, despite uncertainties surrounding the longevity and extent of coronavirus as a global health concern. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could rapidly dissipate or against which our treatment, if developed, may not be partially or fully effective.

Government entities may take actions that directly or indirectly have the effect of limiting opportunities for VERU-111 as a COVID-19 treatment.

Various government entities, including the U.S. government, are offering incentives, grants and contracts to encourage additional investment by commercial organizations into preventative and therapeutic agents against COVID-19, which may have the effect of increasing the number of competitors and/or providing advantages to competitors. Accordingly, there can be no assurance that we will be able to successfully establish a competitive market share if we develop a COVID-19 treatment. COVID-19 treatments may also be subject to government pricing controls, which could adversely affect the profitability of any COVID-19 treatment we are able to develop and commercialize.

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We may not be entitled to forgiveness of our recently received PPP Loan, and our application for the PPP Loan could in the future be determined to have been impermissible or could result in damage to our reputation.

In April 2020, we received proceeds of approximately $540,000 from a loan under the Paycheck Protection Program of the CARES Act, a portion of which may be forgiven, which we intend to use to retain employees, maintain payroll and make lease and utility payments. The PPP Loan matures in April 2022 and bears annual interest at a rate of 1.0%. Commencing in November 2020, we are required to pay the lender equal monthly payments of principal and interest as required to fully amortize by April 2022 any principal amount outstanding on the PPP Loan as of October 2020. A portion of the PPP Loan may be forgiven by the SBA upon our application beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven is reduced if our full-time headcount declines or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act. The certification described above does not contain any objective criteria and is subject to interpretation. However, on April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties, or damages or could be required to repay the PPP Loan in its entirety.  In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.

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Item 6.  Exhibits 





 

Exhibit

Number

Description

3.1

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form SB-2 Registration Statement (File No. 333-89273) filed with the SEC on October 19, 1999).



 

3.2

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 27,000,000 shares (incorporated by reference to Exhibit 3.2 to the Company's Form SB-2 Registration Statement (File No. 333-46314) filed with the SEC on September 21, 2000).



 

3.3

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 35,500,000 shares (incorporated by reference to Exhibit 3.3 to the Company's Form SB-2 Registration Statement (File No. 333-99285) filed with the SEC on September 6, 2002).



 

3.4

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 38,500,000 shares (incorporated by reference to Exhibit 3.4 to the Company's Form 10-QSB (File No. 1-13602) filed with the SEC on May 15, 2003).



 

3.5

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company designating the terms and preferences for the Class A Preferred Stock – Series 3 (incorporated by reference to Exhibit 3.5 to the Company's Form 10-QSB (File No. 1-13602) filed with the SEC on May 17, 2004).



 

3.6

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company designating the terms and preferences for the Class A Preferred Stock – Series 4 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K (File No. 1-13602) filed with the SEC on November 2, 2016).



 

3.7

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company changing the corporate name to Veru Inc. and increasing the number of authorized shares of common stock to 77,000,000 shares (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K (File No. 1-13602) filed with the SEC on August 1, 2017).



 

3.8

Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 154,000,000 shares (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K (File No. 1-13602) filed with the SEC on March 29, 2019).

3.9

Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K (File No. 1-13602) filed with the SEC on May 22, 2013)4, 2018).



 

4.1

Amended and Restated Articles of Incorporation, as amended (same as Exhibits 3.1,  3.2,  3.3,  3.4,  3.5,  3.63.7 and 3.73.8).



 

4.2

Articles II, VII and XI of the Amended and Restated By-Laws (included in Exhibit 3.7)3.9).



 

10.1

Executive Employment Agreement, dated as of October 4, 2017, between the CompanyVeru Inc. 2018 Equity Incentive Plan (as amended and Michele Grecorestated effective March 24, 2020) (incorporated by reference to Exhibit 10.1 to the Company'sCompany’s Form 8-K (File No. 1-13602) filed with the SEC on January 10, 2018).March 26, 2020.*  +



 

10.2

SeparationForm of Non-Qualified Stock Option Grant Agreement and General Release, effective as of January 4,under Veru Inc. 2018 between the Company and Daniel Haines (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K (File No. 1-13602) filed with the SEC on January 10, 2018).Equity Incentive Plan.  +*, **

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10.3

Form of Non-Qualified Stock Option Grant Agreement under Veru Inc. 2017 Equity Incentive Plan.  *, **



 

31.1

Certification of PrincipalChief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**



 

31.2

Certification of PrincipalChief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**



 

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).**, ***



 

101

The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended DecemberMarch 31, 2017,2020, formatted in XBRL (Extensible Business Reporting Language):  (1) the Unaudited Condensed Consolidated Balance Sheets, (2) the Unaudited Condensed Consolidated Statements of Operations, (3) the Unaudited Condensed Consolidated StatementStatements of Stockholders’ Equity, (4) the Unaudited Condensed Consolidated Statements of Cash Flows and (5) the Notes to the Unaudited Condensed Consolidated Financial Statements.

*

Management contract or compensatory plan or arrangement

**

Filed herewith

***

This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

+

Management contract or compensatory plan or arrangement



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





VERU INC.





DATE: February 14, 2018May 13, 2020



/s/ Mitchell S. Steiner

Mitchell S. Steiner President and

Chairman, Chief Executive Officer and President





DATE: February 14, 2018May 13, 2020



/s/ Michele Greco

Michele Greco Executive Vice President of Finance

Chief Financial Officer and

Chief Administrative Officer



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