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 December 31, 2017June 30, 2022
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
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.) | |
1000, Miami, FL |
| |
(Address of | (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 ☒x 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 ☒x 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 | |
| Emerging growth |
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 ☒x
As of February 13, 2018,August 8, 2022, the registrant had 53,512,94680,146,735 shares of $0.01 par value common stock outstanding.
VERU INC.
PAGE | |
3 | |
PART I. FINANCIAL INFORMATION | |
5 | |
5 | |
6 | |
Unaudited Condensed Consolidated | 7 |
9 | |
Notes to Unaudited Condensed Consolidated Financial Statements | |
10 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
26 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
37 | |
38 | |
PART II. OTHER INFORMATION | |
39 | |
40 | |
44 |
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"“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 condition or business, our development and commercialization plans relating to our product candidates and products, future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, royalty payments, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, future ordering patterns of our customers, objectives of management, business strategies, clinical trial timing, plans and plans,results, 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"“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'sCompany’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 and uncertainties. You should read these statements carefully because they discuss our future expectations or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results to differ materially from those currently anticipated include the following:
potential delays in the timing of and results from clinical trials and studies, including potential delays in the recruitment of patients and their ability to effectively participate in such trials and studies due to COVID-19 or other reasons, and the risk that such results will not support marketing approval and commercialization in the United States or in any foreign country;
potential delays in the timing of any submission to the U.S. Food and Drug Administration (the “FDA”) and potential delays in, or failure to obtain, regulatory approval of products under development or authorization of the Company’s emergency use authorization application for sabizabulin for certain COVID-19 patients, including the risk of a delay or failure in reaching agreement with the FDA on the design of a clinical trial or in obtaining authorization to commence a clinical trial or commercialize a product candidate in the U.S.;
potential delays in the timing of FDA approval of the release of manufactured lots of approved products;
clinical results or early data from clinical trials may not be replicated or continue to occur in additional trials or may not otherwise support further development in the specified product candidate or at all;
risks related to our ability to obtain sufficient financing on acceptable terms when needed to fund product development and our operations, including our ability to secure timely grant or other funding to develop, manufacture or distribute sabizabulin as a potential COVID-19 treatment;
risks related to the development of our product portfolio, including clinical trials, regulatory approvals and time and cost to bring any of our product candidates to market, and risks related to efforts of our collaborators such as in the development of a companion diagnostic for enobosarm;
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 still in development 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 and the possibility that as vaccines and other treatments become widely distributed the need for new COVID-19 treatment candidates may be reduced or eliminated;
risks related to our ability to scale up and manufacture sabizabulin in sufficient quantities as a COVID-19 treatment if we receive an emergency use authorization;
government entities may take actions that directly or indirectly have the effect of limiting opportunities for sabizabulin as a COVID-19 treatment, including favoring other treatment alternatives or imposing price controls on COVID-19 treatments;
product demand and market acceptance of our commercial product and our products in development, if approved;
some of our products are in development and we may fail to successfully commercialize such products;
risks related to any potential new telehealth platform developed or used by us in commercializing our current product or potential future products, including potential regulatory uncertainty around such platforms;
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;
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 as well as potential healthcare reform measures;
the risk that we will be affected by regulatory and legal developments, including a reclassification of products or repeal or modification of part or all of the Patient Protection and Affordable Care Act (the “ACA”);
risks inherent in doing business on an international level, including currency risks, regulatory requirements, political risks, export restrictions and other trade barriers;
the disruption of production at our manufacturing facilities or facilities of third parties on which we rely and/or of our ability to supply product due to raw material shortages, labor shortages, physical damage to our or third parties’ facilities, COVID-19 (including the impact of COVID-19 on suppliers of key raw materials), product testing, transportation delays or regulatory or other governmental actions, and the duration and impact of any such disruptions;
our reliance on major customers and risks related to delays in payment of accounts receivable by major customers;
risks from rising costs of raw materials and our ability to pass along increased costs to our customers;
risks 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, 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 indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units, and as a result government ministries or other public health sector customers may order and purchase fewer units than the full maximum tender amount;
our ability to identify, successfully negotiate and complete suitable acquisitions, out-licensing transactions, in-licensing transactions or other strategic initiatives and to realize any potential benefits of such transactions or initiatives; and
our ability to successfully integrate acquired businesses, technologies or products.
All forward-looking statements in this report should be considered in the context of the risks and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following:
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Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk“Risk Factors,"” in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and Part II, Item 1A of this Form 10-Q.2021. 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.
PART I.FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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| December 31, 2017 |
| September 30, 2017 | ||
ASSETS |
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Current Assets: |
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Cash | $ | 3,572,350 |
| $ | 3,277,602 |
Accounts receivable, net |
| 3,000,308 |
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| 3,555,350 |
Inventory, net |
| 3,067,036 |
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| 2,767,924 |
Prepaid expenses and other current assets |
| 625,497 |
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| 697,097 |
TOTAL CURRENT ASSETS |
| 10,265,191 |
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| 10,297,973 |
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LONG-TERM ASSETS |
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PLANT AND EQUIPMENT |
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Equipment, furniture and fixtures |
| 4,069,810 |
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| 4,067,896 |
Leasehold improvements |
| 287,686 |
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| 287,686 |
Less: accumulated depreciation and amortization |
| (3,844,272) |
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| (3,800,043) |
Plant and equipment, net |
| 513,224 |
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| 555,539 |
Other trade receivables (Note 5) |
| — |
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| 7,837,500 |
Other assets |
| 159,662 |
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| 156,431 |
Deferred assets |
| 423,001 |
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| — |
Deferred income taxes |
| 12,124,000 |
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| 8,827,000 |
Intangible assets, net |
| 20,684,175 |
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| 20,752,991 |
Goodwill |
| 6,878,932 |
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| 6,878,932 |
TOTAL ASSETS | $ | 51,048,185 |
| $ | 55,306,366 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Accounts payable | $ | 2,517,371 |
| $ | 2,685,718 |
Accrued expenses and other current liabilities |
| 2,383,628 |
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| 1,441,359 |
Unearned revenue |
| 990,016 |
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| 1,014,517 |
Accrued compensation |
| 338,136 |
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| 345,987 |
TOTAL CURRENT LIABILITIES |
| 6,229,151 |
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| 5,487,581 |
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LONG-TERM LIABILITIES |
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Other liabilities (Note 5) |
| — |
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| 1,233,750 |
Deferred rent |
| 68,446 |
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| 131,830 |
TOTAL LIABILITIES |
| 6,297,597 |
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| 6,853,161 |
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Commitments and contingencies (Note 10) |
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STOCKHOLDERS' EQUITY |
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Preferred stock |
| — |
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| — |
Common stock |
| 556,967 |
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| 553,922 |
Additional paid-in-capital |
| 91,102,159 |
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| 90,550,669 |
Accumulated other comprehensive loss |
| (581,519) |
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| (581,519) |
Accumulated deficit |
| (38,520,414) |
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| (34,263,262) |
Treasury stock, at cost |
| (7,806,605) |
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| (7,806,605) |
TOTAL STOCKHOLDERS' EQUITY |
| 44,750,588 |
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| 48,453,205 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 51,048,185 |
| $ | 55,306,366 |
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See notes to unaudited condensed consolidated financial statements. |
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June 30, | September 30, | ||||
2022 | 2021 | ||||
Assets | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 100,550,610 | $ | 122,359,535 | |
Accounts receivable, net | 8,302,745 | 8,794,224 | |||
Notes receivable | — | 5,000,000 | |||
Inventory, net | 7,722,551 | 5,574,253 | |||
Prepaid research and development costs | 9,611,066 | 9,174,586 | |||
Prepaid expenses and other current assets | 2,173,722 | 850,889 | |||
Total current assets | 128,360,694 | 151,753,487 | |||
Plant and equipment, net | 1,081,710 | 592,603 | |||
Operating lease right-of-use assets | 4,970,311 | 969,839 | |||
Deferred income taxes | 13,005,533 | 13,024,550 | |||
Intangible assets, net | 3,995,238 | 4,048,810 | |||
Goodwill | 6,878,932 | 6,878,932 | |||
Other assets | 2,284,890 | 878,502 | |||
Total assets | $ | 160,577,308 | $ | 178,146,723 | |
Liabilities and Stockholders' Equity | |||||
Current liabilities: | |||||
Accounts payable | $ | 6,936,312 | $ | 3,409,771 | |
Accrued research and development costs | 10,721,360 | 2,020,445 | |||
Accrued compensation | 4,016,771 | 4,986,058 | |||
Accrued expenses and other current liabilities | 2,133,286 | 1,615,922 | |||
Residual royalty agreement liability, short-term portion | 3,050,135 | 3,237,211 | |||
Operating lease liability, short-term portion | 951,574 | 497,903 | |||
Total current liabilities | 27,809,438 | 15,767,310 | |||
Residual royalty agreement liability, long-term portion | 11,557,190 | 9,397,136 | |||
Operating lease liability, long-term portion | 4,264,458 | 609,921 | |||
Deferred income taxes | 63,426 | 63,426 | |||
Other liabilities | 15,000 | 14,986 | |||
Total liabilities | 43,709,512 | 25,852,779 | |||
Commitments and contingencies (Note 12) |
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Stockholders' equity: | |||||
Preferred stock; 0 shares issued and outstanding at June 30, 2022 and September 30, 2021 | — | — | |||
Common stock, par value $0.01 per share; 154,000,000 shares authorized, 82,311,689 and 82,153,452 shares issued and 80,127,985 and 79,969,748 shares outstanding at June 30, 2022 and September 30, 2021, respectively | 823,117 | 821,535 | |||
Additional paid-in-capital | 248,984,393 | 241,658,711 | |||
Accumulated other comprehensive loss | (581,519) | (581,519) | |||
Accumulated deficit | (124,551,590) | (81,798,178) | |||
Treasury stock, 2,183,704 shares, at cost | (7,806,605) | (7,806,605) | |||
Total stockholders' equity | 116,867,796 | 152,293,944 | |||
Total liabilities and stockholders' equity | $ | 160,577,308 | $ | 178,146,723 | |
See notes to unaudited condensed consolidated financial statements. | |||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Net revenues | $ | 9,602,195 | $ | 17,655,592 | $ | 36,765,721 | $ | 45,613,068 | |||
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Cost of sales | 2,533,572 | 3,782,480 | 6,679,738 | 9,995,023 | |||||||
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Gross profit | 7,068,623 | 13,873,112 | 30,085,983 | 35,618,045 | |||||||
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Operating expenses: | |||||||||||
Research and development | 18,133,412 | 11,188,246 | 43,755,677 | 24,438,813 | |||||||
Selling, general and administrative | 10,758,986 | 5,556,730 | 24,881,330 | 14,745,507 | |||||||
Total operating expenses | 28,892,398 | 16,744,976 | 68,637,007 | 39,184,320 | |||||||
Gain on sale of PREBOOST® business | — | — | — | 18,410,158 | |||||||
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Operating (loss) income | (21,823,775) | (2,871,864) | (38,551,024) | 14,843,883 | |||||||
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Non-operating expenses: | |||||||||||
Interest expense | (1,185,093) | (1,287,525) | (3,556,477) | (3,728,259) | |||||||
Change in fair value of derivative liabilities | 881,000 | (1,372,000) | (557,000) | (2,029,000) | |||||||
Other income (expense), net | 69,895 | (34,540) | 135,897 | (170,841) | |||||||
Total non-operating expenses | (234,198) | (2,694,065) | (3,977,580) | (5,928,100) | |||||||
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(Loss) income before income taxes | (22,057,973) | (5,565,929) | (42,528,604) | 8,915,783 | |||||||
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Income tax expense (benefit) | 137,603 | (2,873,063) | 224,808 | (2,773,071) | |||||||
Net (loss) income | $ | (22,195,576) | $ | (2,692,866) | $ | (42,753,412) | $ | 11,688,854 | |||
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Net (loss) income per basic common share outstanding | $ | (0.28) | $ | (0.03) | $ | (0.53) | $ | 0.16 | |||
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Basic weighted average common shares outstanding | 80,088,431 | 79,729,370 | 80,054,594 | 75,054,871 | |||||||
Net (loss) income per diluted common share outstanding | $ | (0.28) | $ | (0.03) | $ | (0.53) | $ | 0.14 | |||
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Diluted weighted average common shares outstanding | 80,088,431 | 79,729,370 | 80,054,594 | 82,807,156 | |||||||
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See notes to unaudited condensed consolidated financial statements. | |||||||||||
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| Three Months Ended | ||||
| December 31, | ||||
| 2017 |
| 2016 | ||
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Net revenues | $ | 2,586,613 |
| $ | 3,243,599 |
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Cost of sales |
| 1,272,574 |
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| 1,591,315 |
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Gross profit |
| 1,314,039 |
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| 1,652,284 |
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Operating expenses: |
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Research and development |
| 2,038,786 |
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| 171,100 |
Selling, general and administrative |
| 2,947,697 |
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| 2,529,504 |
Loss on settlement of accounts receivable |
| 3,764,137 |
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| — |
Business acquisition |
| — |
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| 826,370 |
Total operating expenses |
| 8,750,620 |
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| 3,526,974 |
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Operating loss |
| (7,436,581) |
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| (1,874,690) |
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Non-operating expenses: |
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Interest and other expense, net |
| (13,169) |
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| (9,621) |
Foreign currency transaction loss |
| (53,455) |
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| (11,939) |
Total non-operating expenses |
| (66,624) |
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| (21,560) |
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Loss before income taxes |
| (7,503,205) |
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| (1,896,250) |
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Income tax benefit |
| (3,246,053) |
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| (530,069) |
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Net loss | $ | (4,257,152) |
| $ | (1,366,181) |
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Net loss per basic and diluted common share outstanding | $ | (0.08) |
| $ | (0.04) |
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Basic and diluted weighted average common shares outstanding |
| 53,154,076 |
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| 30,976,140 |
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See notes to unaudited condensed consolidated financial statements. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||
| Additional | Other | Treasury | ||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stock, | ||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | at Cost | Total | ||||||||||||
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Balance at September 30, 2021 | 82,153,452 | $ | 821,535 | $ | 241,658,711 | $ | (581,519) | $ | (81,798,178) | $ | (7,806,605) | $ | 152,293,944 | ||||||
Share-based compensation | — | — | 1,880,428 | — | — | — | 1,880,428 | ||||||||||||
Issuance of shares pursuant to share-based awards | 79,334 | 793 | 209,076 | — | — | — | 209,869 | ||||||||||||
Net loss | — | — | — | — | (6,380,006) | — | (6,380,006) | ||||||||||||
Balance at December 31, 2021 | 82,232,786 | 822,328 | 243,748,215 | (581,519) | (88,178,184) | (7,806,605) | 148,004,235 | ||||||||||||
Share-based compensation | — | — | 2,124,941 | — | — | — | 2,124,941 | ||||||||||||
Issuance of shares pursuant to share-based awards | 17,267 | 173 | 46,924 | — | — | — | 47,097 | ||||||||||||
Net loss | — | — | — | — | (14,177,830) | — | (14,177,830) | ||||||||||||
Balance at March 31, 2022 | 82,250,053 | 822,501 | 245,920,080 | (581,519) | (102,356,014) | (7,806,605) | 135,998,443 | ||||||||||||
Share-based compensation | — | — | 2,910,976 | — | — | — | 2,910,976 | ||||||||||||
Issuance of shares pursuant to share-based awards | 61,636 | 616 | 153,337 | — | — | — | 153,953 | ||||||||||||
Net loss | — | — | — | — | (22,195,576) | — | (22,195,576) | ||||||||||||
Balance at June 30, 2022 | 82,311,689 | $ | 823,117 | $ | 248,984,393 | $ | (581,519) | $ | (124,551,590) | $ | (7,806,605) | $ | 116,867,796 | ||||||
See notes to unaudited condensed consolidated financial statements. | |||||||||||||||||||
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| Accumulated |
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| Additional |
| Other |
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| Preferred |
| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
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| Stock |
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| at Cost |
| Total | |||||||
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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 |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
See notes to unaudited condensed consolidated financial statements. | ||||||||||||||||||||||
VERU INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
| Accumulated | ||||||||||||||||||
| Additional | Other | Treasury | ||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stock, | ||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | at Cost | Total | ||||||||||||
| |||||||||||||||||||
Balance at September 30, 2020 | 72,047,385 | $ | 720,474 | $ | 126,971,518 | $ | (581,519) | $ | (89,192,552) | $ | (7,806,605) | $ | 30,111,316 | ||||||
Share-based compensation | — | — | 785,297 | — | — | — | 785,297 | ||||||||||||
Issuance of shares pursuant to share-based awards | 468,611 | 4,686 | 619,133 | — | — | — | 623,819 | ||||||||||||
Issuance of shares pursuant to common stock purchase warrants | 1,574,611 | 15,746 | (15,746) | — | — | — | — | ||||||||||||
Net income | — | — | — | — | 17,227,701 | — | 17,227,701 | ||||||||||||
Balance at December 31, 2020 | 74,090,607 | 740,906 | 128,360,202 | (581,519) | (71,964,851) | (7,806,605) | 48,748,133 | ||||||||||||
Share-based compensation | — | — | 1,002,281 | — | — | — | 1,002,281 | ||||||||||||
Issuance of shares pursuant to share-based awards | 357,297 | 3,573 | 645,702 | — | — | — | 649,275 | ||||||||||||
Shares issued in connection with public offering of common stock, net of fees and costs | 7,419,354 | 74,194 | 107,868,104 | — | — | — | 107,942,298 | ||||||||||||
Net loss | — | — | — | — | (2,845,981) | — | (2,845,981) | ||||||||||||
Balance at March 31, 2021 | 81,867,258 | 818,673 | 237,876,289 | (581,519) | (74,810,832) | (7,806,605) | 155,496,006 | ||||||||||||
Share-based compensation | — | — | 1,900,085 | — | — | — | 1,900,085 | ||||||||||||
Issuance of shares pursuant to share-based awards | 170,194 | 1,702 | 263,351 | — | — | — | 265,053 | ||||||||||||
Net loss | — | — | — | — | (2,692,866) | — | (2,692,866) | ||||||||||||
Balance at June 30, 2021 | 82,037,452 | $ | 820,375 | $ | 240,039,725 | $ | (581,519) | $ | (77,503,698) | $ | (7,806,605) | $ | 154,968,278 | ||||||
See notes to unaudited condensed consolidated financial statements. | |||||||||||||||||||
VERU INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | |||||
June 30, | |||||
2022 | 2021 | ||||
OPERATING ACTIVITIES | |||||
Net (loss) income | $ | (42,753,412) | $ | 11,688,854 | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | |||||
Depreciation and amortization | 147,156 | 170,713 | |||
Noncash change in right-of-use assets | 411,002 | 282,843 | |||
Noncash interest expense, net of interest paid | 1,415,978 | (2,923,628) | |||
Share-based compensation | 6,916,345 | 3,687,663 | |||
Gain on sale of PREBOOST® business | — | (18,410,158) | |||
Deferred income taxes | 19,017 | (2,912,778) | |||
Change in fair value of derivative liabilities | 557,000 | 2,029,000 | |||
Other | 63,133 | 172,085 | |||
Changes in current assets and liabilities: | |||||
Increase in accounts receivable | (930,021) | (3,083,306) | |||
Increase in inventory | (2,216,377) | (416,867) | |||
Increase in prepaid expenses and other assets | (1,737,701) | (9,610,334) | |||
Increase in accounts payable | 3,526,541 | 2,115,007 | |||
Increase in accrued expenses and other current liabilities | 8,258,099 | 2,783,696 | |||
Decrease in operating lease liabilities | (303,266) | (337,346) | |||
Net cash used in operating activities | (26,626,506) | (14,764,556) | |||
INVESTING ACTIVITIES | |||||
Cash proceeds from sale of PREBOOST® business | 5,000,000 | 15,000,000 | |||
Capital expenditures | (584,245) | (154,416) | |||
Net cash provided by investing activities | 4,415,755 | 14,845,584 | |||
FINANCING ACTIVITIES | |||||
Proceeds from stock option exercises | 410,919 | 1,538,147 | |||
Proceeds from sale of shares in public offering, net of fees | — | 108,099,988 | |||
Payment of costs related to public offering | — | (137,690) | |||
Proceeds from premium finance agreement | — | 1,061,442 | |||
Installment payments on premium finance agreement | — | (1,061,442) | |||
Cash paid for debt portion of finance lease | (9,093) | (14,283) | |||
Net cash provided by financing activities | 401,826 | 109,486,162 | |||
Net (decrease) increase in cash | (21,808,925) | 109,567,190 | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 122,359,535 | 13,588,778 | |||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 100,550,610 | $ | 123,155,968 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for interest | $ | 2,140,499 | $ | 6,651,887 | |
Schedule of non-cash investing and financing activities: | |||||
Right-of-use asset recorded in exchange for lease liabilities | $ | 4,411,474 | $ | — | |
Notes receivable for sale of PREBOOST® business | $ | — | $ | 5,000,000 | |
Costs related to public offering in accounts payable or accrued expenses and other current liabilities | $ | — | $ | 20,000 | |
See notes to unaudited condensed consolidated financial statements. | |||||
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|
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|
|
|
| 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. |
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|
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”)(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”)(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, 2017.2021. The accompanying condensed consolidated balance sheet as of September 30, 20172021 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations and cash flows for the three and nine months ended December 31, 2017June 30, 2022 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2018.2022.
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), Veru International Holdco Inc., 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 acquisition (the APP Acquisition) of APP through the merger of a wholly owned subsidiary of theThe Company into APP, the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer health care product, the FC2 female condom. The completion of the APP Acquisition transitioned the Company intois a biopharmaceutical company withfocused on developing novel medicines for COVID-19 and other viral and acute respiratory distress syndrome (ARDS)-related diseases and for the management of breast and prostate cancers. The Company has multiple drug products under clinical developmentdevelopment. The Company also has 2 approved products: ENTADFI™, a new treatment for benign prostatic hyperplasia that was approved by the FDA in December 2021, and commercialization focused in urologythe FC2 Female Condom/FC2 Internal Condom® (FC2), an FDA-approved product for the dual protection against unplanned pregnancy and oncology. Nearly allthe transmission of sexually transmitted infections. All of the Company’s net revenues during the three and nine months ended December 31, 2017June 30, 2022 and 2016the three months ended June 30, 2021 and most of the Company’s net revenues during the nine months ended June 30, 2021 were derived from sales of FC2. The Female Health Company Limited is
Segments: We regularly review our operating segments and the holding companyapproach used by management to evaluate performance and allocate resources. Prior to the commercialization of The Female Health Company (UK) plc,ENTADFI, we managed 2 distinct business segments: Pharmaceuticals, which is locatedengaged exclusively in London, England (collectivelyresearch and development activities and FC2, which included 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 bothCompany’s single 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 andproduct. Beginning in the U.S.second quarter of 2022, as a result of added commercialization efforts related to ENTADFI, the Company now operates as a single operating segment. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by prescription.
Cash concentration: The Company’s cash is maintained primarily in threethe chief operating decision maker (CODM) for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods. Our CODM allocates resources and assesses financial institutions, located in Chicago, Illinois, London, England and Kuala Lumpur, Malaysia, respectively.
Accounts receivable and concentration of credit risk: Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables basedperformance on a review of all outstanding amounts on a periodicconsolidated basis.
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 occasionallyOther comprehensive (loss) income: Accounting principles generally require that recognized revenue, expenses, gains and losses be offeredincluded in net (loss) income. Although certain changes in assets and liabilities, such as foreign currency translation adjustments, are reported as a sales promotion or for certain sales. The Company has agreed to credit terms of up to 150 days with our distributor in the Republic of South Africa. For the most recent order of 15 million units under the Brazil tender, the Company has agreed to up to 360 day credit terms with our distributor in Brazil subject to earlier payment upon receipt of payment by the distributor from the Brazilian Government. 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.
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.
Foreign currency translation and operations: Effective October 1, 2009, 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 integralseparate component of the U.K. parent’s operations, it, too, adopted the U.S. dollar as its functional currency asequity section 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:
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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”) 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 balance sheets, these items, along with net (loss) income, are components of other comprehensive loss. For the three and nine months ended June 30, 2022 and 2021, comprehensive (loss) income is equivalent to the reported net (loss) income.
Recently adopted accounting pronouncements: 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. The Company adopted ASU 2019-12 on a prospective basis effective October 1, 2021. The adoption of ASU 2019-12 did not impact our consolidated financial statements are not necessarily indicativeand related disclosures.
Note 2 – Sale of PREBOOST® Business
On December 8, 2020, the Company entered into an Asset Purchase Agreement, pursuant to which the Company sold substantially all of the amounts that could be realizedassets related to the Company's PREBOOST® business. PREBOOST® is a 4% benzocaine medicated individual wipe for the treatment of premature ejaculation. The transaction closed on dispositionDecember 8, 2020. The purchase price for the transaction was $20.0 million, consisting of $15.0 million paid at closing, a $2.5 million note receivable due 12 months after closing and a $2.5 million note receivable due 18 months after closing. The Company collected the financial instruments.$5.0 million due on the notes receivable during the nine months ended June 30, 2022. Total assets sold, consisting of intangible assets, had a net book value of approximately $1.6 million, resulting in a pre-tax gain on sale of approximately $18.4 million. The Company had income before income taxes of $327,000 during the nine months ended June 30, 2021 related to the PREBOOST® business before the sale.
Note 3 – Fair Value Measurements
FASB ASCAccounting Standards Codification (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.
As of June 30, 2022 and September 30, 2021, 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 connectionhierarchy.
The following table provides a reconciliation of the beginning and ending liability balance associated with the APP Acquisition areembedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2022 and 2021:
Nine Months Ended | |||||
June 30, | |||||
2022 | 2021 | ||||
Beginning balance | $ | 7,851,000 | $ | 4,182,000 | |
Change in fair value of derivative liabilities | 557,000 | 2,029,000 | |||
Ending balance | $ | 8,408,000 | $ | 6,211,000 | |
The expense associated with the change in fair value of the embedded derivatives is included as a separate line item on the accompanying unaudited condensed consolidated statements of operations.
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 8 for additional information. There is no current observable market for these types of derivatives. The Company previously determined the fair value of the embedded derivatives using a Monte Carlo simulation model. Since the Credit Agreement has been satisfied as of September 30, 2021, the fair value of the embedded derivative within the Residual Royalty Agreement has been calculated by using a scenario-based method, whereby different scenarios are valued and probability weighted. The Company determined that with only the embedded derivative under the Residual Royalty Agreement remaining, there is no material difference between these two valuation models. The scenario-based valuation model incorporates transaction details such as the contractual terms of the instrument and assumptions including projected FC2 revenues, expected cash outflows, probability and estimated dates of a change of control, risk-free interest rates and applicable credit risk. A significant increase in projected FC2 revenues or a significant increase in the probability or acceleration of the timing of a change of control event, in isolation, would result in a significantly higher fair value measurement of the liability associated with the embedded derivative.
The following tables present quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 inputs,of the fair value hierarchy as of June 30, 2022 and September 30, 2021:
Valuation Methodology | Significant Unobservable Input | June 30, 2022 | ||
Scenario-Based | Estimated change of control dates | September 2023 to September 2025 | ||
Discount rate | 11.6% to 11.9% | |||
Probability of change of control | 20% to 90% |
Valuation Methodology | Significant Unobservable Input | September 30, 2021 | ||
Monte Carlo Simulation | Estimated change of control dates | September 2022 to September 2025 | ||
Discount rate | 6.6% to 7.9% | |||
Probability of change of control | 20% to 90% |
Note 4 – Revenue from Contracts with Customers
The Company generates nearly all its revenue from direct product sales. Revenue from direct product sales is generally recognized when the customer obtains control of the product, which include discounted cash flow methodologies,occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Sales taxes and other similar techniques,taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue.
The amount of consideration the Company ultimately receives varies depending upon sales discounts, and other incentives that the Company may offer, which are accounted for as variable consideration when thereestimating the amount of revenue to recognize. The estimate of variable consideration requires significant judgment. The Company includes estimated amounts in the transaction price to the extent it is limited market activityprobable 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 the determination of fair value requireswhether to include estimated amounts in the transaction price are based largely upon an assessment of current contract sales terms and historical payment experience.
Product returns are typically not significant judgmentbecause returns are generally not allowed unless the product is damaged at time of receipt.
The Company’s revenue is from sales of FC2 in the U.S. prescription channel and direct sales of FC2 in the global public health sector, and also included sales of PREBOOST® medicated wipes for prevention of premature ejaculation before the sale of the PREBOOST® business. The following table presents net revenues from these three categories:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
FC2 | |||||||||||
U.S. prescription channel | $ | 6,736,158 | $ | 13,501,862 | $ | 29,900,890 | $ | 32,916,343 | |||
Global public health sector | 2,866,037 | 4,153,730 | 6,864,831 | 11,833,894 | |||||||
Total FC2 | 9,602,195 | 17,655,592 | 36,765,721 | 44,750,237 | |||||||
PREBOOST® | — | — | — | 862,831 | |||||||
Net revenues | $ | 9,602,195 | $ | 17,655,592 | $ | 36,765,721 | $ | 45,613,068 | |||
The following table presents net revenue by geographic area:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
United States | $ | 7,024,786 | $ | 14,080,810 | $ | 30,780,271 | $ | 35,049,646 | |||
Other | 2,577,409 | 3,574,782 | 5,985,450 | 10,563,422 | |||||||
Net revenues | $ | 9,602,195 | $ | 17,655,592 | $ | 36,765,721 | $ | 45,613,068 | |||
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 estimation.
Research and development costs: Research and development expenses include salaries and benefits, clinical trials costs and contract services. Research and development expenses are chargediii) the product is delivered to operations as they are incurred.
The Company records estimated coststhe customer or distributor, in accordance with the terms 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 componentagreement. Some of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimatescontracts require the customer to make advanced payments prior to transferring control of the work completed and in accordance with agreements established with its third-party service providers underproducts. These advanced payments create a contract liability for the service agreements.Company. 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 onebalances 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 isliability, included in cashaccrued expenses and other current liabilities 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,sheets, were approximately $312,000 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$132,000 at June 30, 2022 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. 2021, respectively.
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.
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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 determined the fair value of intangible assets, including in-process research and development ("IPR&D”), 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 adjusted to present value using an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets 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 using internal and external sources. Although a valuation is required to be finalized within a one-year period, it must consider all and only those facts and evidence which existed at the acquisition date. The most complex and judgmental matters applicable to the valuation process are summarized below:
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Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount 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.
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,
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inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation.
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.
Goodwill: Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired in connection with 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 amount 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.
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 cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value; however, if actual results are not consistent with our estimates 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 period based on the grant-date fair value. In many instances, the equity awards 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.
Advertising: The Company's policy is to expense advertising costs 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, the amount of any future tax benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized.
Other comprehensive loss: Accounting principles 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 component of the equity section of the accompanying condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss.
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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 intent is to settle the intercompany trade account on a current basis. Since the U.K. and Malaysia subsidiaries adopted 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, 2017 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 uncertainty 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.
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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® 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. Goodwill 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.
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Note 4 - Inventory
Inventory consists of the following components at December 31, 2017 and September 30, 2017:
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| December 31, 2017 |
| September 30, 2017 | ||
FC2 |
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Raw material | $ | 554,737 |
| $ | 530,384 |
Work in process |
| 121,137 |
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| 90,164 |
Finished goods |
| 2,631,155 |
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| 2,427,386 |
Inventory, gross |
| 3,307,029 |
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| 3,047,934 |
Less: inventory reserves |
| (272,980) |
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| (312,997) |
FC2, net |
| 3,034,049 |
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| 2,734,937 |
PREBOOST® |
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Finished goods |
| 32,987 |
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| 32,987 |
Inventory, net | $ | 3,067,036 |
| $ | 2,767,924 |
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 are 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 90 days subsequent to clearance of the product by the Ministry of Health in Brazil. The Company classified approximately $1.4 million of trade receivables with its distributor in Brazil as long-term as of June 30, 2022, 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 sheet.
The components of accounts receivable consistconsisted of the following at December 31, 2017June 30, 2022 and September 30, 2017: 2021:
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| December 31, 2017 |
| September 30, 2017 | ||
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Trade receivables |
| $ | 2,905,094 |
| $ | 11,330,814 |
Other receivables |
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| 128,317 |
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| 100,139 |
Accounts receivable, gross |
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| 3,033,411 |
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| 11,430,953 |
Less: allowance for doubtful accounts |
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| (33,103) |
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| (38,103) |
Accounts receivable, net |
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| 3,000,308 |
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| 11,392,850 |
Less: long-term trade receivables |
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| (7,837,500) |
Current accounts receivable, net |
| $ | 3,000,308 |
| $ | 3,555,350 |
June 30, | September 30, | ||||
2022 | 2021 | ||||
Trade receivables, gross | $ | 9,756,866 | $ | 8,938,849 | |
Less: allowance for doubtful accounts | (14,143) | (20,643) | |||
Less: allowance for sales returns and payment term discounts | (11,978) | (123,982) | |||
Less: long-term trade receivables* | (1,428,000) | — | |||
Accounts receivable, net | $ | 8,302,745 | $ | 8,794,224 | |
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 December 31, 2017June 30, 2022 and at September 30, 2017, Semina’s2021, 0 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 June 30, 2022, 2 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 88% of the Company’snet accounts receivable and long-term othertrade receivables balance. in the aggregate. At September 30, 2021, 3 customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 90% of net accounts receivable in the aggregate.
For the three months ended December 31, 2017 and 2016,June 30, 2022, there were four and three3 customers who eachwhose individual net revenue to the Company exceeded 10 percent10% of the Company’s net revenues, respectively.representing 92% of the Company’s net revenues in the aggregate. For the three months ended June 30, 2021, there were 2 customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 75% of the Company’s net revenues in the aggregate.
For the nine months ended June 30, 2022, there were 2 customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 78% of the Company’s net revenues in the aggregate. For the nine months ended June 30, 2021, there were 2 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.
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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 forth the components ofThere was 0 material change in the allowance for doubtful accounts at December 31, 2017for the nine months ended June 30, 2022 and 2016:2021.
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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 |
Recoveries of accounts receivable previously written-offcharged off are recorded when received. TheIn the global public health sector, 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.
Note 6 - Revolving Line– 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 June 30, 2022 and September 30, 2021:
June 30, | September 30, | ||||
2022 | 2021 | ||||
FC2: | |||||
Raw material | $ | 1,599,984 | $ | 1,371,133 | |
Work in process | 54,004 | 112,915 | |||
Finished goods | 5,162,190 | 4,547,690 | |||
FC2, gross | 6,816,178 | 6,031,738 | |||
Less: inventory reserves | (83,424) | (457,485) | |||
FC2, net | 6,732,754 | 5,574,253 | |||
ENTADFI: | |||||
Raw material | 141,079 | — | |||
Work in process | 848,718 | — | |||
Total ENTADFI | 989,797 | — | |||
Inventory, net | $ | 7,722,551 | $ | 5,574,253 | |
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 June 30, 2022 and September 30, 2021:
Estimated | June 30, | September 30, | |||||
Useful Life | 2022 | 2021 | |||||
Plant and equipment: | |||||||
Manufacturing equipment | 5 - 8 years | $ | 2,902,718 | $ | 2,875,744 | ||
Office equipment, furniture and fixtures | 3 - 10 years | 1,303,730 | 991,146 | ||||
Leasehold improvements | 3 - 8 years | 484,460 | 298,886 | ||||
Total plant and equipment | 4,690,908 | 4,165,776 | |||||
Less: accumulated depreciation and amortization | (3,609,198) | (3,573,173) | |||||
Plant and equipment, net | $ | 1,081,710 | $ | 592,603 | |||
Depreciation expense was approximately $39,000 and $21,000 for the three months ended June 30, 2022 and 2021, respectively, and approximately $94,000 and $75,000 for the nine months ended June 30, 2022 and 2021, respectively. Plant and equipment included $171,000 and $210,000 at June 30, 2022 and September 30, 2021, respectively, for deposits on equipment, furniture, and leasehold improvements, which have not been placed into service; therefore, the Company has not started to record depreciation expense.
Note 7 – Intangible Assets and Goodwill
Intangible Assets
The gross carrying amounts and net book value of intangible assets were as follows at June 30, 2022:
Gross Carrying | Accumulated | Net Book | ||||||
Amount | Amortization | Value | ||||||
Intangible asset with finite life: | ||||||||
Covenants not-to-compete | $ | 500,000 | $ | 404,762 | $ | 95,238 | ||
Indefinite-lived intangible assets: | ||||||||
Acquired in-process research and development assets | 3,900,000 | — | 3,900,000 | |||||
Total intangible assets | $ | 4,400,000 | $ | 404,762 | $ | 3,995,238 | ||
The gross carrying amounts and net book value of intangible assets were as follows at September 30, 2021:
Gross Carrying | Accumulated | Net Book | ||||||
Amount | Amortization | Value | ||||||
Intangible asset with finite life: | ||||||||
Covenants not-to-compete | $ | 500,000 | $ | 351,190 | $ | 148,810 | ||
Indefinite-lived intangible assets: | ||||||||
Acquired in-process research and development assets | 3,900,000 | — | 3,900,000 | |||||
Total intangible assets | $ | 4,400,000 | $ | 351,190 | $ | 4,048,810 | ||
Amortization expense was approximately $18,000 for the three months ended June 30, 2022 and 2021and approximately $54,000 and $96,000 for the nine months ended June 30, 2022 and 2021, respectively.
Goodwill
The carrying amount of goodwill at June 30, 2022 and September 30, 2021 was $6.9 million. There was 0 change in the balance during the nine months ended June 30, 2022 and 2021.
Note 8 – Debt
SWK Credit Agreement
The Company’sOn 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 amountsthe 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 were outstandingentitled 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 paid 176.5% of the aggregate amount advanced to the Company under the Credit Agreement. The Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement. The Agent has released its security interest in Company collateral previously pledged to secure its obligations under the Credit Agreement.
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, which commenced after the Company 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. 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 Residual Royalty Agreement, or (ii) mutual agreement of the parties. If a change of control or sale of the FC2 business occurs, 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) 5.
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 are adjusted to fair market value at each 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 were amortized to interest expense over the term of the Credit Agreement 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 were presented as a reduction of the Credit Agreement obligation and were amortized to interest expense over the term of the Credit Agreement using the effective interest method.
At June 30, 2022 and September 30, 20172021, the Residual Royalty Agreement liability consisted of the following:
June 30, | September 30, | ||||
2022 | 2021 | ||||
Residual royalty agreement liability, fair value at inception | $ | 346,000 | $ | 346,000 | |
Add: accretion of liability using effective interest rate | 9,138,587 | 5,582,110 | |||
Less: cumulative payments | (3,285,262) | (1,144,763) | |||
Residual royalty agreement liability, excluding embedded derivative liability | 6,199,325 | 4,783,347 | |||
Add: embedded derivative liability at fair value (see Note 3) | 8,408,000 | 7,851,000 | |||
Total residual royalty agreement liability | 14,607,325 | 12,634,347 | |||
Residual royalty agreement liability, short-term portion | (3,050,135) | (3,237,211) | |||
Residual royalty agreement liability, long-term portion | $ | 11,557,190 | $ | 9,397,136 | |
As the Company has repaid the original principal of $10.0 million advanced in connection with the Credit Agreement and the Residual Royalty Agreement, payments under the Residual Royalty Agreement are classified as interest payments and included in operating activities on the accompanying unaudited condensed consolidated statements of cash flows. The short-term portion of the Residual Royalty Agreement liability represents the aggregate of the estimated quarterly payments on the Residual Royalty Agreement payable during the 12-month period subsequent to the balance sheet date.
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 nine months ended June 30, 2022 and 2021, interest expense related to the Credit Agreement and Residual Royalty Agreement was as follows:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Amortization of discounts | $ | — | $ | 327,550 | $ | — | $ | 1,400,039 | |||
Accretion of residual royalty agreement | 1,185,093 | 952,276 | 3,556,477 | 2,295,313 | |||||||
Amortization of deferred issuance costs | — | 7,699 | — | 32,907 | |||||||
Interest expense | $ | 1,185,093 | $ | 1,287,525 | $ | 3,556,477 | $ | 3,728,259 | |||
Premium Finance Agreement
On November 1, 2020, the Company entered into a Premium Finance Agreement to finance $1.1 million of its directors and officers liability insurance premium at an annual percentage rate of 3.94%. The financing was payable in 3 quarterly installments of principal and interest, beginning on January 1, 2021. The last payment was made in June 2021 and there was 0 balance outstanding as of June 30, 2022 or when it expired on December 29, 2017.September 30, 2021.
Note 7 -9 – Stockholders’ Equity
Preferred Stock
The Company has 5,000,000 authorized 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 other0 shares of Class A Preferred Stock of any series issued and outstanding at December 31, 2017 orJune 30, 2022 and September 30, 2017.2021. The Company has 15,000 authorized shares designated as Class B Preferred Stock with a par value of $0.50 per share. There were no0 shares of Class B Preferred Stock issued and outstanding at December 31, 2017 orJune 30, 2022 and September 30, 2017.2021, and there was no activity during the nine months then ended.
Common Stock Offering
On February 22, 2021, we completed an underwritten public offering of 7,419,354 shares of our common stock, which included the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $15.50 per share. Net proceeds to the Company from this offering were approximately $108.0 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 Company’s shelf registration statement on Form S-3 (File No. 333-239493).
Common Stock Purchase Warrants
In connection with the closing of the acquisition of APP Acquisition,(the “APP Acquisition”) on October 31, 2016, the Company issued a warrantwarrants to purchase up to 2,585,379 shares of the Company's common stock to Torreya Capital, the Company'sCompany’s then financial advisor (the Financial“Financial Advisor Warrant)Warrants”). The Financial Advisor Warrant hasWarrants had a five-yearfive-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 WarrantWarrants vested upon issuance. HalfDuring the nine months ended June 30, 2021, the remaining outstanding Financial Advisor Warrants to purchase 2,326,841 shares of the shares subject toCompany’s common stock were exercised using the Financial Advisor Warrant, or 1,292,690 shares, are locked-up for a period of 18 months fromcashless exercise feature, resulting in 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 statement1,574,611 shares of operations for the three months ended December 31, 2016.common stock. As of June 30, 2022, there were 0 outstanding common stock purchase warrants.
16
Aspire Capital Purchase Agreement
On December 29, 2017,June 26, 2020, the Company entered into a common stock purchase agreement (the “2020 Purchase Agreement)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 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $15.0$23.9 million of the Company’s common stock in the aggregate. Concurrently with entering into the 2020 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 and under its current registration statement on Form S-3 (File No. 333-221120), aof 1933 one or more 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 2020 Purchase Agreement.
Under the 2020 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.
Since inception of the 2020 Purchase Agreement, we have sold 1,644,737 shares of common stock to Aspire Capital resulting in proceeds to the Company of $5.0 million. The Company has not sold shares to Aspire Capital under the 2020 Purchase Agreement since June 2020. As of June 30, 2022, the amount remaining under the 2020 Purchase Agreement was $18.9 million, which is registered under the Company’s shelf registration statement on Form S-3 (File No. 333-239493).
In consideration for entering into the 2020 Purchase Agreement and concurrently with the execution of the 2020 Purchase Agreement, the Company issued to Aspire Capital 304,457212,130 shares of the Company’s common stock. The shares of common stock issued as consideration were valued at $347,081.$681,000, based on the closing price per share of the Company’s common stock on the date the shares were issued. This amount and related expenses of $75,920 have been$50,000, which total approximately $731,000, were recorded as deferred costs. The unamortized amount of deferred costs related to the 2020 Purchase Agreement of $578,000 at June 30, 2022 and September 30, 2021 is included in deferredother assets on the accompanying unaudited condensed consolidated balance sheet at December 31, 2017. Assheets.
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 nine months ended December 31, 2017June 30, 2022 and 2016,2021, we recorded share-based compensation expenses as follows:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Cost of sales | $ | 25,275 | $ | 15,921 | $ | 70,923 | $ | 50,548 | |||
Selling, general and administrative | 2,052,755 | 1,444,145 | 5,036,356 | 2,719,232 | |||||||
Research and development | 832,946 | 440,019 | 1,809,066 | 917,883 | |||||||
Share-based compensation | $ | 2,910,976 | $ | 1,900,085 | $ | 6,916,345 | $ | 3,687,663 | |||
We have issued share-based awards to employees and non-executive directors under the Company’s approved equity plans. Upon the exercise of share-based awards, new shares are issued from authorized common stock.
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|
|
|
|
| 2017 |
| 2016 | ||
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|
|
|
|
|
|
Cost of sales |
| $ | 2,373 |
| $ | — |
Selling, general and administrative |
|
| 176,229 |
|
| 317,311 |
Research and development |
|
| 28,852 |
|
| — |
|
| $ | 207,454 |
| $ | 317,311 |
Equity Plans
On June 16, 2022, the Company’s board of directors adopted the Company’s 2022 Employment Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules. The Inducement Plan is used exclusively for the issuance of equity awards to certain new hires who satisfied the requirements to be granted inducement grants under Nasdaq rules as an inducement material to the individual’s entry into employment with the Company. The terms of the Inducement Plan are substantially similar to the terms of our 2018 Plan. The Company has reserved 4,000,000 shares of common stock under the Inducement Plan and as of June 30, 2022, 3,910,000 shares remain available for issuance.
In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (as amended, the “2018 Plan”). On March 29, 2022, the Company’s stockholders approved an increase in the number of shares that may be issued under the 2018 Plan to 18.5 million. As of June 30, 2022, 6,297,389 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 June 30, 2022, 18,767 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 no0 further awards will be made under the 2008 Plan.
Stock Incentive Plan.Options
Each option grants the holder the right to purchase from us 1 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.
Stock Options
The following table outlines the weighted average assumptions for options granted during the three and nine months ended December 31, 2017June 30, 2022 and 2016:2021:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Weighted Average Assumptions: | |||||||||||
Expected volatility | 92.58% | 78.53% | 83.77% | 68.88% | |||||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% | |||||||
Risk-free interest rate | 3.01% | 1.10% | 2.10% | 0.64% | |||||||
Expected term (in years) | 6.0 | 6.0 | 6.0 | 5.9 | |||||||
Fair value of options granted | $ | 8.97 | $ | 5.98 | $ | 6.92 | $ | 3.46 | |||
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|
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 |
During the three and nine months ended December 31, 2017June 30, 2022 and 2016,2021, 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 December 31, 2017: June 30, 2022:
Weighted Average | |||||||||
Remaining | Aggregate | ||||||||
Number of | Exercise Price | Contractual Term | Intrinsic | ||||||
Shares | Per Share | (years) | Value | ||||||
Outstanding at September 30, 2021 | 10,600,680 | $ | 2.84 | ||||||
Granted | 4,219,965 | $ | 9.61 | ||||||
Exercised | (158,237) | $ | 2.60 | ||||||
Forfeited and expired | (55,334) | $ | 4.56 | ||||||
Outstanding at June 30, 2022 | 14,607,074 | $ | 4.79 | 7.73 | $ | 98,145,668 | |||
Exercisable at June 30, 2022 | 8,144,463 | $ | 2.20 | 6.63 | $ | 74,877,016 | |||
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| Weighted Average |
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| |||
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| Remaining |
| Aggregate | |
| Number of |
| Exercise Price |
| Contractual Term |
| Intrinsic | ||
| Shares |
| Per Share |
| (years) |
| Value | ||
Outstanding at September 30, 2017 | 2,830,805 |
| $ | 1.27 |
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Granted | 1,183,051 |
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| 1.15 |
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Exercised | — |
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| — |
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|
Forfeited | — |
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| — |
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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 |
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 June 30, 2022 of $11.30, less the respective weighted average exercise price per share at period end.
The total intrinsic value of options exercised during the nine months ended December 31, 2017. June 30, 2022 and 2021 was approximately $1.3 million and $8.3 million, respectively. Cash received from options exercised during the nine months ended June 30, 2022 and 2021 was approximately $411,000 and $1.5 million, respectively.
As of December 31, 2017,June 30, 2022, the Company had unrecognized compensation expense of approximately $2.0$31.3 million related to unvested stock options. This expense is expected to be recognized over approximately 3a weighted average period of 2.1 years.
Restricted Stock
TheDuring the quarter ended June 30, 2021, the Company has issued restrictedmodified stock options held by an optionee upon resignation from the board of directors. As permitted under the 2018 Plan and with the approval of the Compensation Committee of the Board of Directors, the stock options were modified to employees, directors and consultants. Such issuances may haveaccelerate 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, provideddate of resignation. The aggregate amount of expense recognized in connection with the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting date.
18
A summary of the non-vested stock activityoptions for the three and nine months ended December 31, 2017 is presented in the table below:
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| Weighted Average |
|
| |
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| Grant Date |
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| |
| Shares |
| Fair Value |
| Vesting Period | |
Outstanding at September 30, 2017 | 198,750 |
| $ | 0.99 |
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|
Granted | — |
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Vested | (190,000) |
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Forfeited | — |
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|
Outstanding at December 31, 2017 | 8,750 |
| $ | 1.82 |
| April 2018 |
As of December 31, 2017, thereJune 30, 2021 was approximately $4,000$536,000 and is included in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statements of total unrecognized compensation costoperations. There was no additional expense recognized related to non-vested restrictedthe modification of stock which is expected to be recognized overoptions during the next 0.3 years.three or nine months ended June 30, 2022.
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 NASDAQNasdaq 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 December 31, 2017, there was approximately $54,000 of unrecognized compensation cost related to non-vestedJune 30, 2022, vested stock appreciation rights based on 50,000 shares of common stock remain outstanding.
Note 11 – Leases
The Company has operating leases for its office, manufacturing and warehouse space, and office 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 five years, which include the option to extend a lease when the Company is reasonably certain to exercise that option. 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 lease costs as the sublease is outside of the Company’s normal business operations. This is consistent with the Company’s recognition of sublease income prior to the adoption of FASB ASC Topic 842.
In June 2021, the Company executed a lease for its new corporate headquarters in Miami, Florida. The Company is leasing approximately 12,000 square feet of office space for an eight year term, which commenced on March 1, 2022. The space replaced the Company’s previous corporate headquarters in Miami, Florida when the existing lease terminated at the end of February 2022. Annual base rent payments are $58.00 per square foot and are subject to a 3% annual escalation. Based on the terms of the lease agreement, the Company paid a security deposit of approximately $117,000, which is expected to be recognized overincluded in other assets on the next 0.8 years.accompanying unaudited condensed consolidated balance sheets as of June 30, 2022 and as of September 30, 2021. The Company does not have any leases that have not yet commenced as of June 30, 2022.
The components of the Company’s lease cost were as follows for the three and nine months ended June 30, 2022 and 2021:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Finance lease cost: | |||||||||||
Amortization of right-of-use assets | $ | — | $ | 2,178 | $ | 3,631 | $ | 6,535 | |||
Interest on lease liabilities | — | 611 | 403 | 2,327 | |||||||
Operating lease cost | 285,010 | 136,140 | 598,965 | 408,079 | |||||||
Short-term lease cost | 11,112 | 1,863 | 36,817 | 5,589 | |||||||
Variable lease cost | 69,531 | 48,061 | 162,287 | 124,283 | |||||||
Sublease income | (44,844) | (44,844) | (134,533) | (134,533) | |||||||
Total lease cost | $ | 320,809 | $ | 144,009 | $ | 667,570 | $ | 412,280 | |||
19
The Company paid cash of $449,000 and $497,000 for amounts included in the measurement of operating lease liabilities during the nine months ended June 30, 2022 and 2021, respectively.
The Company’s operating lease right-of-use assets and the related lease liabilities are presented as separate line items on the accompanying unaudited condensed consolidated balance sheets as of June 30, 2022 and September 30, 2021.
Note 9 - Industry Segments
Other information related to the Company’s leases as of June 30, 2022 and Financial Information about Foreign and Domestic OperationsSeptember 30, 2021 was as follows:
June 30, | September 30, | ||
2022 | 2021 | ||
Operating Leases | |||
Weighted-average remaining lease term | 6.9 | 2.9 | |
Weighted-average discount rate | 7.7% | 11.5% | |
Finance Leases | |||
Weighted-average remaining lease term | — | 0.4 | |
Weighted-average discount rate | — | 13.9% |
The Company’s lease agreements do not provide a readily determinable implicit rate. Therefore, the Company currently operates in two reporting segments: Commercial and Research and Development. There are no significant inter-segment sales. We evaluate the performance of each segmentestimates its incremental borrowing rate based on operating profit or loss. There is no inter-segment allocationinformation available at lease commencement in order to discount lease payments to present value.
As of interest expense and income taxes. Our chief operating decision-maker (CODM) is Mitchell Steiner, M.D., our President and Chief Executive Officer. June 30, 2022, maturities of lease liabilities were as follows:
Information about the Company's operations by segment and geographic area is as follows (in thousands):
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| 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) |
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Revenues: |
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|
United States | $ | 994 |
| $ | 358 |
South Africa |
| 318 |
|
| 636 |
Zimbabwe |
| 300 |
|
| 516 |
Peru |
| 282 |
|
| — |
Cameroon |
| — |
|
| 891 |
Other |
| 693 |
|
| 843 |
| $ | 2,587 |
| $ | 3,244 |
Operating | Sublease | ||||
Leases | Income | ||||
Fiscal year ended September 30, | |||||
2022 | $ | 231,392 | $ | 51,203 | |
2023 | 1,023,701 | 190,749 | |||
2024 | 930,215 | — | |||
2025 | 925,979 | — | |||
2026 | 788,467 | — | |||
Thereafter | 2,859,431 | — | |||
Total lease payments | 6,759,185 | $ | 241,952 | ||
Less imputed interest | (1,543,153) | ||||
Total lease liabilities | $ | 5,216,032 | |||
All of our revenues are attributed to our Commercial reporting segment. Amounts related to long-lived assets, depreciation and amortization, and income taxes are not reported as part of the reporting segments or reviewed by the CODM. These amounts are included in Corporate in the reconciliations above.
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$30.0 million.
Litigation
In connection with the APP Acquisition, two purported derivative and class action lawsuits were filed against the Company in the Circuit Court 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 members of our board 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
20
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 connectionCollaborative Arrangements
On January 31, 2022, the Company entered into a Clinical Trial Collaboration and Supply Agreement (the “Lilly Agreement”) with Eli Lilly and Company (“Lilly”). Under the Company's acquisition ofLilly Agreement, the Company is sponsoring a clinical trial in which both the Company’s enobosarm compound and Lilly’s compound are being dosed in combination. The Company is conducting the research at its own cost and Lilly is contributing its compound towards the study at no cost to the Company. The parties will continue to hold exclusive rights to all intellectual property relating solely to their own respective compounds. The Company will provide to Lilly copies of clinical data relating to the clinical trial and certain rights associated with Solifenacin DRGto use the clinical data. Veru maintains full exclusive, global commercialization rights to the enobosarm compound.
The terms of the Lilly Agreement meet the criteria under ASC Topic 808, Collaborative Arrangements (“ASC 808”), as both parties are active participants in the activity and Tadalafil/Finasteride combination capsules in December 2017,are exposed to the risks and rewards dependent on the commercial success of the activity. ASC 808 does not provide guidance on how to account for the activities under the collaboration, and the Company willdetermined that Lilly did not meet the definition of a customer under ASC 606, Revenue from Contracts with Customers. The Company has concluded that ASC 730, Research and Development, should be obligated to make upfront payments totaling $500,000applied by March 2018,analogy. There is no financial statement impact for the Lilly Agreement as well as future installment paymentsthe value of the drug supply received from Lilly is offset against the drug supply cost within research and milestone payments. The $500,000 is included in accrued expenses on the accompanying condensed consolidated balance sheet as of December 31, 2017.development expense.
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 (NOL) 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 (“SAB 118”), directing registrants to consider the impact of the Tax Act as “provisional” 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.
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21
The Tax Act imposes a one-time transition 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”) which 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 rate the Company has used assumptions and estimates that may change 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 Tax 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, 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.
As of December 31, 2017,September 30, 2021, the Company had U.S. federal and state net operating lossNOL carryforwards of approximately $12,100,000$38.8 million and $15,351,000,$25.0 million, respectively, for income tax purposes with $29.7 million and $22.6 million, respectively, expiring in years 2022 to 2037.2040 and $9.1 million and $2.4 million, respectively, which can be carried forward indefinitely. As of September 30, 2021, the Company also had U.S. federal research and development tax credit carryforwards of $4.4 million, expiring in years 2038 to 2041. The Company’s U.K. subsidiary has U.K. net operating lossNOL carryforwards of approximately $62,223,000$63.5 million as of December 31, 2017,September 30, 2021, which can be carried forward indefinitely to be used to offset future U.K. taxable income.
A reconciliation of income tax expense and the amount computed by applying the U.S. statutory federal income tax rate of 21% to (loss) income before income taxes is as follows:
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|
| 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 | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Income tax (benefit) expense at U.S. federal statutory rates | $ | (4,632,174) | $ | (1,168,845) | $ | (8,931,007) | $ | 1,872,314 | |||
State income tax (benefit) expense, net of federal (benefit) expense | (358,662) | (90,502) | (691,515) | 144,971 | |||||||
Non-deductible expenses | (355,069) | (2,807) | 4,860 | (2,807) | |||||||
Effect of stock options exercised | (147,570) | 53,011 | (170,920) | — | |||||||
Effect of common stock purchase warrants exercised | — | — | — | (2,038,919) | |||||||
Effect of Paycheck Protection Program funds | — | 8,784 | — | (113,442) | |||||||
U.S. research and development tax credit | (1,283,944) | (919,415) | (4,160,374) | (919,415) | |||||||
Effect of foreign income tax rates | 366,493 | (3,716,935) | 327,055 | (3,744,512) | |||||||
Effect of global intangible low taxed income | (12,989) | 78,626 | — | 148,383 | |||||||
Change in valuation allowance | 6,504,878 | 2,834,482 | 13,637,539 | 1,828,730 | |||||||
Other, net | 56,640 | 50,538 | 209,170 | 51,626 | |||||||
Income tax expense (benefit) | $ | 137,603 | $ | (2,873,063) | $ | 224,808 | $ | (2,773,071) | |||
Significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30, | September 30, | ||||
2022 | 2021 | ||||
Deferred tax assets: | |||||
Federal net operating loss carryforwards | $ | 14,771,226 | $ | 8,209,224 | |
State net operating loss carryforwards | 2,163,558 | 1,646,827 | |||
Foreign net operating loss carryforwards – U.K. | 15,861,787 | 15,875,889 | |||
Foreign capital allowance – U.K. | 117,709 | 117,709 | |||
U.S. research and development tax credit carryforwards | 6,921,789 | 2,761,415 | |||
Share-based compensation | 3,502,093 | 2,071,838 | |||
Interest expense | 2,124,706 | 1,368,042 | |||
Change in fair value of derivative liabilities | 1,151,454 | 1,025,425 | |||
Other, net – U.K. | 83,344 | 83,344 | |||
Other, net – Malaysia | 95,736 | 100,654 | |||
Other, net – U.S. | 276,602 | 203,237 | |||
Gross deferred tax assets | 47,070,004 | 33,463,604 | |||
Valuation allowance for deferred tax assets | (33,217,550) | (19,580,011) | |||
Net deferred tax assets | 13,852,454 | 13,883,593 | |||
Deferred tax liabilities: | |||||
In-process research and development | (882,427) | (882,427) | |||
Covenant not-to-compete | (21,549) | (33,671) | |||
Other, net – U.S. | (6,371) | (6,371) | |||
Net deferred tax liabilities | (910,347) | (922,469) | |||
Net deferred tax asset | $ | 12,942,107 | $ | 12,961,124 | |
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| December 31, |
| September 30, | ||
Deferred tax assets: | 2017 |
| 2017 | ||
Federal net operating loss carryforwards | $ | 4,063,000 |
| $ | 4,075,000 |
State net operating loss carryforwards |
| 1,703,000 |
|
| 963,000 |
AMT credit carryforward |
| 533,000 |
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| 533,000 |
Foreign net operating loss carryforwards – U.K. |
| 10,578,000 |
|
| 10,578,000 |
Foreign capital allowance – U.K. |
| 108,000 |
|
| 108,000 |
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 |
Foreign tax credits |
| 1,820,000 |
|
| 1,797,000 |
Other, net - U.S. |
| 71,000 |
|
| 82,000 |
Gross deferred tax assets |
| 19,516,000 |
|
| 19,071,000 |
Valuation allowance for deferred tax assets |
| (2,144,000) |
|
| (2,144,000) |
Net deferred tax assets |
| 17,372,000 |
|
| 16,927,000 |
Deferred tax liabilities: |
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In process research and development |
| (4,562,000) |
|
| (7,000,000) |
Developed technology |
| (575,000) |
|
| (900,000) |
Covenant not-to-compete |
| (106,000) |
|
| (200,000) |
Other |
| (5,000) |
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|
|
Net deferred tax liabilities |
| (5,248,000) |
|
| (8,100,000) |
Net deferred tax asset | $ | 12,124,000 |
| $ | 8,827,000 |
The deferred tax amounts have been classified inon the accompanying unaudited condensed consolidated balance sheets as follows:
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| 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 |
June 30, | September 30, | ||||
2022 | 2021 | ||||
Deferred tax asset – U.K. | $ | 12,909,797 | $ | 12,923,896 | |
Deferred tax asset – Malaysia | 95,736 | 100,654 | |||
Total deferred tax asset | $ | 13,005,533 | $ | 13,024,550 | |
Deferred tax liability – U.S. | $ | (63,426) | $ | (63,426) | |
Total deferred tax liability | $ | (63,426) | $ | (63,426) | |
Note 14 – Net (Loss) Income Per Share
Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share is computed by dividing net (loss) 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 common stock purchase warrants as determined under the treasury stock method.
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:
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| Gross Carrying |
| Accumulated |
| Net Book | |||
| Amount |
| Amortization |
| Value | |||
Intangible assets with finite lives: |
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|
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 |
The gross carrying amountsfollowing table provides a reconciliation of the net (loss) income per basic and diluted common share outstanding:
Three Months Ended | Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Net (loss) income | $ | (22,195,576) | $ | (2,692,866) | $ | (42,753,412) | $ | 11,688,854 | |||
Basic weighted average common shares outstanding | 80,088,431 | 79,729,370 | 80,054,594 | 75,054,871 | |||||||
Net effect of dilutive instruments: | |||||||||||
Stock options | — | — | — | 7,208,123 | |||||||
Stock appreciation rights | — | — | — | 44,379 | |||||||
Common stock purchase warrants | — | — | — | 499,783 | |||||||
Total net effect of dilutive instruments | — | — | — | 7,752,285 | |||||||
Diluted weighted average common shares outstanding | 80,088,431 | 79,729,370 | 80,054,594 | 82,807,156 | |||||||
Net (loss) income per basic common share outstanding | $ | (0.28) | $ | (0.03) | $ | (0.53) | $ | 0.16 | |||
Net (loss) income per diluted common share outstanding | $ | (0.28) | $ | (0.03) | $ | (0.53) | $ | 0.14 | |||
For the nine months ended June 30, 2021, approximately 819,000 potentially dilutive instruments were excluded from the computation of net book value of intangible assets are as follows at September 30, 2017:
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|
|
| Gross Carrying |
| Accumulated |
| Net Book | |||
| Amount |
| Amortization |
| Value | |||
Intangible assets with finite lives: |
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|
|
|
|
|
|
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 assets are carried at cost less accumulated amortization. Amortization is recorded over the projected related revenue stream for the PREBOOST® developed technology over the next 10 years and 7 years for the covenants not-to-compete, and the amortization expense is recorded in 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 overincome per diluted weighted average common share outstanding because their respective estimated useful lives.
Amortization expense was $68,816 and $26,729effect would have been antidilutive. Due to our net loss for the three and nine months ended December 31, 2017June 30, 2022 and 2016, respectively. Based on finite-lived intangible assets recorded asthree months ended June 30, 2021, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Notes 9 and 10 for a discussion of December 31, 2017, the estimated future amortization expense is as follows:our potentially dilutive instruments.
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| 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 |
Note 13 - Subsequent Events
We have evaluated events and transactions that occurred subsequent to December 31, 2017 through the date the financial statements were issued, for potential recognition or disclosure in the accompanying unaudited condensed consolidated financial statements. We did not identify any events or transactions that should be recognized or disclosed in the accompanying unaudited condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Veru Inc. is a biopharmaceutical company focused on urologydeveloping novel medicines for COVID-19 and oncology.other viral and acute respiratory distress syndrome (ARDS)-related diseases and for the management of breast and prostate cancers. The Company does businessalso has two FDA-approved products for sexual health.
Biopharmaceuticals
Infectious disease franchise:
The Company opportunistically developed sabizabulin 9mg, which has both anti-inflammatory and antiviral activities, as a two-pronged approach to the treatment of COVID-19 viral infection in hospitalized moderate to severe COVID-19 patients who are at high risk for ARDS and death.
Phase 3 COVID-19 registration trial – Sabizabulin 9mg for the treatment of hospitalized COVID-19 patients. Sabizabulin is an oral, first-in-class, new chemical entity, microtubule disruptor that has dual anti-inflammatory and antiviral properties. The Phase 3 COVID-19 study was a double-blind, randomized, placebo-controlled clinical trial conducted in approximately 210 hospitalized moderate to severe COVID-19 patients who were at high risk for ARDS and death. The primary endpoint was the proportion of deaths by Day 60. The FDA granted Fast Track designation to the Company’s COVID-19 program in January 2022. In April 2022, a planned interim analysis of the first 150 patients randomized into the study was conducted and the Independent Data Monitoring Committee unanimously voted to stop the Phase 3 COVID-19 clinical study for clear efficacy benefit. Sabizabulin treatment versus placebo resulted in both "Veru"a clinically meaningful and "The Female Health Company."statistically significant 55.2% relative reduction in deaths (p=0.0042) and no safety issues were identified.
On May 10, 2022, the Company had a pre-Emergency Use Authorization (EUA) meeting with the FDA to discuss next steps including the submission of an EUA application regarding sabizabulin for COVID-19. The outcome of this meeting was: (i) the FDA agreed that no additional efficacy studies were required to support an EUA application or a new drug application (NDA); and (ii) the FDA agreed that no additional safety data was required to support an EUA application and that collection of safety data under the EUA may satisfy the safety requirement for an NDA. The FDA agreed that the request for the EUA is supported by efficacy and safety from our positive Phase 3 COVID-19 study in hospitalized moderate to severe COVID-19 patients who are at high risk for ARDS and death and no additional clinical trials are required to support an NDA submission. On June 7, 2022, the Company submitted a request for FDA emergency use authorization. On July 31, 2017,6, 2022, the Company changed its corporate nameannounced the publication of the results from the Phase 3 COVID-19 study evaluating the efficacy and safety of oral sabizabulin in The Female HealthNew England Journal of Medicine Evidence. On July 25, 2022, the Company announced that the United Kingdom’s Medicines and Healthcare Products Regulatory Agency had informed the Company that it considers that the currently available safety and efficacy data will support an expedited review of the marketing authorization for the Company’s sabizabulin treatment in hospitalized COVID-19 patients at high risk for ARDS when the application is submitted. On July 27, 2022, the Company announced that the European Medicines Agency’s Emergency Task Force had informed the Company that it had initiated the review of sabizabulin for the treatment of hospitalized COVID-19 patients at high risk for ARDS for emergency use in the European Union Member States.
Oncology program:
The Company’s breast cancer drug pipeline has three clinical development programs for two drugs: enobosarm, an oral selective androgen receptor targeting agonist, and sabizabulin, an oral cytoskeleton disruptor.
Phase 3 ARTEST clinical study – Enobosarm monotherapy as a 3rd line treatment of AR+ER+HER2- metastatic breast cancer (high AR nuclei staining). We are enrolling the Phase 3 multicenter, international, open label, and randomized (1:1) ARTEST registration clinical trial design to Veru Inc.
Veru utilizesevaluate the U.S. Foodefficacy and Drug Administration's (the FDA) 505(b)(2) regulatory approval pathwaysafety of enobosarm monotherapy versus physician’s choice of either exemestane everolimus or a SERM as the active comparator for the treatment of AR+ ER+ HER2- metastatic breast cancer in approximately 210 patients with high AR nuclei staining in their breast cancer tissue who have previously received a nonsteroidal aromatase inhibitor, fulvestrant, and a CDK4/6 inhibitor. We have identified that patients who have higher levels androgen receptor nuclei staining in their breast cancer tissue are most likely to respond to enobosarm. Based on the recommendation of the FDA to have a companion diagnostic test to determine the patient’s AR status, we have partnered with Roche/Ventana Diagnostics, a global oncology diagnostics company, who is working to develop and, if approved, commercialize drug candidates. The FDA's 505(b)(2) regulatory approval pathway is designeda companion diagnostic AR immunohistochemistry test. In January 2022, our enobosarm program received a Fast Track designation by the FDA.
Phase 3 ENABLAR-2 clinical study – Enobosarm + abemaciclib combination as a 2nd line treatment of AR+ER+HER2- metastatic breast cancer (high AR nuclei staining). We are enrolling a Phase 3 multicenter, open label, randomized (1:1), active control clinical study, named ENABLAR-2 to allow for potentially expedited, lower cost and lower risk regulatory approval based on previously established safety,evaluate the efficacy and manufacturing information onsafety of enobosarm plus abemaciclib combination therapy versus an alternative estrogen blocking agent (fulvestrant or an aromatase inhibitor) in subjects with AR+ ER+ HER2- metastatic breast cancer who have previously received first line palbociclib (a CDK4/6 inhibitor) plus an estrogen blocking agent (non-steroidal aromatase inhibitor or fulvestrant) and have a high AR nuclei staining in their breast cancer tissue. We plan to enroll approximately 186 subjects in this Phase 3 clinical study. We have a clinical trial collaboration and supply agreement with Eli Lilly and Company (“Lilly”) for the ENABLAR-2 Phase 3 clinical study. Under the terms of the non-exclusive clinical trial collaboration and supply agreement, Veru is responsible for conducting the clinical trial, while Lilly will supply abemaciclib for the study. Veru maintains full exclusive, global rights to enobosarm.
Planned Phase 2b clinical study – Sabizabulin monotherapy as a 3rd line treatment of AR+ER+HER2- metastatic breast cancer (low AR nuclei staining). We also intend to conduct a Phase 2b clinical study of sabizabulin, a novel oral cytoskeleton disruptor, for the treatment of AR+ ER+ HER2- metastatic breast cancer in patients with a low AR nuclei staining. The Phase 2b clinical trial will be an open label, multicenter, and randomized (1:1) study evaluating the efficacy and safety of sabizabulin 32mg monotherapy versus physician’s choice of either exemestane everolimus or a SERM as the active comparator for the treatment of ER+ HER2- metastatic breast cancer in approximately 200 patients with a low level of AR nuclei staining in their breast cancer tissue who have previously received a nonsteroidal aromatase inhibitor, fulvestrant, and a CDK4/6 inhibitor.
The Company’s prostate cancer drug that has been alreadypipeline includes sabizabulin, VERU-100 and zuclomiphene citrate.
Sabizabulin 32mg for the treatment of metastatic castration resistant and androgen receptor targeting agent resistant prostate cancer:
Phase 1b/2 clinical studies to determine maximum tolerated dose and recommended dosing of sabizabulin. We are completing the Phase 1b open label clinical trial of sabizabulin in 39 men with metastatic castration resistant and androgen receptor targeting agent resistant prostate cancer ± taxane chemotherapy and the Phase 2 clinical study in 41 men with metastatic castration resistant prostate cancer who have also become resistant to at least one androgen receptor targeting agent, but prior to proceeding to IV chemotherapy. In the Phase 1b/2 studies, sabizabulin was both well tolerated and demonstrated promising preliminary efficacy data.
Phase 3 VERACITY clinical study. We are currently enrolling the Phase 3 VERACITY registration study evaluating sabizabulin 32mg in approximately 245 men who have metastatic castration resistant prostate cancer and who had tumor progression while receiving at least one androgen receptor targeting agent, but prior to IV chemotherapy.
VERU-100, long-acting GnRH antagonist subcutaneous depot, for the treatment of advanced hormone sensitive prostate cancer:
Phase 2 dose finding clinical study. We are currently enrolling a study to determine optimal dose of VERU-100 in approximately 45 men with advance hormone sensitive prostate cancer.
Planned Phase 3 registration clinical study. If the Phase 2 trial is successful, then, as discussed with and agreed upon by the FDA, the Phase 3 clinical trial will be a single arm, multicenter, open-label study in approximately 100 men with hormone sensitive advanced prostate cancer using the achievement and maintenance of castration levels of testosterone as the primary endpoint.
Zuclomiphene citrate, estrogen receptor agonist, for the treatment of hot flashes caused by prostate cancer hormonal therapies in men with advanced prostate cancer:
Planned Phase 2b zuclomiphene clinical study. The Company reported positive dose finding Phase 2 study in January 2020. The Company plans to further optimize the dosing schedule of zuclomiphene citrate in a Phase 2b study.
Sexual Health Program
ENTADFI™ (finasteride and tadalafil). ENTADFI was approved by the FDA in December 2021 as a new oral treatment for the sameBPH, 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,an enlarged prostate gland. The co-administration of tadalafil and manufacturing application. The Company is currently developing the following drug product candidates: Tamsulosin DRS slow release granulesfinasteride has been shown to provide faster and Tamsulosin XR capsules for lower urinary tract symptomsmore effective treatment of benign prostatic hyperplasia (BPH or enlarged prostate), Solifenacin DRG, slowthan finasteride alone without causing sexual adverse effects. The FDA had been reviewing our product release granules, for overactive bladder (urge incontinence, urgency, or frequencycriteria from our contract manufacturing facility and has now given its approval. We have now initiated the U.S. commercial launch and availability of urination), Tadalafil/finasteride combination capsule for restricted urination because of an enlarged prostate; VERU-944 (cis-clomiphene citrate) for hot flashesENTADFI. We plan to market ENTADFI to healthcare providers and patients via telemedicine and internet pharmacy services (including through a collaboration with GoodRx) and we expect that distribution will also be conducted through the traditional pharmaceutical distribution channels. We will plan to augment our marketing and sales efforts by seeking partners in men associated with prostate cancer hormone treatment, VERU-722 (fixed ratio clomiphene citrate) for male infertilitythe U.S. 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.outside the U.S.
To help support these clinical development programs, the Company markets and sells the PREBOOST® medicated individual wipe, which is a male genital desensitizing drug product for the prevention of premature ejaculation and is being co-promoted with Timm Medical Technologies, Inc., and also markets and sells the FC2 Female Condom/FC2 Internal Condom® (FC2). FC2 is sold in both the commercial sector and in the US marketpublic health sector in the U.S. and globally. In the U.S., FC2 is available by prescription through multiple telemedicine and otherinternet pharmacy channels as well as retail pharmacies. The Company has launched its own dedicated direct to patient telemedicine and pharmacy services portal/platform to continue to drive sales channelsgrowth. FC2 is also available to public health sector entities such as state departments of health and through The Female Health Company Division in501(c)(3) organizations. 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.
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 completed 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 believe that the new bioequivalence study and capsule formulation development will affect the timing of its planned submission of an NDA for Tamsulosin DRS granules and Tamsulosin XR capsules and, if the new bioequivalence study is successful, plans to submit the NDA in 2018.
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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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Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling the Female Condom (FC2). FC2 is the only currently available female-controlled product approved for market by the FDA and cleared by the World Health Organization (WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy and sexually transmitted infections (STIs), including HIV/AIDS and the Zika virus. Nearly allAll of the Company’s net revenues for the three months ended December 31, 2017 and 2016 were derived from sales of FC2.
FC2’s primary use is for disease prevention and family planning, and the public health sector is the Company’s main market. Within the public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.
FC2 has been distributed in 144 countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other STIs and unwanted pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the 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.
FC2 has a relatively small customer base, with a limited number of customers who generally purchase in large quantities. Over the past few years, major customers have included large global agencies, such as UNFPA and USAID. Other customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and NGOs.
Purchasing patterns for FC2 vary significantly from one customer to another, and may reflect factors other than simple demand. For example, some governmental agencies purchase FC2 through a formal procurement process in which a tender (request for bid) is issued for either a specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited period of time in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful bidder. The entire tender process, from publication to award, may take many months to complete. A tender award indicates acceptance of the 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 variations due to the timing and shipment of large orders of FC2.
In April 2017, the Company launched a small scale marketing and sales program to support the promotion of FC2 in the US market. The commercial team developed a plan to confirm the “proof of concept” that FC2 represented a significant business opportunity. This required changes in the distribution process for FC2 in the US. As part of this reorganization the Company announced new distribution agreements with three of the country's largest distributors that support the pharmaceutical industry. This newly developed network now allows up to 98% of major retail pharmacies the ability to make FC2 available to their customers. In addition to the distribution system, the Company expanded sales and market access efforts that resulted in FC2 now being available through the following access points: community-based organizations, by prescription, utilizing the telemedicine “HeyDoctor” App, through 340B covered entities, college and universities and our patient assistance program. We continue to increase healthcare provider awareness, education and acceptance which has resulted in more women utilizing FC2 in the US. We believe that the initial results from these efforts support the US market opportunity and that we will continue to see increased utilization of FC2.
27
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 |
Revenues. The Company's revenues are primarilycurrently derived from sales of FC2 in the commercial and public sectorhealth sectors.
In February 2022, the Company received a tender award to supply 57% of a tender covering up to 120 million female condoms over three years in the Republic of South Africa. The Company has received its first orders and is manufacturing units under this tender award. In October 2020, the Company was awarded up to 20 million units through its distributor in Brazil under the new Brazil female condom tender. The Company began shipping units under this tender award in the first quarter of fiscal 2021 and we have shipped approximately 9.7 million units through June 30, 2022. The Company does not anticipate any additional shipments under this tender in Brazil.
Revenues. Most of the Company's net revenues during the nine months ended June 30, 2022 and 2021 were derived from sales of FC2 in the U.S. prescription channel and global public health sector. The Company also had revenues from sales of PREBOOST® (Roman Swipes) during the nine months ended June 30, 2021 through the date the PREBOOST® business was sold on December 8, 2020. These sales are recognized upon shipment or delivery of the product to its customers. Other sales are from FC2 into the prescription channel in the US and sales of PREBOOST; however, these sales were not material to our results for the three months ended December 31, 2017.customers depending on contract terms.
The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with public health sector groups and completing partnership arrangements with companies with the necessary marketing and financial resources and local market expertise.
The Company’s most significant customers to date have been eithertelemedicine providers in the U.S. who sell into the prescription channel and global public health sector agencies or those who facilitate their purchasespurchase and/or distribution ofdistribute FC2 for use in preventing the transmission of 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
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. The Company also hired a small sales force to help educate doctors, pharmacists, clinics and student health centers on the benefits of FC2 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.
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 materialsignificant portion of the Company's future unit 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.
We have seen an increase in the cost of the nitrile polymer used to produce FC2 and may experience increases in other raw material, logistic, and energy costs due to the impact of COVID-19 and increased inflation. Additionally, increases in Malaysian minimum wages will increase our production costs and those of our suppliers. Our costs of sales and gross margins may be adversely impacted if we are unable to pass along cost increases to our customers.
Conducting research and development is central to our business model. Since the completionThe Company has multiple products under clinical development and management routinely evaluates and prioritizes each product in its portfolio of products. Advancement is limited to available working capital and management’s understanding of the APP Acquisition weprospects for each product. If future prospects do not meet management’s strategic goals, advancement may be discontinued. 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 $18.1 million and $11.2 million for the three months ended June 30, 2022 and 2021, respectively, and $43.8 million and $24.4 million for the nine months ended June 30, 2022 and 2021, respectively. We expect to increase ourcontinue this trend of increased expenses relating to research and development due to advancement of multiple drug candidates.
COVID-19 Environment
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 from time to time 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.
To date, COVID-19 has not impacted the Company’s ability to supply product demand for FC2. Since the start of the pandemic, we have, from time to time, experienced some temporary disruptions to our manufacturing facility due to the implementation of government policies. Most recently, on June 1, 2021, the Malaysian government issued a nationwide lockdown order placing limitations on social and economic activity in the country. The Company was able to secure the required approvals, as a health product, to continue to partially operate by reducing the number of employees physically allowed in the facilities to 60% of the total workforce. On July 3, 2021, the lockdown was strengthened in the region in which the Company operates and the Company entered into a two-week period ceasing all operations, in common with similar manufacturing businesses. On July 19, 2021, after allowing some time for staff testing, operations resumed at the required levels of 60% of the total workforce. The Company has partially mitigated the disruption to production by changing staffing patterns. From time to time, we have temporarily paused operations as part of our contact tracing protocols and to allow for cleaning and disinfection of our production facility.
The Company has enrolled manufacturing staff in a vaccination program. 100% of the staff have received two doses of vaccination and more than 90% of staff have also received a booster. This has allowed shift patterns to return to normal and the facility is allowed to operate at 100% capacity under the current Malaysia control orders.
The Company has had and believes it continues to have a sufficient quantity of FC2 inventory both inside and outside of Malaysia to satisfy expected customer demand. The closure and reduced operating capacity did not have a material impact to the Company’s consolidated operating results in fiscal 2021 or the first half of fiscal 2022 and we do not expect them to have a material impact on the Company’s consolidated operating results in foreseeable future periods. The Company continues to operate enhanced health and safety protocols to protect the employees at its Malaysian facility, to respond in the event an employee at the facility is determined to have tested positive for COVID-19, and to mitigate the impact of COVID-19 on the Company’s Malaysian manufacturing operations. However, no such measures can eliminate risks relating to the COVID-19 pandemic, and if the Company’s Malaysian manufacturing facility is subject to future government mandates to counter COVID-19 or 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 also produces surgical gloves and has at times prioritized their production 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 reduced capacity, and the Company may also encounter issues shipping product into key markets or through freight or other carriers. To mitigate these factors, the Company continues to build strategic stock to ensure supply is available during a period of potential disruption. The COVID-19 pandemic and related economic disruption may also adversely affect customer demand for FC2. For example, sales of FC2 could be impacted in the U.S. prescription channel if insurance coverage is affected by job losses and in the global public health 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. The COVID-19 pandemic did not have a material net impact on our consolidated operating results during the three or nine months ended June 30, 2022.
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 as a result of uncertainties, including the extent and rate of the spread of the virus that continue to fluctuate, the potential for additional peaks in infection rates, and the timing and availability of vaccines, treatments or cures to slow and eventually stop the spread. 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 clearer.
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2017JUNE 30, 2022 COMPARED TO THREE MONTHS ENDEDDECEMBER 31, 2016 JUNE 30, 2021
The Company generated net revenues of $2,586,613$9.6 million and net loss of $4,257,152,$22.2 million, or $(0.08)$(0.28) per basic and diluted common share, for the three months ended December 31, 2017,June 30, 2022, compared to net revenues of $3,243,599$17.7 million and net loss of $1,366,181,$2.7 million, or $(0.04)$(0.03) per basic and diluted common share, for the three months ended December 31, 2016.
June 30, 2021. Net revenues decreased $656,986, or 20 percent, on a 31 percent decrease in unit sales46% compared to the prior period.
All of the Company’s net revenues for the three months ended December 31, 2017, compared with the same period last year. The principal factorJune 30, 2022 and 2021 were derived from sales of FC2 in the U.S. prescription channel and global public health sector. There was a decrease isin the period to period impact of the timing of shipments for key customers. The FC2 average sales price per unit increased 16 percentof 6%. The principal factor for the decrease in the FC2 average sales price per unit compared to prior period was the change in the sales mix with the sameU.S. prescription channel representing 70% of total FC2 net revenues in the current year period lastcompared to 76% of total FC2 net revenues in the prior year period. The Company experienced a decrease compared to the prior year period of 50% in FC2 net revenues in the U.S. prescription channel and a decrease compared to the prior year period of 31% in FC2 net revenues in the global public health sector. The decrease in FC2 net revenues in the U.S. prescription channel is primarily due to changeslower volume from telemedicine customers as a result of business challenges they experienced, which resulted in sales mix and unit price increases for customersa slowdown in orders during the current quarter. We expect their historical ordering patterns to resume in future quarters, although there is uncertainty as to timing of the resumption. The reduction in the U.S.
Cost ofglobal public health sector is primarily due to sales decreased $318,741 to $1,272,574 in the three months ended December 31, 2017 from $1,591,315 for the samefiscal 2021 period last year. The reduction is duerelated to the lower unit sales.Brazil and South Africa tenders, which did not repeat in the fiscal 2022 period.
Gross profit decreased $338,245, or 20 percent, to $1,314,039 for the three months ended December 31, 2017 from $1,652,284 for the three months ended December 31, 2016. Gross profit margin for the three months ended December 31, 2017 and for the same period in 2016 was 51 percent of net revenues.
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 sectorhealth sector.
Cost of sales decreased to $2.5 million in the three months ended June 30, 2022 from $3.8 million in the three months ended June 30, 2021 due to the decrease in unit sales.
Gross profit decreased to $7.1 million in the three months ended June 30, 2022 from $13.9 million in the three months ended June 30, 2021. Gross profit margin for the remainderfiscal 2022 period was 74% of net revenues, compared to 79% of net revenues for the fiscal 2018.2021 period. The decrease in the gross profit and gross profit margin is primarily due to higher FC2 net revenues in the U.S. prescription channel in the prior period, which had higher profit margins.
Research and development expenses increased $1,867,686 to $2,038,786 for$18.1 million in the three months ended December 31, 2017June 30, 2022 from $171,100$11.2 million in the prior year period.same period in fiscal 2021. The increase is primarily due to increased research and development costs associated with the multiple in-process research and development projects, acquired pursuant tomainly for the APP AcquisitionPhase 3 COVID-19 registration trial and manufacturing costs for pre-launch inventory, and increased personnel costs associatedcosts. During the third quarter of fiscal 2022, the Company had four Phase 3 clinical trials and two Phase 2 clinical trial ongoing with additional clinical trial initiations planned, compared to two Phase 3 clinical trials and two Phase 2 clinical trials during the research and development.third quarter of fiscal 2022. This clinical trial activity has resulted in increased costs.
Selling, general and administrative expenses increased $418,193, or 17 percent, to $2,947,697 for$10.8 million in the three months ended December 31, 2017June 30, 2022 from $2,529,504$5.6 million in the three months ended June 30, 2021. The increase is due primarily to the following: an increase in compensation costs, resulting from increased personnel and an increase in salaries for a cost-of-living adjustment; increased share-based compensation costs, resulting from an increase in headcount and an increase in the fair value of stock options due to increased volatility in our stock price; and additional costs associated with the commercialization of ENTADFI™, commercialization costs related to preparations for the potential launch of sabizabulin for COVID-19, and the launch of the Company’s own dedicated direct to patient telemedicine and pharmacy services portal/platform for FC2.
Interest expense, which is related to the Credit Agreement and Residual Royalty Agreement, was $1.2 million in the three months ended June 30, 2022, which is comparable with $1.3 million in the three months ended June 30, 2021.
Income associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $0.9 million in the three months ended June 30, 2022, compared to expense of $1.3 million in the three months ended June 30, 2021. 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.
Income tax expense in the third quarter of fiscal 2022 was $138,000, compared to income tax benefit of $2.9 million in the third quarter of fiscal 2021. The change is due primarily to a tax benefit recorded in the prior year period resulting from an adjustment of the value of U.K. net operating losses due to an increase in the U.K. tax rates from 19% to 25%. The U.S. continues to have a full valuation allowance on its deferred tax assets; therefore, activity in the U.S. has no effect on income tax expense.
NINE MONTHS ENDED JUNE 30, 2022 COMPARED TO NINE MONTHS ENDED JUNE 30, 2021
The Company generated net revenues of $36.8 million and net loss of $42.8 million, or $(0.53) per basic and diluted common share, for the nine months ended June 30, 2022, compared to net revenues of $45.6 million and net income of $11.7 million, or $0.16 per basic common share and $0.14 per diluted common share, for the nine months ended June 30, 2021. Net revenues decreased 19% over the prior period.
All of the Company’s net revenues for the nine months ended June 30, 2022 and most of the Company’s net revenues for the nine months ended June 30, 2021 were derived from sales of FC2 in the U.S. prescription channel and global public health sector. There was a 47% decrease in total FC2 unit sales and an increase in FC2 average sales price per unit of 54%. The principal factor for the increase in the FC2 average sales price per unit compared to prior period was the change in the sales mix with the U.S. prescription channel representing 81% of total FC2 net revenues in the current year period compared to 74% of total FC2 net revenues in the prior year period. The increase primarily relatesCompany experienced a decrease compared to salaries for ourthe prior year period of 9% in FC2 net revenues in the U.S. Commercial team, partprescription channel and a decrease compared to the prior year period of our Commercial reporting segment.
42% in FC2 net revenues in the global public health sector. The Company incurred a loss ondecrease in FC2 net accounts receivable of approximately $3.76 million forrevenues in the three months ended December 31, 2017,U.S. prescription channel is due to lower volume from telemedicine customers as a result of business challenges they experienced, which resulted in a settlement agreement we entered with Semina, our distributorslowdown in Brazil. This amountorders during the current quarter. We expect their historical ordering patterns to resume in future quarters, although there is presenteduncertainty as a separate line itemto timing of the resumption. The reduction in the accompanying unaudited condensed consolidated statement of operations.
Business acquisition expenses for the three months ended December 31, 2017 decreasedglobal public health sector is primarily due to zero from $826,370sales in the prior yearfiscal 2021 period for expenses representing costs related to the APP Acquisition.
InterestBrazil and other expense, net,South Africa tenders, which did not repeat in the fiscal 2022 period. Results for the threenine months ended June 30, 2021 included net revenues of $0.9 million related to the PREBOOST® business before the sale of such business in December 31, 20172020.
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 health sector.
Cost of sales decreased to $6.7 million in the nine months ended June 30, 2022 from $10.0 million in the nine months ended June 30, 2021 due to the decrease in unit sales.
Gross profit decreased to $30.1 million in the nine months ended June 30, 2022 from $35.6 million in the nine months ended June 30, 2021. Gross profit margin for the fiscal 2022 period was $13,169,82% of net revenues, compared to $9,62178% of net revenues for the fiscal 2021 period. The increase in the gross profit and gross profit margin is primarily due to the increase in FC2 net revenues in the U.S. prescription channel as a percentage of total net revenues, which have higher profit margins.
Research and development expenses increased to $43.8 million in the nine months ended June 30, 2022 from $24.4 million in the same period in fiscal year 2017.2021. The increase is primarily due to increased costs associated with the multiple in-process research and development projects, mainly for the Phase 3 COVID-19 registration trial, the Phase 3 VERACITY clinical study, and the Phase 3 ARTEST study; as well as increased personnel costs. During the nine months ended June 30, 2022, the Company had four Phase 3 clinical trials and two Phase 2 clinical trial ongoing with additional clinical trial initiations planned, compared to two Phase 3 clinical trials and three Phase 2 clinical trials during the third quarter of fiscal 2022. This clinical trial activity has resulted in increased costs.
Selling, general and administrative expenses increased to $24.8 million in the nine months ended June 30, 2022 from $14.7 million in the nine months ended June 30, 2021. The increase is due primarily to the following: an increase in compensation costs, resulting from increased personnel and an increase in salaries for a cost-of-living adjustment; increased share-based compensation costs, resulting from an increase in headcount and an increase in the fair value of stock options due to increased volatility in our stock price; and additional costs associated with the commercialization of ENTADFI™, commercialization costs related to preparations for the potential launch of sabizabulin for COVID-19, and the launch of the Company’s own dedicated direct to patient telemedicine and pharmacy services portal/platform for FC2.
During the nine months end June 30, 2021, we recorded a foreign currency transaction losspre-tax gain on sale of $53,455the Company’s PREBOOST® business of $18.4 million. See Note 2 to the financial statements included in this report for additional information.
Interest expense, which is related to the Credit Agreement and Residual Royalty Agreement, was $3.6 million in the most recent quarter,nine months ended June 30, 2022, which is comparable to $3.7 million in the nine months ended June 30, 2021.
Expense associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $0.6 million in the nine months ended June 30, 2022, compared to $11,939 forexpense of $2.0 million in the same period last year.
The income tax benefit for the threenine months ended December 31, 2017June 30, 2021. 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.
Income tax expense in the nine months ended June 30, 2022 was $3,246,053,$224,000, compared to income tax benefit of $530,069 for$2.8 million in the samenine months ended June 30, 2021. The change is due primarily to a tax benefit recorded in the prior year period in fiscal year 2017. Theresulting from an adjustment of the value of U.K. net operating losses due to an increase in the incomeU.K. tax benefit is duerates from 19% to the change25%. The U.S. continues to have a full valuation allowance on its deferred tax assets; therefore, activity in the U.S. federal corporatehas no effect on income tax rate from 35% to 21% under the Tax Act and the increase in the loss before income taxes.expense.
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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 $11.4cash equivalents on hand at June 30, 2022 was $100.6 million, compared to $122.4 million at September 30, 2017 to $3.0 million at December 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.
2021. At December 31, 2017,June 30, 2022, the Company had working capital of $4.0$100.6 million and stockholders’ equity of $44.8$116.9 million compared to working capital of $4.8$136.0 million and stockholders’ equity of $48.5$152.3 million as of December 31, 2016.September 30, 2021. The decrease in working capital is primarily due to the decrease in cash on hand, related to our increased spend on research and development costs, and an increase in accounts payable and accrued research and development costs.
We anticipate that we will continue to consume cash 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, “Risk Factors - We may need to seek and secure significant funding through financings or from other sources to effectively commercialize sabizabulin as a treatment for COVID-19” below in this Quarterly Report on 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, 2021 for a description of certain risks that will affect our future capital requirements.
The Company believes its current cash position and cash expected to be generated from sales of the Company’s approved products, FC2 and ENTADFI, are adequate to fund planned operations of the Company for the next 12 months. To the extent the Company may need additional capital for its operations or the conditions for raising capital are favorable, the Company may access financing alternatives that 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 current effective shelf registration statement on Form S-3 (File No. 333-239493) or under a new registration statement.
Operating activities
Operating activities used cash of $26.6 million in the nine months ended June 30, 2022. Cash used in operating activities included net loss of $42.8 million, adjustments to reconcile net loss to net cash used in operating activities totaling an increase of $9.5 million and changes in operating assets and liabilities resulting in an increase of $6.6 million. Adjustments to net loss primarily consisted of $6.9 million of share-based compensation and interest expense in excess of interest paid of $1.4 million. The increase in cash from changes in operating assets and liabilities included an increase in accounts payable of $3.5 million and an increase in accrued expenses and other current liabilities of $8.3 million, partially offset by an increase in accounts receivable of $0.9 million, an increase in inventory of $2.2 million, and an increase in prepaid expenses and other current assets of $1.7 million.
Operating activities used cash of $14.8 million in the nine months ended June 30, 2021. Cash from operating activities included net income of $11.7 million, adjustments to reconcile net income to net cash provided by operating activities totaling a reduction of $17.9 million and changes in operating assets and liabilities of $8.5 million. Adjustments to net income primarily consisted of $18.4 million related to the gain on sale of the
PREBOOST® business, $2.9 million of interest paid in excess of interest expense, and $2.9 million of deferred income taxes, partially offset by $3.7 million of share-based compensation and $2.0 million for the change in fair value of derivative liabilities. The decrease in cash from changes in operating assets and liabilities included an increase in prepaid expenses and other assets of $9.6 million and an increase in accounts receivable of
$3.1 million, partially offset by an increase in accrued expenses and other current liabilities of $2.8 million.
Investing activities
Net cash from investing activities was $4.4 million in the nine months ended June 30, 2022, and consisted of $5.0 million collected on notes receivable from the sale of the Company’s PREBOOST® business, partially offset by $0.6 million associated with capital expenditures primarily at our U.S. location.
Net cash from investing activities was $14.8 million in the nine months ended June 30, 2021, primarily attributed to $15.0 million received from the sale of the Company’s PREBOOST® business.
Financing activities
Net cash provided by financing activities in the nine months ended June 30, 2022 was $0.4 million, attributed toproceeds from stock option exercises of $0.4 million.
Net cash provided by financing activities in the nine months ended June 30, 2021 was $109.5 million and primarily consisted of proceeds from the underwritten public offering of the Company’s common stock, net of fees and costs paid through June 30, 2021 of $108.0 million (see discussion below) and proceeds from stock option exercises of $1.5 million.
Sources of Capital
Common Stock Offering
On February 22, 2021, we completed an underwritten public offering of 7,419,354 shares of our common stock, which included the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $15.50 per share. Net proceeds to the Company from this offering were $108.0 million after deducting underwriting discounts and commissions and costs incurred by the Company. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239493).
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 Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement. The Agent has released its security interest in Company collateral previously pledged to secure its obligations under the Credit Agreement.
In connection with the Company's acquisitionCredit Agreement, Veru and the Agent also entered into a Residual Royalty Agreement, dated as of intellectual property rights associated with Solifenacin DRGMarch 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, which continues after the repayment of the loan and Tadalafil/ Finasteride combination capsules,return premium under the Credit Agreement. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company will be obligatedof the amount due in connection therewith pursuant to make upfrontthe Residual Royalty Agreement, or (ii) mutual agreement of the parties.
The Company made total payments totaling $500,000 by March 2018, as well as future installmentunder the Residual Royalty Agreement of $2.1 million during the nine months ended June 30, 2022 and made total payments and milestone payments.
The Company's Credit Agreement with BMO Harris Bank N.A. expired on December 29, 2017. No amounts were outstanding under the Credit Agreement of $6.4 million during the threenine months ended December 31, 2017 or 2016.June 30, 2021. The Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12-month period subsequent to June 30, 2022 will be approximately $3.1 million under the Residual Royalty Agreement.
Aspire Capital Purchase Agreement
On December 29, 2017,June 26, 2020, the Company entered into thea common stock purchase agreement (the “2020 Purchase AgreementAgreement”) 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 and in its sole discretion during the 36-month term of the 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $15.0$23.9 million of the Company'sCompany’s common stock in the aggregate. Upon execution of the 2020 Purchase Agreement, the Company issued and sold to Aspire Capital under the 2020 Purchase Agreement 1,644,737 shares of common stock at a price per share of $3.04, for an aggregate purchase price of $5,000,000. Other than the 304,457212,130 shares of common stock issued to Aspire Capital in consideration for entering into the 2020 Purchase Agreement and the initial sale of 1,644,737 shares of common stock, the Company has no obligation to sell any shares of common stock pursuant to the 2020 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 2020 Purchase Agreement. As of the date of filing this Quarterly Report with the SEC, noThe Company has not sold shares of the Company’s common stock have been sold to Aspire Capital under the 2020 Purchase Agreement.
The Company believes its current cash position and its ability to secure equity financing or other financing alternatives are adequate to fund operationsAgreement since June 2020. As of June 30, 2022, the Company for the next 12 months. Such financing alternatives may include debt financing, convertible debt or other equity-linked securities and may include financingsamount remaining under the Company's current2020 Purchase Agreement was $18.9 million, which is registered under the Company’s shelf registration statement on Form S-3 (File No. 333-221120)333-239493).
Fair Value Measurements
As of June 30, 2022 and September 30, 2021, 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 Company's intentionfair values of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company previously determined the fair value of the embedded derivatives using a Monte Carlo simulation model. Since the Credit Agreement has been satisfied as of September 30, 2021, the fair value of the embedded derivative within the Residual Royalty Agreement has been calculated by using a scenario-based method, whereby different scenarios are valued and probability weighted. The Company determined that with only the embedded derivative under the Residual Royalty Agreement remaining, there is to be opportunistic when pursuing equity financingno material difference between these two valuation models. The scenario-based valuation model incorporates transaction details such as the contractual terms of the instrument and assumptions including projected FC2 revenues, expected cash outflows, probability and estimated dates of a change of control, risk-free interest rates and applicable credit risk. 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 include selling common stock underhave a material effect on our results of operations. See Note 3 to the Purchase Agreement with Aspire Capital and/or a marketed deal with an investment bank. See Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Needfinancial statements included in this report for Capital" in the Company's Form 10-K for the year ended September 30, 2017, for a description of certain risks related to our ability to raise capital on acceptable terms.additional information.
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, 2021. 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 linesuch exposures since September 30, 2021.
Item 4. 4. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any material pending legal proceedings at the date of filing of this Quarterly Report on Form 10-Q.
In connection with the APP Acquisition, two purported derivative and class action lawsuits were filed against the Company in the Circuit Court 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 members of our board 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.
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, 2017.2021. 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, 2017,2021, except for the following additional risk factor:factors relating to our development of sabizabulin as a treatment for COVID-19 viral infection. 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 which could affect the risk factors set forth below.
We may be unable to obtain an emergency use authorization from the FDA to market sabizabulin as a potential treatment for COVID-19 in the United States in a timely manner, if at all.
In response to the global outbreak of COVID-19, we have been pursuing the development of sabizabulin as a treatment for COVID-19. Our ability to commercialize sabizabulin as a treatment for COVID-19 will depend on regulatory approval in the United States and other jurisdictions. In the United States, we initially plan to use the FDA's Emergency Use Authorization ("EUA") process, and on June 7, 2022, the Company submitted a request for an EUA. EUA is a form of temporary marketing authorization that the FDA may grant to an investigational drug at times when the Secretary of Health and Human Services has declared a public health emergency to exist. This declaration was made by the Secretary of Health and Human Services in March 2020 in relation to the COVID-19 pandemic. In order to grant an EUA, the FDA must determine that an investigational drug is safe and may be effective in treating the disease that is the subject of the public health emergency. Although the EUA process is designed to enable more expeditious marketing of a drug in response to a public health emergency, FDA review of an EUA application may take longer than expected and may result in the FDA requesting additional data or other information that may have the effect of delaying the EUA, and any agreements or positions taken by the FDA in a pre-EUA meeting does not bind the FDA or prevent it from later taking a different position, asking for more data, or delaying or denying the application. The recently passed Tax Cuts and Jobs ActFDA may decline to grant an EUA if it concludes that an investigational drug is not safe or effective. If any such issues arise in connection with our submission of an EUA for sabizabulin, our ability to market sabizabulin as a COVID-19 treatment may delayed or dependent on a more time-consuming regulatory approval process, which may have a significant impactmaterial adverse effect on our financial conditionbusiness. If we are granted an EUA by the FDA for sabizabulin, we would be able to distribute sabizabulin under the conditions set forth in the EUA prior to FDA approval. Furthermore, the FDA may revoke (or refuse to grant) an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, and resultswe cannot predict how long, if ever, an EUA would remain in place. Such revocation could adversely impact our business in a variety of operations.ways, including if sabizabulin is not yet approved by the FDA and if we and our manufacturing partners have invested in the supply chain to provide sabizabulin under an EUA.
On December 22, 2017, significant changes were enactedWe may be unable to obtain emergency authorizations or approvals from regulatory authorities in foreign countries to market sabizabulin as a potential treatment for COVID-19 in a timely manner, if at all.
Similar to the U.S. tax law pursuantregulatory challenges we face for an EUA or approval of sabizabulin for the treatment of COVID-19 in the United States, we will not be able to H.R.1. “An Actmarket sabizabulin for the treatment of COVID-19 in any foreign jurisdiction without an applicable authorization or approval in any such foreign jurisdiction. We have never received any such authorization or approval for any of our drug candidates from any foreign regulatory authority and, even if such an authorization or approval is granted, we have no experience marketing a drug outside the United States. Like any EUA or approval in the United States, any authorization or approval outside the United States may be subject to Provide for Reconciliation Pursuant to Titles II and Vvarious conditions required by any such foreign regulatory authority. There can be no assurances of the Concurrent Resolutiontiming of receipt of any such foreign authorization or approval or whether we will receive any such foreign authorization or approval at all and, if we do receive any such authorization or approval, whether we will be able to market sabizabulin on favorable economic terms.
We lack experience in scaling-up and commercializing a drug product.
We are working toward the Budgetlarge-scale technical development, manufacturing scale-up and larger scale deployment of sabizabulin as a COVID-19 treatment. To support the scale-up, we have expended and will need to continue to expend significant resources and capital. In connection with this process, we may seek to enter into a collaboration or other arrangement with a larger organization, although we may be unable to enter into such arrangements on favorable terms, or at all, or may decide to proceed with development and commercialization on our own. In that case, we will need to expend significant resources to commercialize sabizabulin, which may require additional financial resources. As part of our efforts, we intend to apply for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act makes broad and complex changes toan advanced purchase agreement from the U.S. tax codegovernment and governments outside the U.S. There can be no assurances that could materially affect us. any such advanced purchase agreements will be executed. The Tax Act includes a permanent reductiongovernment from which an advanced purchase agreement is obtained may also impose restrictions on or mandate input as to our conduct of manufacturing activities or distribution activities, which may cause delays in the U.S. federal corporate income tax rate from 35%event of disagreement.
In addition, since the path to 21%, requires companieslicensure or emergency approval of any COVID-19 treatment remains uncertain, we may have a widely used drug in circulation in the United States or another country prior to pay a one-time transition tax on the previously untaxed earningsour receipt 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.
Whilemarketing approval. Unexpected safety issues, including any that we have reflectednot yet observed in our clinical trials for sabizabulin, could lead to significant reputational damage for us and our drug development program going forward and other issues, including delays in our other programs, the impactneed for re-design of our clinical trials and the need for significant additional financial resources.
If we are unable to manufacture sabizabulin as a COVID-19 treatment in sufficient quantities, at sufficient yields or are unable to obtain regulatory approvals for a manufacturing facility for sabizabulin, we may experience delays in product development, regulatory approval and commercial distribution.
Commercialization of sabizabulin as a COVID-19 treatment will require access to facilities to manufacture sabizabulin at sufficient yields and at commercial-scale. We have no experience in manufacturing any of our drug candidates in the volumes that would be necessary to support commercial sales. Efforts to establish these capabilities may not meet initial expectations as to scheduling, scale-up, reproducibility, yield, purity, cost, potency or quality. In addition, other companies, many with substantial resources, may compete with us for access to materials needed to manufacture sabizabulin.
Manufacturing sabizabulin as a COVID-19 treatment will involve a complicated process with which we have limited experience. We are dependent on third-party organizations to conduct our manufacturing activities. If third-party manufacturing organizations are unable to manufacture sabizabulin in commercial quantities and at sufficient yields, then we will need to identify and reach supply arrangements with additional third parties. Third-party manufacturers must also be inspected by the FDA as part of the Tax ActFDA’s review of our marketing application. Sabizabulin may be in competition with other products for access to these facilities and may be subject to delays in manufacturing if third parties give other products higher priority. We may not be able to enter into any necessary additional third-party manufacturing arrangements on acceptable terms, or on a timely basis. In addition, we have to enter into technical transfer agreements and share our know-how with the accountingthird-party manufacturers, which can be time-consuming and may result in delays. Any delay in the manufacture or delivery of sabizabulin could adversely affect our ability to sell sabizabulin as a COVID-19 treatment, if approved.
Our reliance on third-party manufacturers may adversely affect our operations or result in unforeseen delays or other problems beyond our control. Because of certain discrete items, we are still evaluatingcontractual restraints and the full potential impactlimited number of third-party manufacturers with the Tax Actexpertise, required regulatory approvals and facilities to manufacture sabizabulin on a commercial scale, replacement of a manufacturer may be expensive and time-consuming and may cause interruptions in the production of sabizabulin. A third-party manufacturer may also encounter difficulties in production. These problems may include:
difficulties with production costs, scale up and yields;
availability of raw materials and supplies;
quality control and assurance;
shortages of qualified personnel;
compliance with strictly enforced federal, state and foreign regulations that vary in each country where products might be sold; and
lack of capital funding.
As a result, any delay or interruption could have a material adverse effect on our tax provision and deferred tax assets. It is possible that the changes contained in the Tax Act could result in a write down of deferred tax assets or otherwise have an adverse impact on our effective tax rate, tax payments,business, financial condition, or results of operations. The Tax Act is complex and additional interpretative guidance
We may face competition in connection with sabizabulin for a COVID-19 treatment.
Another party may be issuedsuccessful in producing a more efficacious treatment for COVID-19 which may also lead to the diversion of governmental and quasi-governmental funding away from us and toward other companies. In particular, given the widespread media attention on the current COVID-19 pandemic, there are efforts by public and private entities to develop COVID-19 treatments. Those other entities may develop COVID-19 treatments that, as compared to sabizabulin, are more effective, become the standard of care, have broader market acceptance, are safer or have fewer or less severe side effects, are more convenient, are developed at a lower cost or earlier, or may be more successfully commercialized. Many of these other organizations are much larger than we are and have access to larger pools of capital and broader manufacturing infrastructure. Larger pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for their products, and may have the resources to heavily invest to accelerate discovery and development of their vaccine candidates. Our business could affect interpretationsbe materially and assumptionsadversely affected if competitors develop and commercialize one or more COVID-19 treatments before we have made,can complete development and seek approval for sabizabulin.
Our ability to produce a treatment for the COVID-19 virus may be curtailed by government actions or interventions, which may be more likely during a global health crisis such as well as actions weCOVID-19.
Given the significant global impact of the COVID-19 pandemic, it is possible that one or more government entities may take actions that directly or indirectly have the effect of diminishing some of our rights or opportunities with respect to sabizabulin and the economic value of a COVID-19 treatment to us could be limited. Governments and other health authorities may also focus on vaccines rather than treatment options such as sabizabulin in addressing the COVID-19 pandemic, which may reduce funding and other market opportunities for sabizabulin. We also intend to seek to enter into contracts with the U.S. government and other health authorities to supply sabizabulin, which will depend on spending and political priorities, the availability of alternative treatment options, and the continuation of the COVID-19 as a public health emergency. Government entities may also impose restrictions or limitations on our third-party service providers and may require us to obtain alternative sources for sabizabulin. If we are unable to timely enter into alternative arrangements, or if such alternative arrangements are not available on satisfactory terms, we will experience delays in the development or production of our sabizabulin, increased expenses, and delays in potential distribution or commercialization of our vaccine candidates, when and if approved.
We may need to seek and secure significant funding through financings or from other sources to effectively commercialize sabizabulin as a treatment for COVID-19.
We are currently advancing our pipeline of prostate and breast cancer drug candidates and are conducting multiple clinical studies. Discovering development candidates and developing investigational medicines is expensive, and we expect to continue to spend substantial amounts to (i) perform basic research, perform preclinical studies, and conduct clinical trials of our current and future programs, (ii) continue to develop and expand our platform and infrastructure and supply preclinical studies and clinical trials with appropriate grade materials (including cGMP materials), (iii) seek regulatory approvals for our investigational medicines, and (iv) launch and commercialize any products for which we receive regulatory approval, including building our own commercial sales, marketing, and distribution organization. Furthermore, our ongoing work on sabizabulin will require significant additional investment during 2022 and beyond.
As of June 30, 2022, we had approximately $100.6 million in cash and cash equivalents. We expect that our existing cash and cash equivalents will be sufficient to fund our current operations through at least the next twelve months. However, our operating plan may change as a result of many factors currently unknown to us, including with respect to our development, manufacturing and commercialization of sabizabulin for COVID-19 and availability and conditions of advanced purchase agreements, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, structured financings, government or other third-party funding, sales of assets, marketing and distribution arrangements, other collaborations and licensing arrangements, or a combination of these approaches. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations. Our spending will vary based on new and ongoing development and corporate activities. Because the Tax Act.length of time and activities associated with discovery of development candidates and development of our investigational medicines are highly uncertain, we are unable to estimate the actual funds we will require for development, marketing, and commercialization activities.
Exhibit Number | Description |
2.1 | |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
3.8 | |
3.9 | |
4.1 | Amended and Restated Articles of Incorporation, as amended (same as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,3.7and |
4.2 | Articles II, VII and XI of the Amended and Restated By-Laws (included in Exhibit |
10.1 | |
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33
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31.2 | |
32.1 | |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended |
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104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101). |
* | 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. |
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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, 2018August 11, 2022
/s/ Mitchell S. Steiner
Mitchell S. Steiner President and
Chairman, Chief Executive Officer and President
DATE: February 14, 2018August 11, 2022
/s/ Michele Greco
Michele Greco Executive Vice President of Finance
Chief Financial Officer and
Chief Administrative Officer