UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31 2020, 2021
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-13602
Veru Inc.
(Exact Name of Registrant as Specified in its Charter)
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Wisconsin |
| 39-1144397 |
(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
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48 NW 25th Street, Suite 102, Miami, FL |
| 33127 |
(Address of Principal Executive Offices) |
| (Zip Code) |
305-509-6897
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | VERU | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
| Accelerated filer ☐ |
Non-accelerated filer ☒ |
| Smaller reporting company☒ |
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| Emerging growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as determined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 11, 2020,10, 2021, the registrant had 66,095,53879,683,554 shares of $0.01 par value common stock outstanding.
VERU INC.
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PART I. FINANCIAL INFORMATION |
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5 | |
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5 | |
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6 | |
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Unaudited Condensed Consolidated Statements of Stockholders’ Equity | 7 |
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8 | |
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Notes to Unaudited Condensed Consolidated Financial Statements | 9 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 38 |
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PART II. OTHER INFORMATION |
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2
Certain statements included in this quarterly report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the anticipated or potential impact of COVID-19 and the global response thereto on our financial statementscondition or business, future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, debt repayments, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, clinical trial timing, 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" or the negative of these terms or other words of similar meaning. These statements are based upon the Company's current plans and strategies and reflect the Company's current assessment of the risks and uncertainties related to its business and are made as of the date of this report. These statements are 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; |
· | 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 |
· | 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 |
· | risks related to the development of our product portfolio, including clinical trials, regulatory approvals and time and cost to bring to market; |
· | risks related to the impact of the COVID-19 pandemic on our business, the nature and extent of which is highly uncertain and unpredictable; |
· | our pursuit of a COVID-19 treatment candidate is |
· | risks related to our commitment of financial resources and personnel to the development of a COVID-19 treatment which may cause delays in or otherwise negatively impact our other development programs, despite uncertainties about the longevity and extent of COVID-19 as a global health concern |
· | government entities may take actions that directly or indirectly have the effect of limiting opportunities for |
· | product demand and market |
· | some of our products are in development and we may fail to successfully commercialize such products; |
· | risks related to intellectual property, including the uncertainty of obtaining intellectual property protections and in enforcing them, the possibility of infringing a third party’s intellectual property, and licensing risks; |
· | 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 |
3
· | the risk that we will be affected by regulatory and legal developments, including a reclassification of |
· | 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 actions; |
· | our reliance on major customers and risks related to delays in payment of accounts receivable by major customers; |
3
· | 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 |
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· | our ability to identify, successfully negotiate and complete suitable acquisitions or other strategic 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 described above and in Part I, Item 1A, "Risk Factors," in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and Part II, Item 1A of this Form 10-Q.2020. 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 except as required by applicable law.
4
PART I.FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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| March 31, |
| September 30, | March 31, |
| September 30, | ||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | 2,557,514 |
| $ | 6,295,152 | $ | 136,675,153 |
| $ | 13,588,778 |
Accounts receivable, net |
| 5,802,016 |
| 5,021,057 |
| 5,149,154 |
| 5,227,237 | ||
Notes receivable, short-term portion |
| 2,500,000 |
| — | ||||||
Inventory, net |
| 6,016,323 |
| 3,647,406 |
| 7,794,523 |
| 6,704,134 | ||
Prepaid expenses and other current assets |
| 3,084,037 |
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| 1,843,297 |
| 3,932,823 |
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| 1,494,541 |
Total current assets |
| 17,459,890 |
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| 16,806,912 |
| 156,051,653 |
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| 27,014,690 |
Plant and equipment, net |
| 332,362 |
| 351,895 |
| 271,166 |
| 312,691 | ||
Operating lease right-of-use assets |
| 1,075,601 |
| — |
| 1,166,351 |
| 1,352,315 | ||
Deferred income taxes |
| 8,632,613 |
| 8,433,669 |
| 9,435,877 |
| 9,466,800 | ||
Intangible assets, net |
| 20,010,311 |
| 20,168,495 |
| 4,084,524 |
| 5,752,127 | ||
Goodwill |
| 6,878,932 |
| 6,878,932 |
| 6,878,932 |
| 6,878,932 | ||
Notes receivable, long-term portion |
| 2,500,000 |
| — | ||||||
Other assets |
| 1,486,446 |
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| 988,867 |
| 762,746 |
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| 766,120 |
Total assets | $ | 55,876,155 |
| $ | 53,628,770 | $ | 181,151,249 |
| $ | 51,543,675 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable | $ | 4,235,679 |
| $ | 3,124,751 | $ | 5,722,391 |
| $ | 2,812,673 |
Accrued research and development costs |
| 2,204,196 |
| 2,475,490 |
| 1,100,410 |
| 934,110 | ||
Accrued compensation |
| 1,537,483 |
| 1,597,197 |
| 2,233,650 |
| 2,274,396 | ||
Accrued expenses and other current liabilities |
| 1,781,446 |
| 1,436,888 |
| 1,970,721 |
| 1,177,126 | ||
Credit agreement, short-term portion |
| 6,662,842 |
| 5,385,649 | ||||||
Credit agreement liability |
| 4,467,766 |
| 5,841,874 | ||||||
Residual royalty agreement liability, short-term portion |
| 2,805,741 |
| 1,100,193 | ||||||
Operating lease liability, short-term portion |
| 398,513 |
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| 566,521 |
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| 586,769 |
Total current liabilities |
| 16,820,159 |
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| 14,019,975 |
| 18,867,200 |
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| 14,727,141 |
Credit agreement, long-term portion |
| 2,333,267 |
| 2,886,382 | ||||||
Residual royalty agreement |
| 4,408,215 |
| 3,845,518 | ||||||
Residual royalty agreement liability, long-term portion |
| 5,911,983 |
| 5,617,494 | ||||||
Operating lease liability, long-term portion |
| 871,572 |
| — |
| 786,350 |
| 990,020 | ||
Deferred income taxes |
| 296,605 |
| 296,605 |
| 74,724 |
| 74,724 | ||
Other liabilities |
| 31,760 |
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| 247,154 |
| 14,986 |
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| 22,980 |
Total liabilities |
| 24,761,578 |
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| 21,295,634 |
| 25,655,243 |
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| 21,432,359 |
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Commitments and contingencies (Note 12) |
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Stockholders' equity: |
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Preferred stock; no shares issued and outstanding at March 31, 2020 and September 30, 2019 |
| — |
| — | ||||||
Common stock, par value $0.01 per share; 154,000,000 shares authorized, 67,879,242 and 67,221,951 shares issued and 65,695,538 and 65,038,247 shares outstanding at March 31, 2020 and September 30, 2019, respectively |
| 678,792 |
| 672,220 | ||||||
Preferred stock; no shares issued and outstanding at March 31, 2021 and September 30, 2020 |
| — |
| — | ||||||
Common stock, par value $0.01 per share; 154,000,000 shares authorized, 81,867,258 and 72,047,385 shares issued and 79,683,554 and 69,863,681 shares outstanding at March 31, 2021 and September 30, 2020, respectively |
| 818,673 |
| 720,474 | ||||||
Additional paid-in-capital |
| 113,158,536 |
| 110,268,057 |
| 237,876,289 |
| 126,971,518 | ||
Accumulated other comprehensive loss |
| (581,519) |
| (581,519) |
| (581,519) |
| (581,519) | ||
Accumulated deficit |
| (74,334,627) |
| (70,219,017) |
| (74,810,832) |
| (89,192,552) | ||
Treasury stock, 2,183,704 shares, at cost |
| (7,806,605) |
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| (7,806,605) |
| (7,806,605) |
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| (7,806,605) |
Total stockholders' equity |
| 31,114,577 |
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| 32,333,136 |
| 155,496,006 |
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| 30,111,316 |
Total liabilities and stockholders' equity | $ | 55,876,155 |
| $ | 53,628,770 | $ | 181,151,249 |
| $ | 51,543,675 |
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See notes to unaudited condensed consolidated financial statements. |
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5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| Three Months Ended |
| Six Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| March 31, |
| March 31, | March 31, |
| March 31, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
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Net revenues | $ | 9,943,104 |
| $ | 6,976,115 |
| $ | 20,521,120 |
| $ | 13,347,924 | $ | 13,340,487 |
| $ | 9,943,104 |
| $ | 27,957,476 |
| $ | 20,521,120 |
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Cost of sales |
| 2,506,606 |
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| 2,367,264 |
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| 5,815,527 |
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| 4,094,993 |
| 2,432,187 |
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| 2,506,606 |
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| 6,212,543 |
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| 5,815,527 |
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Gross profit |
| 7,436,498 |
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| 4,608,851 |
| 14,705,593 |
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| 9,252,931 |
| 10,908,300 |
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| 7,436,498 |
| 21,744,933 |
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| 14,705,593 | ||
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Operating expenses: |
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Research and development |
| 3,930,260 |
| 2,910,587 |
| 9,230,234 |
| 5,272,410 |
| 7,572,813 |
| 3,930,260 |
| 13,250,567 |
| 9,230,234 | ||||||
Selling, general and administrative |
| 3,805,916 |
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| 3,822,854 |
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| 7,559,430 |
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| 7,116,838 |
| 4,806,897 |
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| 3,805,916 |
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| 9,188,777 |
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| 7,559,430 |
Total operating expenses |
| 7,736,176 |
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| 6,733,441 |
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| 16,789,664 |
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| 12,389,248 |
| 12,379,710 |
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| 7,736,176 |
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| 22,439,344 |
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| 16,789,664 |
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Operating loss |
| (299,678) |
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| (2,124,590) |
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| (2,084,071) |
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| (3,136,317) | |||||||||||
Gain on sale of PREBOOST® business |
| — |
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| — |
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| 18,410,158 |
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| — | |||||||||||
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Operating (loss) income |
| (1,471,410) |
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| (299,678) |
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| 17,715,747 |
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| (2,084,071) | |||||||||||
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Non-operating (expenses) income: |
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Interest expense |
| (1,164,962) |
| (1,258,272) |
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| (2,306,387) |
| (2,536,695) |
| (1,251,551) |
| (1,164,962) |
|
| (2,440,734) |
| (2,306,387) | ||||
Change in fair value of derivative liabilities |
| 469,000 |
| (628,000) |
|
| 75,000 |
| (403,000) |
| (53,000) |
| 469,000 |
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| (657,000) |
| 75,000 | ||||
Other income (expense), net |
| 51,991 |
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| 1,994 |
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| (10,035) |
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| 10,844 | |||||||||||
Other (expense) income, net |
| (48,330) |
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| 51,991 |
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| (136,301) |
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| (10,035) | |||||||||||
Total non-operating expenses |
| (643,971) |
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| (1,884,278) |
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| (2,241,422) |
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| (2,928,851) |
| (1,352,881) |
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| (643,971) |
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| (3,234,035) |
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| (2,241,422) |
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Loss before income taxes |
| (943,649) |
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| (4,008,868) |
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| (4,325,493) |
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| (6,065,168) | |||||||||||
(Loss) income before income taxes |
| (2,824,291) |
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| (943,649) |
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| 14,481,712 |
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| (4,325,493) | |||||||||||
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Income tax (benefit) expense |
| (133,140) |
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| 25,167 |
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| (209,883) |
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| 117,665 | |||||||||||
Income tax expense (benefit) |
| 21,690 |
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| (133,140) |
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| 99,992 |
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| (209,883) | |||||||||||
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Net loss | $ | (810,509) |
| $ | (4,034,035) |
| $ | (4,115,610) |
| $ | (6,182,833) | |||||||||||
Net (loss) income | $ | (2,845,981) |
| $ | (810,509) |
| $ | 14,381,720 |
| $ | (4,115,610) | |||||||||||
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Net loss per basic and diluted common share outstanding | $ | (0.01) |
| $ | (0.06) |
| $ | (0.06) |
| $ | (0.10) | |||||||||||
Net (loss) income per basic common share outstanding | $ | (0.04) |
| $ | (0.01) |
| $ | 0.20 |
| $ | (0.06) | |||||||||||
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Basic and diluted weighted average common shares outstanding |
| 65,367,493 |
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| 62,767,258 |
| 65,202,103 |
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| 62,659,352 | ||||||||||||
Basic weighted average common shares outstanding |
| 75,175,077 |
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| 65,367,493 |
| 72,717,621 |
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| 65,202,103 | ||||||||||||
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Net (loss) income per diluted common share outstanding | $ | (0.04) |
| $ | (0.01) |
| $ | 0.18 |
| $ | (0.06) | |||||||||||
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Diluted weighted average common shares outstanding |
| 75,175,077 |
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| 65,367,493 |
| 80,654,070 |
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| 65,202,103 | ||||||||||||
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See notes to unaudited condensed consolidated financial statements. | See notes to unaudited condensed consolidated financial statements. | See notes to unaudited condensed consolidated financial statements. |
6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
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| Accumulated |
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| Accumulated |
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| Additional |
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| Treasury |
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| Additional |
| Other |
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| Treasury |
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| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Stock, |
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| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Stock, |
|
|
| ||||||||||||||
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| at Cost |
| Total | 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 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019 | 67,221,951 |
| $ | 672,220 |
| $ | 110,268,057 |
| $ | (581,519) |
| $ | (70,219,017) |
| $ | (7,806,605) |
| $ | 32,333,136 | 67,221,951 |
| $ | 672,220 |
| $ | 110,268,057 |
| $ | (581,519) |
| $ | (70,219,017) |
| $ | (7,806,605) |
| $ | 32,333,136 |
Share-based compensation | — |
|
| — |
|
| 614,498 |
|
| — |
|
| — |
|
| — |
|
| 614,498 | — |
|
| — |
|
| 614,498 |
|
| — |
|
| — |
|
| — |
|
| 614,498 |
Issuance of shares pursuant to share-based awards | 867 |
|
| 8 |
|
| (8) |
|
| — |
|
| — |
|
| — |
|
| — | 867 |
|
| 8 |
|
| (8) |
|
| — |
|
| — |
|
| — |
|
| — |
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (3,305,101) |
|
| — |
|
| (3,305,101) | — |
|
| — |
|
| — |
|
| — |
|
| (3,305,101) |
|
| — |
|
| (3,305,101) |
Balance at December 31, 2019 | 67,222,818 |
|
| 672,228 |
|
| 110,882,547 |
|
| (581,519) |
|
| (73,524,118) |
|
| (7,806,605) |
|
| 29,642,533 | 67,222,818 |
|
| 672,228 |
|
| 110,882,547 |
|
| (581,519) |
|
| (73,524,118) |
|
| (7,806,605) |
|
| 29,642,533 |
Share-based compensation | — |
|
| — |
|
| 681,680 |
|
| — |
|
| — |
|
| — |
|
| 681,680 | — |
|
| — |
|
| 681,680 |
|
| — |
|
| — |
|
| — |
|
| 681,680 |
Issuance of shares pursuant to share-based awards | 356,424 |
|
| 3,564 |
|
| 405,068 |
|
| — |
|
| — |
|
| — |
|
| 408,632 | 356,424 |
|
| 3,564 |
|
| 405,068 |
|
| — |
|
| — |
|
| — |
|
| 408,632 |
Shares issued in connection with common stock purchase agreement | 300,000 |
|
| 3,000 |
|
| 1,224,000 |
|
| — |
|
| — |
|
| — |
|
| 1,227,000 | |||||||||||||||||||
Sale of shares under common stock purchase agreement | 300,000 |
|
| 3,000 |
|
| 1,224,000 |
|
| — |
|
| — |
|
| — |
|
| 1,227,000 | |||||||||||||||||||
Amortization of deferred costs | — |
|
| — |
|
| (34,759) |
|
| — |
|
| — |
|
| — |
|
| (34,759) | — |
|
| — |
|
| (34,759) |
|
| — |
|
| — |
|
| — |
|
| (34,759) |
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (810,509) |
|
| — |
|
| (810,509) | — |
|
| — |
|
| — |
|
| — |
|
| (810,509) |
|
| — |
|
| (810,509) |
Balance at March 31, 2020 | 67,879,242 |
| $ | 678,792 |
| $ | 113,158,536 |
| $ | (581,519) |
| $ | (74,334,627) |
| $ | (7,806,605) |
| $ | 31,114,577 | 67,879,242 |
| $ | 678,792 |
| $ | 113,158,536 |
| $ | (581,519) |
| $ | (74,334,627) |
| $ | (7,806,605) |
| $ | 31,114,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018 | 57,468,660 |
| $ | 574,687 |
| $ | 95,496,506 |
| $ | (581,519) |
| $ | (58,201,651) |
| $ | (7,806,605) |
| $ | 29,481,418 | |||||||||||||||||||
Share-based compensation | — |
|
| — |
|
| 417,256 |
|
| — |
|
| — |
|
| — |
|
| 417,256 | |||||||||||||||||||
Shares issued in connection with public offering of common stock, net of fees and costs | 7,142,857 |
|
| 71,428 |
|
| 9,060,539 |
|
| — |
|
| — |
|
| — |
|
| 9,131,967 | |||||||||||||||||||
Issuance of shares pursuant to share-based awards | 190,000 |
|
| 1,900 |
|
| (1,900) |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (2,148,798) |
|
| — |
|
| (2,148,798) | |||||||||||||||||||
Balance at December 31, 2018 | 64,801,517 |
|
| 648,015 |
|
| 104,972,401 |
|
| (581,519) |
|
| (60,350,449) |
|
| (7,806,605) |
|
| 36,881,843 | |||||||||||||||||||
Share-based compensation | — |
|
| — |
|
| 496,209 |
|
| — |
|
| — |
|
| — |
|
| 496,209 | |||||||||||||||||||
Issuance of shares pursuant to share-based awards | 166,667 |
|
| 1,667 |
|
| 198,333 |
|
| — |
|
| — |
|
| — |
|
| 200,000 | |||||||||||||||||||
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (4,034,035) |
|
| — |
|
| (4,034,035) | |||||||||||||||||||
Balance at March 31, 2019 | 64,968,184 |
| $ | 649,682 |
| $ | 105,666,943 |
| $ | (581,519) |
| $ | (64,384,484) |
| $ | (7,806,605) |
| $ | 33,544,017 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements. | See notes to unaudited condensed consolidated financial statements. | See notes to unaudited condensed consolidated financial statements. |
7
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
| ||
| Six Months Ended | Six Months Ended | ||||||||
| March 31, | March 31, | ||||||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Net loss | $ | (4,115,610) |
| $ | (6,182,833) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
| ||||||
Net income (loss) | $ | 14,381,720 |
| $ | (4,115,610) | |||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
| ||||||
Depreciation and amortization |
| 74,213 |
| 84,394 |
| 131,403 |
| 232,397 | ||
Amortization of intangible assets |
| 158,184 |
| 154,617 | ||||||
Noncash change in right-of-use assets |
| 154,325 |
| — |
| 185,964 |
| 154,325 | ||
Noncash interest expense |
| 2,306,387 |
| 2,536,695 | ||||||
Noncash interest expense, net of interest paid |
| (31,071) |
| 2,306,387 | ||||||
Share-based compensation |
| 1,296,178 |
| 913,465 |
| 1,787,578 |
| 1,296,178 | ||
Gain on sale of PREBOOST® business |
| (18,410,158) |
| — | ||||||
Deferred income taxes |
| (198,944) |
| 24,710 |
| 30,923 |
| (198,944) | ||
Provision for obsolete inventory |
| 229,047 |
| 51,924 |
| 42,513 |
| 229,047 | ||
Change in fair value of derivative liabilities |
| (75,000) |
| 403,000 |
| 657,000 |
| (75,000) | ||
Other |
| 7,500 |
| 122,433 |
| (1,000) |
| 7,500 | ||
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
| ||
Increase in accounts receivable |
| (1,837,178) |
| (54,603) | ||||||
Decrease (increase) in accounts receivable |
| 79,083 |
| (1,837,178) | ||||||
Increase in inventory |
| (2,597,964) |
| (748,095) |
| (1,132,902) |
| (2,597,964) | ||
Increase in prepaid expenses and other assets |
| (962,470) |
| (73,589) |
| (2,434,908) |
| (962,470) | ||
Increase (decrease) in accounts payable |
| 1,110,928 |
| (656,527) | ||||||
Decrease in unearned revenue |
| — |
| (187,159) | ||||||
Decrease in accrued expenses and other current liabilities |
| (293,429) |
| (391,011) | ||||||
Increase in accounts payable |
| 2,815,773 |
| 1,110,928 | ||||||
Increase (decrease) in accrued expenses and other current liabilities |
| 191,734 |
| (293,429) | ||||||
Decrease in operating lease liabilities |
| (183,658) |
|
| — |
| (223,917) |
|
| (183,658) |
Net cash used in operating activities |
| (4,927,491) |
|
| (4,002,579) |
| (1,930,265) |
|
| (4,927,491) |
|
|
|
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
| ||
Cash proceeds from sale of PREBOOST® business |
| 15,000,000 |
| — | ||||||
Capital expenditures |
| (54,680) |
|
| (644) |
| (12,118) |
|
| (54,680) |
Net cash used in investing activities |
| (54,680) |
|
| (644) | |||||
Net cash provided by (used in) investing activities |
| 14,987,882 |
|
| (54,680) | |||||
|
|
|
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| ||
Proceeds from sale of shares in public offering, net of fees |
| — |
| 9,400,000 |
| 108,099,988 |
| — | ||
Payment of costs related to public offering |
| — |
| (268,033) |
| (43,745) |
| — | ||
Proceeds from sale of shares under common stock purchase agreement |
| 1,227,000 |
| — | ||||||
Installment payments on SWK credit agreement |
| (944,612) |
| (3,191,717) |
| — |
| (944,612) | ||
Proceeds from stock option exercises |
| 408,632 |
| 200,000 |
| 1,273,094 |
| 408,632 | ||
Proceeds from premium finance agreement |
| 836,780 |
| — |
| 1,061,442 |
| 836,780 | ||
Installment payments on premium finance agreement |
| (277,965) |
| — |
| (352,664) |
| (277,965) | ||
Proceeds from sale of shares under common stock purchase agreement |
| — |
| 1,227,000 | ||||||
Cash paid for debt portion of finance lease |
| (5,302) |
|
| — |
| (9,357) |
|
| (5,302) |
Net cash provided by financing activities |
| 1,244,533 |
|
| 6,140,250 |
| 110,028,758 |
|
| 1,244,533 |
|
|
|
|
|
|
|
|
| ||
Net (decrease) increase in cash |
| (3,737,638) |
| 2,137,027 | ||||||
Net increase (decrease) in cash |
| 123,086,375 |
| (3,737,638) | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 6,295,152 |
|
| 3,759,509 |
| 13,588,778 |
|
| 6,295,152 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,557,514 |
| $ | 5,896,536 | $ | 136,675,153 |
| $ | 2,557,514 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
| ||||||
Supplemental disclosure of cash flow information: |
|
|
|
| ||||||
Cash paid for interest | $ | 2,471,805 |
| $ | — | |||||
Schedule of non-cash investing and financing activities: |
|
|
|
| ||||||
Right-of-use assets recorded in exchange for lease liabilities | $ | 1,229,926 |
| $ | — | $ | — |
| $ | 1,229,926 |
Notes receivable for sale of PREBOOST® business | $ | 5,000,000 |
| $ | — | |||||
Amortization of deferred costs related to common stock purchase agreement | $ | 34,759 |
| $ | — | $ | — |
| $ | 34,759 |
Costs related to public offering in accounts payable or accrued expenses and other current liabilities | $ | 113,945 |
| $ | — | |||||
|
|
|
|
|
|
|
|
| ||
See notes to unaudited condensed consolidated financial statements. |
|
|
|
|
|
|
|
|
8
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, 2019.2020. The accompanying condensed consolidated balance sheet as of September 30, 20192020 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations for the three and six months ended March 31, 20202021 and cash flows for the six months ended March 31, 20202021 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2020.2021.
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 consolidation and nature of operations: Veru Inc. is referred to in these notes collectively with its subsidiaries as “we,” “our,” “us,” “Veru” or the “Company.” The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Aspen Park Pharmaceuticals, Inc. (“APP”)(APP) and The Female Health Company Limited, and The Female Health Company Limited’s wholly owned 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 (the “Malaysia subsidiary”). All significant intercompany transactions and accounts have been eliminated in consolidation. Prior to the completion of the October 31, 2016 acquisition (the “APP Acquisition”) 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 healthcare product, the FC2 Female Condom/FC2 Internal Condom® (“FC2”). The completion of the APP Acquisition transitioned the Company into ais an oncology biopharmaceutical company focusedwith a focus on oncologydeveloping novel medicines for the management of prostate and urology withbreast cancers. The Company has multiple drug products under clinical development. During fiscal 2020, the Sexual Health Business segment also included PREBOOST® 4% benzocaine medicated individual wipe for the treatment of premature ejaculation. The PREBOOST® business was sold on December 8, 2020. See Note 2 for additional information. Most of the Company’s net revenues during the three and six months ended March 31, 20202021 and 20192020 were derived from sales of FC2.the FC2 Female Condom/FC2 Internal Condom® (FC2), an FDA-approved product for the dual protection against unplanned pregnancy and the transmission of sexually transmitted infections.
Reclassifications: Certain prior period amounts on the accompanying unaudited interim condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations or financial position for any period presented.
Leases: Leases are classified as either operating or finance leases at inception. A right-of-use (“ROU”) asset and corresponding lease liability are established at an amount equal to the present value of fixed lease payments over the lease term at the commencement date. The ROU asset includes any initial direct costs incurred and lease payments made at or before the commencement date and is reduced by lease incentive payments. The Company has elected not to separate the lease and nonlease components for all classes of underlying assets. The Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases that do not have a readily determinable implicit discount rate. The incremental borrowing rate is the rate of interest that the Company would be charged to borrow on a collateralized basis over a similar term and amount in a similar economic environment. The Company determines the incremental borrowing rates for its leases by adjusting the risk-free interest rate with a credit risk premium corresponding to the Company’s credit rating.
9
Operating lease costs are recognized for fixed lease payments on a straight-line basis over the term of the lease. Finance lease costs are a combination of the amortization expense for the ROU asset and interest expense for the outstanding lease liability using the applicable discount rate. Variable lease payments are recognized when incurred based on occurrence or usage. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for short-term leases on a straight-line basis over the lease term.
Other comprehensive lossincome (loss): Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net loss.income (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 unaudited condensed consolidated balance sheets, these items, along with net loss,income (loss), are components of other comprehensive loss. For the three and six months ended March 31, 2021 and 2020, and 2019, comprehensive lossincome (loss) is equivalent to the reported net loss.income (loss).
Recently Issued Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, Leases (Topic 842), which requires that lessees recognize an ROU asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. ASU 2016-02 distinguishes leases as either a finance lease or an operating lease, which affects how the leases are measured and presented in the statement of operations and statement of cash flows, and requires disclosure of key information about leasing arrangements. A modified retrospective transition approach is required upon adoption. In July 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 842, Leases to clarify the implementation guidance and ASU No. 2018‑11, Leases (Topic 842) Targeted Improvements. This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors to address certain implementation issues facing lessors when adopting ASU 2016‑02. In March 2019, the FASB issued ASU 2019‑01, Leases (Topic 842): Codification Improvements to address, among other things, certain transition disclosure requirements subsequent to the adoption of ASU 2016‑02.
The Company adopted the new lease accounting standard using the modified retrospective approach on October 1, 2019 and elected certain practical expedients, including the optional transition method that allows for the application of the new standard at its adoption date with no restatement of prior period amounts. We elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess our prior conclusions about lease identification, lease classification, and initial direct costs. Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $1.2 million and $1.5 million, respectively, and the derecognition of prepaid expenses and operating lease deferred rent liabilities of $23,000 and $247,000, respectively, as of October 1, 2019 with zero cumulative-effect adjustment to retained earnings. The new standard did not materially impact our consolidated statement of operations or cash flows.
In June 2018, the FASB issued ASU 2018‑07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The purpose of ASU 2018-07 is to expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The Company has issued share-based payments to nonemployees in the past but is not able to predict the amount of future share-based payments to nonemployees, if any. We adopted ASU 2018-07 effective October 1, 2019. The adoption of ASU 2018‑07 did not have a material impact on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). Simplifying the Accounting for Income Taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The adoption of ASU 2019-12 is not expected to have a material effect on our consolidated financial statements and related disclosures.
109
Recently adopted accounting pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model requires the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard also applies to receivables arising from revenue transactions such as accounts receivable. The Company adopted ASU 2016-13 on a modified-retrospective basis effective October 1, 2020. The adoption of ASU 2016-13 did not impact our consolidated financial statements and related disclosures.
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 implied 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. The Company adopted ASU 2017-04 on a prospective basis effective October 1, 2020. The adoption of ASU 2017-04 did not impact our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for fair value measurements for assets and liabilities disclosed within the fair value hierarchy. The Company adopted ASU 2018-13 on a retrospective basis effective October 1, 2020. The adoption of ASU 2018-13 did not impact our financial position, results of operations, or cash flows as it modified disclosure requirements only.
Note 2 – LiquiditySale of PREBOOST® Business
On December 8, 2020, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company sold substantially all of the assets related to the Company's PREBOOST® business. PREBOOST® is a 4% benzocaine medicated individual wipe for the treatment of premature ejaculation and was a commercial product in the Company’s Sexual Health Division until the date of the sale. The transaction closed on December 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. 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 has incurred quarterly operating losses sincehad income before income taxes of $327,000 during the fourth quarter of fiscal 2016 and anticipates that it will continuesix months ended March 31, 2021 related to consume cash and incur substantial net losses as it develops its drug candidates. Because of the numerous risks and uncertainties associated withPREBOOST® business before the development of pharmaceutical products, the Company is unable to estimate the exact amounts of capital outlays and operating expenditures necessary to fund development of its drug candidates and obtain regulatory approvals. The Company’s future capital requirements will depend on many factors.
sale. The Company believes its current cash position, cash expectedhad income before income taxes of $231,000 and $279,000 during the three and six months ended March 31, 2020, respectively, related to be generated from sales of the Company’s commercial products, and its ability to secure equity financing or other financing alternatives are adequate to fund planned operations of the Company for the next 12 months. Such financing alternatives may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company's effective shelf registration statement on Form S-3 (File No. 333-221120) (the “Shelf Registration Statement”). The Company intends to be opportunistic when pursuing equity or debt financing which could include selling common stock under its common stock purchase agreement with Aspire Capital Fund, LLC (see Note 9).PREBOOST® business.
Note 3 – Fair Value Measurements
FASB Accounting Standards Codification (“ASC”)(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 three 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 active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
10
Level 3 – Instruments with primarily unobservable value drivers.
We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the six months ended March 31, 2020 and 2019.
As of March 31, 20202021 and September 30, 2019,2020, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, were classified within Level 3 of the fair value hierarchy.
The Company determines the fair value of hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument. The Company estimates the fair value of hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair value. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating the fair value of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Increases in fair value during a given financial quarter result in the recognition of non-cash derivative expense. Conversely, decreases in fair value during a given financial quarter would result in the recognition of non-cash derivative income.
11
The following table provides a reconciliation of the beginning and ending liability balance associated with embedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of March 31, 20202021 and 2019:
2020:
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| ||
| Six Months Ended | Six Months Ended | ||||||||
| March 31, | March 31, | ||||||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
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Beginning balance | $ | 3,625,000 |
| $ | 2,426,000 | $ | 4,182,000 |
| $ | 3,625,000 |
Change in fair value of derivative liabilities |
| (75,000) |
|
| 403,000 |
| 657,000 |
|
| (75,000) |
Ending balance | $ | 3,550,000 |
| $ | 2,829,000 | $ | 4,839,000 |
| $ | 3,550,000 |
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 determined the fair value of the embedded derivatives using a Monte Carlo simulation model to value the financial liabilities at inception and on subsequent valuation dates. This valuation model incorporates transaction details such as the contractual terms of the instruments and assumptions including projected FC2 revenues, expected cash outflows, expected repayment dates, probability and estimated dates of a change of control, expected volatility, and risk-free interest rates.rates and applicable credit risk. A significant increase in projected FC2 revenues or a significant increase in the probability or acceleration of the estimated repayment date or a significant decrease in the probabilitytiming of a change of control event, prior to repayment of the Credit Agreement, in isolation, would result in a significantly lowerhigher fair value measurement of the liabilities associated with the embedded derivatives.
The following table presents quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 of the fair value hierarchy as of March 31, 20202021 and September 30, 2019:
2020:
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| Weighted Average (range, if applicable) | ||
Valuation Methodology |
| Significant Unobservable Input |
| March 31, |
| September 30, |
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|
|
Monte Carlo Simulation |
| Estimated change of control dates |
| December |
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|
|
| Discount rate |
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|
|
| Probability of change of control |
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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 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 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 estimating 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 probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely upon an assessment of current contract sales terms and historical payment experience.
11
Product returns are typically not significant because returns are generally not allowed unless the product is damaged at time of receipt.
12
The Company’s revenue is from direct product sales of FC2 in the global public sector, 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.ejaculation before the sale of the PREBOOST® business. The following table presents net revenues from these three categories:
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| ||||||
| Three Months Ended |
| Six Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| March 31, |
| March 31, | March 31, |
| March 31, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
FC2 |
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Public sector | $ | 2,569,644 |
| $ | 4,249,652 |
| $ | 6,943,438 |
| $ | 8,134,004 | |||||||||||
U.S. prescription channel |
| 6,952,627 |
|
| 2,594,271 |
|
| 13,003,757 |
|
| 5,034,316 | $ | 10,312,742 |
| $ | 6,952,627 |
| $ | 19,414,481 |
| $ | 13,003,757 |
Global public health sector |
| 3,027,745 |
|
| 2,569,644 |
|
| 7,680,164 |
|
| 6,943,438 | |||||||||||
Total FC2 |
| 9,522,271 |
|
| 6,843,923 |
|
| 19,947,195 |
|
| 13,168,320 |
| 13,340,487 |
|
| 9,522,271 |
|
| 27,094,645 |
|
| 19,947,195 |
PREBOOST® |
| 420,833 |
|
| 132,192 |
|
| 573,925 |
|
| 179,604 |
| - |
|
| 420,833 |
|
| 862,831 |
|
| 573,925 |
Net revenues | $ | 9,943,104 |
| $ | 6,976,115 |
| $ | 20,521,120 |
| $ | 13,347,924 | $ | 13,340,487 |
| $ | 9,943,104 |
| $ | 27,957,476 |
| $ | 20,521,120 |
The following table presents net revenue by geographic area:
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| Three Months Ended |
| Six Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| March 31, |
| March 31, | March 31, |
| March 31, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
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United States | $ | 7,674,849 |
| $ | 2,596,281 |
| $ | 14,166,003 |
| $ | 5,645,884 | $ | 10,612,998 |
| $ | 7,674,849 |
| $ | 20,968,836 |
| $ | 14,166,003 |
Zimbabwe |
| — |
| * |
| — |
| 1,948,304 | ||||||||||||||
Brazil |
| * |
| 1,098,000 |
| * |
| * | ||||||||||||||
Other |
| 2,268,255 |
|
| 3,281,834 |
|
| 6,355,117 |
|
| 5,753,736 |
| 2,727,489 |
|
| 2,268,255 |
|
| 6,988,640 |
|
| 6,355,117 |
Net revenues | $ | 9,943,104 |
| $ | 6,976,115 |
| $ | 20,521,120 |
| $ | 13,347,924 | $ | 13,340,487 |
| $ | 9,943,104 |
| $ | 27,957,476 |
| $ | 20,521,120 |
*Less than 10% of total net revenues
The Company’s performance obligations consist mainly of transferring control of products identified in the contracts which occurs either when: i) the product is made available to the customer for shipment; ii) the product is shipped via common carrier; or iii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. Some of the Company’s contracts require the customer to make advanced payments prior to transferring control of the products. These advanced payments create a contract liability for the Company. The balances of the Company’s contract liability, included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balancesbalance sheets, waswere approximately $508,000$140,000 and $249,000$6,000 at March 31, 20202021 and September 30, 2019,2020, respectively.
The Company records an unearned revenue liability if a customer pays consideration for product that was shipped by the Company but revenue recognition criteria have not been met under the terms of a contract. Unearned revenue is recognized as revenue after control of the product is transferred to the customer and all revenue recognition criteria have been met. The Company had no unearned revenue at March 31, 2020 or September 30, 2019.
The Company recognized revenue of $299,000 and $221,000 during the six months ended March 31, 2020 and 2019, respectively, after satisfying its contract obligations and transferring control for previously recorded contract liabilities or unearned revenue.
Note 5 – Accounts Receivable and Concentration of Credit Risk
The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable isare 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 18090 days subsequent to clearance of the product by the Ministry of Health in Brazil. The Company classified approximately $1.1 million and $300,000 of trade receivables with its distributor in Brazil as long-term as of March 31, 2020 and September 30, 2019, respectively, because payment was expected in greater than one year. The long-term portion of trade receivables is included in other assets on the accompanying unaudited condensed consolidated balance sheets.
13
The components of accounts receivable consist of the following at March 31, 20202021 and September 30, 2019:
2020:
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| March 31, |
| September 30, | March 31, |
| September 30, | ||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
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Trade receivables, gross | $ | 7,013,027 |
| $ | 5,410,165 | $ | 5,287,926 |
| $ | 5,332,786 |
Less: allowance for doubtful accounts |
| (25,643) |
| (33,143) |
| (24,643) |
| (25,643) | ||
Less: allowance for sales and payment term discounts |
| (84,743) |
| (49,623) | ||||||
Less: long-term trade receivables* |
| (1,100,625) |
|
| (306,342) | |||||
Less: allowance for sales returns and payment term discounts |
| (114,129) |
|
| (79,906) | |||||
Accounts receivable, net | $ | 5,802,016 |
| $ | 5,021,057 | $ | 5,149,154 |
| $ | 5,227,237 |
*Included in other assets on the accompanying unaudited condensed consolidated balance sheets
At March 31, 20202021 and at September 30, 2019,2020, no customers had a current accounts receivable balance that represented greater than 10% of current assets.
12
At March 31, 2021, three customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 81% of net accounts receivable in the aggregate. At September 30, 2020, three customers had an accounts receivable balance greater than 10% of net accounts receivable, and long-term trade receivables, representing 81%89% of net accounts receivable and long-term trade receivables in the aggregate. At September 30, 2019, two customers had an accounts receivable balance greater than 10% of net accounts receivable and long-term trade receivables, representing 66% of net accounts receivable and long-term trade receivables in the aggregate.
For the three months ended March 31, 2021, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 77% of the Company’s net revenues in the aggregate. For the three months ended March 31, 2020, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 80% of the Company’s net revenues in the aggregate.
For the threesix months ended March 31, 2019,2021, there were fourtwo customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 82%69% of the Company’s net revenues in the aggregate.
For the six months ended March 31, 2020, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 71% of the Company’s net revenues in the aggregate. For the six months ended March 31, 2019, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 66% of the Company’s net revenues in the aggregate.
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 charged-off when deemed uncollectible.
The table below summarizes the There was no material change in the allowance for doubtful accounts for the six months ended March 31, 20202021 and 2019:2020.
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| Six Months Ended March 31, | ||||
| 2020 |
| 2019 | ||
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Beginning balance | $ | 33,143 |
| $ | 36,201 |
Charges to expense |
| — |
|
| — |
Charge-offs |
| (7,500) |
|
| — |
Ending balance | $ | 25,643 |
| $ | 36,201 |
Recoveries of accounts receivable previously charged 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 FC2 for use in HIV/AIDS prevention and family planning programs. In the U.S., the Company’s customers include telemedicine providers who sell into the prescription channel.
14
Note 6 – Balance Sheet Information
Inventory
Inventories are valued at the lower of cost or net realizable value. The cost is determined using the first-in, first-out (“FIFO”)(FIFO) method. Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date. Write-downs of inventories establish a new cost basis which is not increased for future increases in the net realizable value of inventories or changes in estimated obsolescence.
Inventory consisted of the following at March 31, 20202021 and September 30, 2019:2020:
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| March 31, |
| September 30, | ||
| 2021 |
| 2020 | ||
FC2: |
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|
|
Raw material | $ | 1,176,815 |
| $ | 962,860 |
Work in process |
| 44,425 |
|
| 106,272 |
Finished goods |
| 6,634,584 |
|
| 5,634,612 |
FC2, gross |
| 7,855,824 |
|
| 6,703,744 |
Less: inventory reserves |
| (61,301) |
|
| (29,331) |
FC2, net |
| 7,794,523 |
|
| 6,674,413 |
PREBOOST® |
|
|
|
|
|
Finished goods |
| — |
|
| 29,721 |
Inventory, net | $ | 7,794,523 |
| $ | 6,704,134 |
13
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|
|
|
| March 31, |
| September 30, | ||
| 2020 |
| 2019 | ||
FC2: |
|
|
|
|
|
Raw material | $ | 665,134 |
| $ | 426,590 |
Work in process |
| 49,684 |
|
| 187,970 |
Finished goods |
| 5,386,041 |
|
| 3,157,952 |
FC2, gross |
| 6,100,859 |
|
| 3,772,512 |
Less: inventory reserves |
| (84,536) |
|
| (125,106) |
Inventory, net | $ | 6,016,323 |
| $ | 3,647,406 |
Fixed Assets
We record equipment, furniture and fixtures, and leasehold improvements at historical cost. Expenditures for maintenance and repairs are recorded to expense. Depreciation and amortization are primarily computed using the straight-line method. Depreciation and amortization are computed over the estimated useful lives of the respective assets. Leasehold improvements are depreciated on a straight-line basis over the lesser of the remaining lease term or the estimated useful lives of the improvements.
Plant and equipment consisted of the following at March 31, 20202021 and September 30, 2019:
2020:
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| ||||
| Estimated |
| March 31, |
| September 30, | Estimated |
| March 31, |
| September 30, | ||||
| Useful Life |
| 2020 |
| 2019 | Useful Life |
| 2021 |
| 2020 | ||||
Plant and equipment: |
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Manufacturing equipment | 5 - 8 years |
| $ | 2,748,604 |
| $ | 2,716,647 | 5 - 8 years |
| $ | 2,697,662 |
| $ | 2,752,854 |
Office equipment, furniture and fixtures | 3 - 10 years |
| 817,951 |
| 795,228 | 3 - 10 years |
| 833,588 |
| 803,484 | ||||
Leasehold improvements | 3 - 8 years |
|
| 298,886 |
|
| 298,886 | 3 - 8 years |
|
| 298,886 |
|
| 298,886 |
Total plant and equipment |
|
|
| 3,865,441 |
|
| 3,810,761 |
|
|
| 3,830,136 |
|
| 3,855,224 |
Less: accumulated depreciation and amortization |
|
|
| (3,533,079) |
|
| (3,458,866) |
|
|
| (3,558,970) |
|
| (3,542,533) |
Plant and equipment, net |
|
| $ | 332,362 |
| $ | 351,895 |
|
| $ | 271,166 |
| $ | 312,691 |
Note 7 – Intangible Assets and Goodwill
Intangible Assets
The gross carrying amounts and net book value of intangible assets arewere as follows at March 31, 2020:
2021:
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|
| ||||
| Gross Carrying |
| Accumulated |
| Net Book | Gross Carrying |
| Accumulated |
| Net Book | ||||||
| Amount |
| Amortization |
| Value | Amount |
| Amortization |
| Value | ||||||
Intangible assets with finite lives: |
|
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|
|
|
|
| ||||||||
Developed technology - PREBOOST® | $ | 2,400,000 |
| $ | 645,641 |
| $ | 1,754,359 | ||||||||
Intangible asset with finite life: |
|
|
|
|
|
|
|
| ||||||||
Covenants not-to-compete |
| 500,000 |
|
| 244,048 |
|
| 255,952 | $ | 500,000 |
| $ | 315,476 |
| $ | 184,524 |
Total intangible assets with finite lives |
| 2,900,000 |
|
| 889,689 |
|
| 2,010,311 | ||||||||
Indefinite-lived intangible assets: |
|
|
|
|
|
| ||||||||||
Acquired in-process research and development assets |
| 18,000,000 |
|
| — |
|
| 18,000,000 |
| 3,900,000 |
|
| — |
|
| 3,900,000 |
Total intangible assets | $ | 20,900,000 |
| $ | 889,689 |
| $ | 20,010,311 | $ | 4,400,000 |
| $ | 315,476 |
| $ | 4,084,524 |
15
The gross carrying amounts and net book value of intangible assets arewere as follows at September 30, 2019:
2020:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Gross Carrying |
| Accumulated |
| Net Book | Gross Carrying |
| Accumulated |
| Net Book | ||||||
| Amount |
| Amortization |
| Value | Amount |
| Amortization |
| Value | ||||||
Intangible assets with finite lives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology - PREBOOST® | $ | 2,400,000 |
| $ | 523,172 |
| $ | 1,876,828 | $ | 2,400,000 |
| $ | 768,111 |
| $ | 1,631,889 |
Covenants not-to-compete |
| 500,000 |
|
| 208,333 |
|
| 291,667 |
| 500,000 |
|
| 279,762 |
|
| 220,238 |
Total intangible assets with finite lives |
| 2,900,000 |
|
| 731,505 |
|
| 2,168,495 |
| 2,900,000 |
|
| 1,047,873 |
|
| 1,852,127 |
Acquired in-process research and development assets |
| 18,000,000 |
|
| — |
|
| 18,000,000 |
| 3,900,000 |
|
| — |
|
| 3,900,000 |
Total intangible assets | $ | 20,900,000 |
| $ | 731,505 |
| $ | 20,168,495 | $ | 6,800,000 |
| $ | 1,047,873 |
| $ | 5,752,127 |
ForAs discussed in Note 2, the Company sold its intangible assets related to PREBOOST® as part of the sale of the PREBOOST® business on December 8, 2020. The remaining net book value of the PREBOOST® developed technology, acquired in the acquisition of APP, was $1.6 million on the date of the sale. Amortization expense was approximately $18,000 and $79,000 for the three months ended March 31, 20202021 and 2019, amortization expense was2020,respectively, and approximately $79,000$78,000 and $77,000, respectively. For$158,000 for the six months ended March 31, 20202021 and 2019, amortization expense was approximately $158,000 and $155,000,2020, respectively.
Goodwill
The carrying amount of goodwill at March 31, 20202021 and September 30, 20192020 was $6.9 million. There was no change in the balance during the six months ended March 31, 20202021 and 2019.2020.
14
Note 8 – Debt
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. After payment by the Company of certain fees and expenses of the Agent and the Lenders as required in the Credit Agreement, the Company received net proceeds of approximately $9.9 million from the $10.0 million loan under the Credit Agreement.
The Lenders will beare entitled to receive quarterly payments on the term loan based on the Company’s product revenue from net sales of FC2 as provided in the Credit Agreement until the Company has paid 176.5% of the aggregate amount advanced to the Company under the Credit Agreement. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is less than $10.0 million, the quarterly payments will be 32.5% of product revenue from net sales of FC2 during the quarterly period. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is equal to or greater than $10.0 million, the quarterly payments are calculated as follows: (i) as it relates to each quarter during the 2019 calendar year, the sum of 12.5% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period (as defined in the Credit Agreement), plus 5% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period, (ii) as it relates to each quarter during the 2020 calendar year, the sum of 25% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period, plus 10% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period, and (iii) as it relates to each quarter during the 2021 calendar year and thereafter, the sum of 30% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period, plus 20% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period. Upon the Credit Agreement’s termination date of March 5, 2025, the Company must pay 176.5% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue. The payment requirements described above reflect an amendment to the Credit Agreement dated May 13, 2019 (the “Second Amendment”) which included a reduction to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2019, a return to the original percentages to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2020 and an increase to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2021 and thereafter until the loan has been repaid.
16
Upon a change of control of the Company or sale of the FC2 business, the Company must pay off the loan by making a payment to the Lenders equal to (i) 176.5% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue from net sales of FC2, plus (ii) the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five. A “change of control” under the Credit Agreement includes (i) an acquisition by any person of direct or indirect ownership of more than 50% of the Company’s issued and outstanding voting equity, (ii) a change of control or similar event in the Company’s articles of incorporation or bylaws, (iii) certain Key Persons as defined in the Credit Agreement cease to serve in their current executive capacities unless replaced within 90 days by a person reasonably acceptable to the Agent, which acceptance not to be unreasonably withheld, or (iv) the sale of all or substantially all of the Company’s assets.
The Credit Agreement contains customary representations and warranties in favor of the Agent and the Lenders and certain covenants, including financial covenants addressing minimum quarterly marketing and distribution expenses for FC2 and a requirement to maintain minimum unencumbered liquid assets of $1.0 million. The Credit Agreement also restricts the payment of dividends and share repurchases. The recourse of the Lenders and the Agent for obligations under the Credit Agreement is limited to assets relating to FC2.
15
In connection with the Credit Agreement, the Company and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing after the Company would have paid 175% of the aggregate amount advanced to the Company under the Credit Agreement based on a calculation of revenue-based payments under the Credit Agreement without taking into account the amendments to the payment requirements under the Credit Agreement effected by the Second Amendment. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties. If a change of control or sale of the FC2 business occurs prior to payment in full of the Credit Agreement, there will be no further payment due with respect to the Residual Royalty Agreement. If a change of control or sale of the FC2 business occurs after payment in full of the Credit Agreement, the Agent will receive a payment that is the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five.
Pursuant to a Guarantee and Collateral Agreement dated as of March 5, 2018 (the “Collateral Agreement”) and an Intellectual Property Security Agreement dated as of March 5, 2018 (the “IP Security Agreement”), the Company’s obligations under the Credit Agreement are secured by a lien against substantially all of the assets of the Company that relate to or arise from FC2. In addition, pursuant to a Pledge Agreement dated as of March 5, 2018 (the “Pledge Agreement”), the Company’s obligations under the Credit Agreement are secured by a pledge of up to 65% of the outstanding shares of The Female Health Company Limited, a wholly owned U.K. subsidiary.
For accounting purposes, the $10.0 million advance under the Credit Agreement was allocated between the Credit Agreement and the Residual Royalty Agreement on a relative fair value basis. A portion of the amount allocated to the Credit Agreement and a portion of the amount allocated to the Residual Royalty Agreement, in both cases equal to the fair value of the respective change of control provisions, was allocated to the embedded derivative liabilities. The derivative liabilities will beare adjusted to fair market value at each subsequent reporting period. For financial statement presentation, the embedded derivative liabilities have been included with their respective host instruments as noted in the following tables. The debt discounts are being amortized to interest expense over the expected term of the loan using the effective interest method. Additionally, the Company recorded deferred loan issuance costs of approximately $267,000 for legal fees incurred in connection with the Credit Agreement. The deferred loan issuance costs are presented as a reduction inof the Credit Agreement obligation and are being amortized to interest expense over the expected term of the loan using the effective interest method. The Second Amendment was accounted for as a debt modification, which resulted in prospective adjustment to the effective interest rate.
At March 31, 2021 and September 30, 2020, the Credit Agreement liability consisted of the following:
|
|
|
|
|
|
| March 31, |
| September 30, | ||
| 2021 |
| 2020 | ||
|
|
|
|
|
|
Aggregate repayment obligation | $ | 17,650,000 |
| $ | 17,650,000 |
Less: cumulative payments |
| (12,786,300) |
|
| (10,314,495) |
Remaining repayment obligation |
| 4,863,700 |
|
| 7,335,505 |
Less: unamortized discounts |
| (386,841) |
|
| (1,459,330) |
Less: unamortized deferred issuance costs |
| (9,093) |
|
| (34,301) |
Credit agreement liability | $ | 4,467,766 |
| $ | 5,841,874 |
The Company repaid the original principal of $10.0 million during the quarter ended September 30, 2020. Remaining quarterly payments under the Credit Agreement will be classified as interest payments, consistent with the terms of the Credit Agreement. The Company currently estimates the remaining repayment obligation under the Credit Agreement will be paid during the 12‑month period subsequent to March 31, 2021.
1716
At March 31, 20202021 and September 30, 2019, the Credit Agreement liability consisted of the following:
|
|
|
|
|
|
| March 31, |
| September 30, | ||
| 2020 |
| 2019 | ||
|
|
|
|
|
|
Aggregate repayment obligation | $ | 17,650,000 |
| $ | 17,650,000 |
Less: cumulative payments |
| (6,522,697) |
|
| (5,578,085) |
Less: unamortized discounts |
| (2,884,396) |
|
| (4,590,974) |
Less: unamortized deferred issuance costs |
| (67,798) |
|
| (107,910) |
Credit agreement, excluding embedded derivative liability, net |
| 8,175,109 |
|
| 7,373,031 |
Add: embedded derivative liability at fair value (see Note 3) |
| 821,000 |
|
| 899,000 |
Credit agreement, net |
| 8,996,109 |
|
| 8,272,031 |
Credit agreement, short-term portion |
| (6,662,842) |
|
| (5,385,649) |
Credit agreement, long-term portion | $ | 2,333,267 |
| $ | 2,886,382 |
The short-term portion of the Credit Agreement represents the aggregate of the estimated quarterly revenue-based payments payable during the 12-month periods subsequent to March 31, 2020, and September 30, 2019, respectively.
At March 31, 2020 and September 30, 2019, the Residual Royalty Agreement liability consisted of the following:
|
|
|
|
|
|
| March 31, |
| September 30, | ||
| 2021 |
| 2020 | ||
|
|
|
|
|
|
Residual royalty agreement liability, fair value at inception | $ | 346,000 |
| $ | 346,000 |
Add: accretion of liability using effective interest rate |
| 3,532,724 |
|
| 2,189,687 |
Residual royalty agreement liability, excluding embedded derivative liability |
| 3,878,724 |
|
| 2,535,687 |
Add: embedded derivative liability at fair value (see Note 3) |
| 4,839,000 |
|
| 4,182,000 |
Total residual royalty agreement liability |
| 8,717,724 |
|
| 6,717,687 |
Residual royalty agreement liability, short-term portion |
| (2,805,741) |
|
| (1,100,193) |
Residual royalty agreement liability, long-term portion | $ | 5,911,983 |
| $ | 5,617,494 |
|
|
|
|
|
|
| March 31, |
| September 30, | ||
| 2020 |
| 2019 | ||
|
|
|
|
|
|
Residual royalty agreement liability, fair value at inception | $ | 346,000 |
| $ | 346,000 |
Add: accretion of liability using effective interest rate |
| 1,333,215 |
|
| 773,518 |
Residual royalty agreement liability, excluding embedded derivative liability |
| 1,679,215 |
|
| 1,119,518 |
Add: embedded derivative liability at fair value (see Note 3) |
| 2,729,000 |
|
| 2,726,000 |
Residual royalty agreement liability | $ | 4,408,215 |
| $ | 3,845,518 |
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 six months ended March 31, 20202021 and 2019,2020, interest expense related to the Credit Agreement and Residual Royalty Agreement was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Three Months Ended |
| Six Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| March 31, |
| March 31, | March 31, |
| March 31, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discounts | $ | 844,592 |
| $ | 1,107,622 |
| $ | 1,706,578 |
| $ | 2,265,828 | $ | 499,629 |
| $ | 844,592 |
| $ | 1,072,489 |
| $ | 1,706,578 |
Accretion of residual royalty agreement |
| 300,519 |
|
| 123,946 |
|
| 559,697 |
|
| 216,297 |
| 740,179 |
|
| 300,519 |
|
| 1,343,037 |
|
| 559,697 |
Amortization of deferred issuance costs |
| 19,851 |
|
| 26,704 |
|
| 40,112 |
|
| 54,570 |
| 11,743 |
|
| 19,851 |
|
| 25,208 |
|
| 40,112 |
Interest expense | $ | 1,164,962 |
| $ | 1,258,272 |
| $ | 2,306,387 |
| $ | 2,536,695 | $ | 1,251,551 |
| $ | 1,164,962 |
| $ | 2,440,734 |
| $ | 2,306,387 |
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 is payable in three quarterly installments of principal and interest, beginning on January 1, 2021. The balance of the insurance premium liability is $709,000 as of March 31, 2021 and is included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheet.
On November 1, 2019, the Company entered into a Premium Finance Agreement to finance $837,000 of its directors and officers liability insurance premium at an annual percentage rate of 4.18%. The financing iswas payable in three quarterly installments of principal and interest, which began on January 1, 2020. The last payment was made on July 1, 2020 and there was no balance of the insurance premium liability is $559,000outstanding as of March 31, 2020 and is included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheet.September 30, 2020.
18
Note 9 – Stockholders’ Equity
Preferred Stock
The Company has 5,000,000 authorized shares designated as Class A Preferred Stock with a par value of $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 – Series 2 authorized; 700,000 shares of Class A Preferred Stock – Series 3 authorized; and 548,000 shares of Class A Preferred Stock – Series 4 (the “Series 4 Preferred Stock”) authorized. There were no shares of Class A Preferred Stock of any series issued and outstanding at March 31, 20202021 and September 30, 2019.2020. The Company has 15,000 authorized shares designated as Class B Preferred Stock with a par value of $0.50 per share. There were no shares of Class B Preferred Stock issued and outstanding at March 31, 20202021 and September 30, 2019.2020, and there was no activity during the six-month periods then ended.
17
Common Stock Offering
On October 1, 2018,February 22, 2021, we completed an underwritten public offering of 7,142,8577,419,354 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 $1.40$15.50 per share. Net proceeds to the Company from this offering were $9.1$107.9 million after deducting underwriting discounts and commissions and costs paidincurred by the Company.Company through March 31, 2021. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Shelf Registration Statement.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 Advisor Warrant”Warrants”). The Financial Advisor Warrant hasWarrants had a five-year term expiring October 31, 2021, a cashless exercise feature and a strike price equal to $1.93 per share. The Financial Advisor WarrantWarrants vested upon issuance. As of September 30, 2020, an aggregate of 2,326,841 shares of common stock remained available for purchase under the Financial Advisor Warrants. During the first quarter of fiscal 2021, the remaining Financial Advisor Warrants to purchase 2,326,841 shares of the Company’s common stock were exercised using the cashless exercise feature, resulting in the issuance and remains outstanding atof 1,574,611 shares of common stock. As of March 31, 2020.2021, there were no outstanding common stock purchase warrants.
Aspire Capital Purchase Agreement
On December 29, 2017,June 26, 2020, the Company entered into a common stock purchase agreement (the “Purchase“2020 Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”)(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 Rights Agreement”), in which the Company agreed to prepare and file under the Securities Act of 1933 and under the Shelf Registration Statement, aone 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”), 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”) 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 Purchase 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 Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the VWAP Purchase Date.
19
During the six months ended March 31, 2020, we sold 300,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.2 million. As a result of these sales, we recorded approximately $35,000 of deferred costs to additional paid-in capital.
Since inception of the 2020 Purchase Agreement, through March 31, 2020, we have sold an aggregate of 4,017,0101,644,737 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.8$5.0 million. As of March 31, 2020,2021, the amount remaining under the 2020 Purchase Agreement was $7.2 million. Subsequent to March 31, 2020, we sold 400,000 shares of common stock to Aspire Capital$18.9 million, which is registered under the Purchase Agreement resulting in proceeds to the Company of $1.3 million.Company’s shelf registration statement on Form S-3 (File No. 333-239493).
18
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 approximately $347,000.$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 approximately $78,000,$50,000, which total approximately $425,000,$731,000, were recorded as deferred costs. The unamortized amount of deferred costs related to the 2020 Purchase Agreement of approximately $203,000 and $238,000$578,000 at March 31, 20202021 and September 30, 2019, respectively,2020 is included in other assets on the accompanying unaudited condensed consolidated balance sheets.
Note 10 – Share-based Compensation
We allocate share-based compensation expense to cost of sales, selling, general and administrative expense, and research and development expense based on the award holder’s employment function. For the three and six months ended March 31, 20202021 and 2019,2020, we recorded share-based compensation expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales | $ | 18,415 |
| $ | 16,425 |
| $ | 34,627 |
| $ | 30,970 |
Selling, general and administrative |
| 713,603 |
|
| 480,628 |
|
| 1,275,087 |
|
| 952,323 |
Research and development |
| 270,263 |
|
| 184,627 |
|
| 477,864 |
|
| 312,885 |
Share-based compensation | $ | 1,002,281 |
| $ | 681,680 |
| $ | 1,787,578 |
| $ | 1,296,178 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales | $ | 16,425 |
| $ | 7,778 |
| $ | 30,970 |
| $ | 15,730 |
Selling, general and administrative |
| 480,628 |
|
| 407,426 |
|
| 952,323 |
|
| 734,435 |
Research and development |
| 184,627 |
|
| 81,005 |
|
| 312,885 |
|
| 163,300 |
Share-based compensation | $ | 681,680 |
| $ | 496,209 |
| $ | 1,296,178 |
| $ | 913,465 |
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.
Equity Plans
In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (the(as amended, the “2018 Plan”). On March 24, 2020, the Company’s stockholders approved an increase in the numberA total of 11.0 million shares that may be issuedare authorized for issuance under the 2018 Plan to 11.0 million.Plan. As of March 31, 2020, 5,876,3212021, 3,025,805 shares remain available for issuance under the 2018 Plan.
In July 2017, the Company’s stockholders approved the Company's 2017 Equity Incentive Plan (the “2017 Plan”). A total of 4.7 million shares are authorized for issuance under the 2017 Plan. As of March 31, 2020, 70,1812021, 99 shares remain available for issuance under the 2017 Plan. The 2017 Plan replaced the Company's 2008 Stock Incentive Plan (the “2008 Plan”), and no further awards will be made under the 2008 Plan.
Stock Options
Each option grants the holder the right to purchase from us one share of our common stock at a specified price, which is generally the closing price per share of our common stock on the date the option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance date within three years of the date the option is issued. Options may be exercised after they have vested and prior to the specified expiry date provided applicable exercise conditions are met, if any. The expiry date can be for periods of up to ten years from the date the option is issued. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions established at that time. The Company accounts for forfeitures as they occur and does not estimate forfeitures as of the option grant date.
20
The following table outlines the weighted average assumptions for options granted during the three and six months ended March 31, 20202021 and 2019:2020:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Weighted Average Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
| 77.71% |
|
| 65.66% |
|
| 68.32% |
|
| 63.13% |
Expected dividend yield |
| 0.00% |
|
| 0.00% |
|
| 0.00% |
|
| 0.00% |
Risk-free interest rate |
| 1.00% |
|
| 0.62% |
|
| 0.61% |
|
| 1.63% |
Expected term (in years) |
| 6.0 |
|
| 6.0 |
|
| 5.9 |
|
| 5.9 |
Fair value of options granted | $ | 9.81 |
| $ | 1.84 |
| $ | 3.32 |
| $ | 1.14 |
19
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Weighted Average Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
| 65.66% |
|
| 65.45% |
|
| 63.13% |
|
| 66.88% |
Expected dividend yield |
| 0.00% |
|
| 0.00% |
|
| 0.00% |
|
| 0.00% |
Risk-free interest rate |
| 0.62% |
|
| 2.27% |
|
| 1.63% |
|
| 2.59% |
Expected term (in years) |
| 6.0 |
|
| 5.9 |
|
| 5.9 |
|
| 5.7 |
Fair value of options granted | $ | 1.84 |
| $ | 0.90 |
| $ | 1.14 |
| $ | 0.85 |
During the three and six months ended March 31, 20202021 and 2019,2020, 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 following table summarizes the stock options outstanding and exercisable at March 31, 2020:2021:
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average |
|
|
| |||
|
|
|
|
|
| Remaining |
| Aggregate | |
| Number of |
| Exercise Price |
| Contractual Term |
| Intrinsic | ||
| Shares |
| Per Share |
| (years) |
| Value | ||
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 | 7,027,989 |
| $ | 1.58 |
|
|
|
|
|
Granted | 2,228,827 |
| $ | 1.97 |
|
|
|
|
|
Exercised | (436,748) |
| $ | 1.67 |
|
|
|
|
|
Forfeited | (176,028) |
| $ | 1.51 |
|
|
|
|
|
Outstanding at March 31, 2020 | 8,644,040 |
| $ | 1.68 |
| 8.25 |
| $ | 13,781,911 |
Exercisable at March 31, 2020 | 3,342,581 |
| $ | 1.48 |
| 7.36 |
| $ | 5,973,380 |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average |
|
|
| |||
|
|
|
|
|
| Remaining |
| Aggregate | |
| Number of |
| Exercise Price |
| Contractual Term |
| Intrinsic | ||
| Shares |
| Per Share |
| (years) |
| Value | ||
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020 | 8,599,000 |
| $ | 1.67 |
|
|
|
|
|
Granted | 3,051,600 |
| $ | 5.27 |
|
|
|
|
|
Exercised | (825,908) |
| $ | 1.54 |
|
|
|
|
|
Forfeited and expired | (72,935) |
| $ | 1.77 |
|
|
|
|
|
Outstanding at March 31, 2021 | 10,751,757 |
| $ | 2.70 |
| 8.19 |
| $ | 89,289,061 |
Exercisable at March 31, 2021 | 5,214,736 |
| $ | 1.62 |
| 7.33 |
| $ | 47,723,441 |
The aggregate intrinsic values in the table above are before income taxes and represent the number of in-the-money options outstanding or exercisable multiplied by the closing price per share of the Company’s common stock on the last trading day of the quarter ended March 31, 20202021 of $3.27,$10.78, less the respective weighted average exercise price per share at period end.
The total intrinsic value of options exercised during the six months ended March 31, 20202021 and 20192020 was approximately $1.1$7.0 million and $48,000,$1.1 million, respectively. Cash received from options exercised during the six months ended March 31, 20202021 and 20192020 was approximately $1.3 million and $409,000, and $200,000, respectively.During During the six months ended March 31, 2020, 223,415 options were exercised using the cashless exercise feature available under the 2017 Plan and 2018 Plan, which resulted in the issuance of 143,958 shares of common stock. There were no options exercised using the cashless exercise feature during the six months ended March 31, 2021.
As of March 31, 2020,2021, the Company had unrecognized compensation expense of approximately $4.1$5.7 million related to unvested stock options. This expense is expected to be recognized over approximately threea weighted average period of 1.8 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 vested 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 per share of the Company’s common stock as quoted on NASDAQ on the trading day immediately preceding the date of the completion of the APP Acquisition. Upon exercise, the stock appreciation rights will be settled in common stock issued under the 2017 Plan. As of March 31, 2020,2021, vested stock appreciation rights based on 50,000 shares of common stock remain outstanding.
21
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 sixfive years, which include the option to extend a lease when the Company is reasonably certain to exercise that option. The Company does not have any leases that have not yet commenced as of March 31, 2020.2021. 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.
20
The components of the Company’s lease cost were as follows for the three and six months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
| Three Months Ended |
| Six Months Ended | |||||||||
| Three Months Ended |
| Six Months Ended | March 31, |
| March 31, | ||||||||||
| March 31, 2020 |
| March 31, 2020 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets | $ | 2,179 |
| $ | 4,357 | $ | 2,179 |
| $ | 2,179 |
| $ | 4,357 |
| $ | 4,357 |
Interest on lease liabilities |
| 1,379 |
|
| 2,859 |
| 777 |
| 1,379 |
|
| 1,716 |
| 2,859 | ||
Operating lease cost |
| 121,106 |
| 253,680 |
| 136,613 |
| 121,106 |
| 271,939 |
| 253,680 | ||||
Short-term lease cost |
| 1,863 |
| 3,726 |
| 1,863 |
| 1,863 |
| 3,726 |
| 3,726 | ||||
Variable lease cost |
| 33,671 |
| 67,136 |
| 39,539 |
| 33,671 |
| 76,222 |
| 67,136 | ||||
Sublease income |
| (44,845) |
|
| (89,689) |
| (44,844) |
|
| (44,845) |
|
| (89,689) |
|
| (89,689) |
Total lease cost | $ | 115,353 |
| $ | 242,069 | $ | 136,127 |
| $ | 115,353 |
| $ | 268,271 |
| $ | 242,069 |
The Company paid cash of $342,000 and $244,000 for amounts included in the measurement of operating lease liabilities during the six months ended March 31, 2020.2021 and 2020, respectively.
The Company’s operating lease ROUright-of-use assets and the related lease liabilities are presented as separate line items on the accompanying unaudited condensed consolidated balance sheetsheets as of March 31, 2020. The Company’s finance lease ROU asset was $39,000 as of March 31, 20202021 and is included in property and equipment, net on the accompanying unaudited condensed consolidated balance sheet. The current and long-term finance lease liabilities were $20,000 and $17,000, respectively, and are included in accrued expenses and other current liabilities and other liabilities, respectively, on the accompanying unaudited condensed consolidated balance sheet as of March 31,September 30, 2020.
Other information related to the Company’s leases as of March 31, 2021 and September 30, 2020 was as follows:
| |
| |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| March 31, |
| September 30, |
| 2021 |
| 2020 |
Operating Leases |
|
|
|
Weighted-average remaining lease term | 3.3 |
| 3.6 |
Weighted-average discount rate | 11.5% |
| 11.5% |
Finance Leases |
|
|
|
Weighted-average remaining lease term | 0.9 |
| 1.4 |
Weighted-average discount rate | 13.9% |
| 13.9% |
The Company’s lease agreements do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value.
22
As of March 31, 2020, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
| Operating |
| Finance |
| Sublease | |||
| Leases |
| Leases |
| Income | |||
Fiscal year ended September 30, |
|
|
|
|
|
|
|
|
2020 | $ | 211,163 |
| $ | 10,812 |
| $ | 97,081 |
2021 |
| 428,848 |
|
| 22,199 |
|
| 198,668 |
2022 |
| 347,841 |
|
| 9,496 |
|
| 203,584 |
2023 |
| 293,045 |
|
| — |
|
| 190,749 |
2024 |
| 189,335 |
|
| — |
|
| — |
Thereafter |
| 162,672 |
|
| — |
|
| — |
Total lease payments |
| 1,632,904 |
|
| 42,507 |
| $ | 690,082 |
Less imputed interest |
| (362,819) |
|
| (5,498) |
|
|
|
Total lease liabilities | $ | 1,270,085 |
| $ | 37,009 |
|
|
|
Under FASB ASC 840, the lease accounting guidance prior to the Company’s adoption of FASB ASC 842, the Company had net capital lease assets of $43,000 included in property and equipment, net and a related capital lease obligation of $42,000 included in accrued expenses and other current liabilities and other liabilities on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2019.
Under FASB ASC 840, future minimum payments under operating leases consisted of the following as of September 30, 2019:
|
|
|
|
|
|
|
|
|
| Operating |
| Sublease |
|
| |||
| Leases |
| Income |
| Net Total | |||
Fiscal year ended September 30, |
|
|
|
|
|
|
|
|
2020 | $ | 469,002 |
| $ | 193,753 |
| $ | 275,249 |
2021 |
| 433,751 |
|
| 198,668 |
|
| 235,083 |
2022 |
| 337,456 |
|
| 203,584 |
|
| 133,872 |
2023 |
| 114,493 |
|
| 190,749 |
|
| (76,256) |
2024 |
| 11,238 |
|
| — |
|
| 11,238 |
Total minimum lease payments | $ | 1,365,940 |
| $ | 786,754 |
| $ | 579,186 |
The minimum lease payments presented above do not include real estate taxes, common area maintenance charges or insurance charges payable under the Company’s operating leases for office and manufacturing facility space. These amounts are generally not fixed and can fluctuate from year to year.
Note 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 $10.0 million.
Litigation
From time to time we may be involved in litigation or other contingencies arising in the ordinary course of business. Based on the information presently available, management believes there are no contingencies, claims or actions, pending or threatened, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or results of operations.
In accordance with FASB ASC 450, Contingencies, we accrue loss contingencies including costs of settlement, damages and defense related to litigation to the extent they are probable and reasonably estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.
2321
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 future milestones is not reasonably estimable, we have not recorded a liability on the accompanying unaudited condensed consolidated financial statements for any of these contingencies.
Note 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.
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) repealed the alternative minimum tax (“AMT”) for corporations. The law provides that AMT carryovers can be utilized to reduce or eliminate the tax liability in subsequent years or to obtain a tax refund. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, accelerates the ability to claim a refund of the entire refundable credit to 2018 with an election when filing. The Tax Act previously allowed a 50% refundable credit for tax years beginning in 2018 through 2020, with a 100% credit refund in 2021. At March 31, 2020, the Company has $0.5 million of AMT credit carryovers in prepaid expenses and other current assets due to the expectation, as a result of the CARES Act, that the AMT credits will be refundable over the next year.
As of September 30, 2019,2020, the Company had U.S. federal and state net operating lossNOL carryforwards of $42.7$41.7 million and $25.4$25.7 million, respectively, for income tax purposes with $14.4$13.5 million and $20.5$19.8 million, respectively, expiring in years 2022 to 2038 and $28.3$28.2 million and $4.9$5.9 million, respectively, which can be carried forward indefinitely. The Company’s U.K. subsidiary has U.K. net operating lossNOL carryforwards of $61.7$61.3 million as of September 30, 2019,2020, which can be carried forward indefinitely to be used to offset future U.K. taxable income.
A reconciliation of income tax (benefit) expense and the amount computed by applying the U.S. statutory federal income tax rate of 21% to (loss) income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at U.S. federal statutory rates | $ | (198,166) |
| $ | (841,862) |
| $ | (908,354) |
| $ | (1,273,685) |
State income tax benefit, net of federal benefits |
| (15,347) |
|
| (199,521) |
|
| (70,347) |
|
| (301,863) |
Effect of foreign income tax rates |
| 23,832 |
|
| 4,830 |
|
| 66,386 |
|
| (3,527) |
Effect of deemed dividend and repatriation tax |
| (34,331) |
|
| 32,318 |
|
| 16,120 |
|
| 63,627 |
Change in valuation allowance |
| 89,741 |
|
| 1,028,063 |
|
| 682,451 |
|
| 1,651,193 |
Other, net |
| 1,131 |
|
| 1,339 |
|
| 3,861 |
|
| (18,080) |
Income tax (benefit) expense | $ | (133,140) |
| $ | 25,167 |
| $ | (209,883) |
| $ | 117,665 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense at U.S. federal statutory rates | $ | (593,101) |
| $ | (198,166) |
| $ | 3,041,159 |
| $ | (908,354) |
State income tax (benefit) expense, net of federal (benefit) expense |
| (45,923) |
|
| (15,347) |
|
| 235,473 |
|
| (70,347) |
Effect of stock options exercised |
| 11,279 |
|
| — |
|
| (53,011) |
|
| — |
Effect of common stock purchase warrants exercised |
| — |
|
| — |
|
| (2,038,919) |
|
| — |
Effect of Paycheck Protection Program funds |
| (26,340) |
|
| — |
|
| (122,226) |
|
| — |
Effect of foreign income tax rates |
| 4,993 |
|
| 23,832 |
|
| (27,577) |
|
| 66,386 |
Effect of global intangible low taxed income |
| (55,388) |
|
| (34,331) |
|
| 69,757 |
|
| 16,120 |
Change in valuation allowance |
| 727,034 |
|
| 89,741 |
|
| (1,005,752) |
|
| 682,451 |
Other, net |
| (864) |
|
| 1,131 |
|
| 1,088 |
|
| 3,861 |
Income tax expense (benefit) | $ | 21,690 |
| $ | (133,140) |
| $ | 99,992 |
| $ | (209,883) |
2422
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| September 30, | March 31, |
| September 30, | ||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards | $ | 8,966,965 |
| $ | 8,971,569 | $ | 8,104,217 |
| $ | 8,759,589 |
State net operating loss carryforwards |
| 1,690,205 |
|
| 1,689,536 |
| 1,635,677 |
|
| 1,682,104 |
Foreign net operating loss carryforwards – U.K. |
| 10,622,504 |
|
| 10,486,476 |
| 11,624,930 |
|
| 11,655,853 |
Foreign capital allowance – U.K. |
| 103,400 |
|
| 103,400 |
| 113,522 |
|
| 113,522 |
Share-based compensation |
| 1,007,166 |
|
| 804,378 |
| 574,699 |
|
| 1,255,983 |
Interest expense |
| 524,852 |
|
| — |
| 706,619 |
|
| 850,248 |
Other, net – U.K. |
| 50,781 |
|
| 50,781 |
| 93,739 |
|
| 93,739 |
Other, net – U.S. |
| 420,636 |
|
| 434,764 |
| 518,584 |
|
| 374,942 |
Gross deferred tax assets |
| 23,386,509 |
|
| 22,540,904 |
| 23,371,987 |
|
| 24,785,980 |
Valuation allowance for deferred tax assets |
| (10,512,660) |
|
| (9,830,209) |
| (13,068,988) |
|
| (14,074,740) |
Net deferred tax assets |
| 12,873,849 |
|
| 12,710,695 |
| 10,302,999 |
|
| 10,711,240 |
Deferred tax liabilities: |
|
|
|
|
|
|
|
| ||
In-process research and development |
| (4,072,740) |
|
| (4,072,740) |
| (882,427) |
|
| (882,427) |
Developed technology |
| (396,947) |
|
| (424,657) |
| — |
|
| (369,237) |
Covenant not-to-compete |
| (57,913) |
|
| (65,993) |
| (41,751) |
|
| (49,832) |
Other, net – Malaysia |
| (3,865) |
|
| (3,865) |
| (11,297) |
|
| (11,297) |
Other, net – U.S. |
| (6,376) |
|
| (6,376) |
| (6,371) |
|
| (6,371) |
Net deferred tax liabilities |
| (4,537,841) |
|
| (4,573,631) |
| (941,846) |
|
| (1,319,164) |
Net deferred tax asset | $ | 8,336,008 |
| $ | 8,137,064 | $ | 9,361,153 |
| $ | 9,392,076 |
The deferred tax amounts have been classified on the accompanying unaudited condensed consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| September 30, | March 31, |
| September 30, | ||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset – U.K. | $ | 8,632,613 |
| $ | 8,433,669 | $ | 9,435,877 |
| $ | 9,466,800 |
Total deferred tax asset | $ | 8,632,613 |
| $ | 8,433,669 | $ | 9,435,877 |
| $ | 9,466,800 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability – U.S. | $ | (292,740) |
| $ | (292,740) | $ | (63,427) |
| $ | (63,427) |
Deferred tax liability – Malaysia |
| (3,865) |
|
| (3,865) |
| (11,297) |
|
| (11,297) |
Total deferred tax liability | $ | (296,605) |
| $ | (296,605) | $ | (74,724) |
| $ | (74,724) |
Note 14 – Paycheck Protection Program
The CARES Act established the Paycheck Protection Program (PPP) administered by the U.S. Small Business Administration (SBA), which authorized forgivable loans to small businesses. Pursuant to the CARES Act, PPP loans will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. In April 2020, the Company applied for a PPP loan and received funding of approximately $540,000. The Company expended the funds received under the PPP in full on qualifying expenses, and maintained the conditions set forth by the PPP. The Company submitted its application for forgiveness in September 2020 and the SBA approved the forgiveness of the full amount of the loan and the related interest on November 10, 2020.
Note 15 – Net Loss(Loss) Income Per Share
Basic net loss(loss) income per common share is computed by dividing net loss(loss) income by the weighted average number of common shares outstanding for the period. Diluted net loss(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.
23
The following table provides a reconciliation of the net (loss) income per basic and diluted common share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income | $ | (2,845,981) |
| $ | (810,509) |
| $ | 14,381,720 |
| $ | (4,115,610) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
| 75,175,077 |
|
| 65,367,493 |
|
| 72,717,621 |
|
| 65,202,103 |
Net effect of dilutive instruments: |
|
|
|
|
|
|
|
|
|
|
|
Stock options |
| — |
|
| — |
|
| 7,147,372 |
|
| — |
Stock appreciation rights |
| — |
|
| — |
|
| 44,256 |
|
| — |
Common stock purchase warrants |
| — |
|
| — |
|
| 744,821 |
|
| — |
Total net effect of dilutive instruments |
| — |
|
| — |
|
| 7,936,449 |
|
| — |
Diluted weighted average common shares outstanding |
| 75,175,077 |
|
| 65,367,493 |
|
| 80,654,070 |
|
| 65,202,103 |
Net (loss) income per basic common share outstanding | $ | (0.04) |
| $ | (0.01) |
| $ | 0.20 |
| $ | (0.06) |
Net (loss) income per diluted common share outstanding | $ | (0.04) |
| $ | (0.01) |
| $ | 0.18 |
| $ | (0.06) |
For the vestingsix months ended March 31, 2021, approximately 211,000 potentially dilutive instruments were excluded from the computation of unvested restricted stock and restricted stock units.net income per diluted weighted average common share outstanding because their effect would have been antidilutive. Due to our net loss for the periods presented,three months ended March 31, 2021 and three and six months ended March 31, 2020, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Notes 9 and 10 for a discussion of our potentially dilutive potential common shares.instruments.
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Note 1516 – Industry Segments
The Company currently operates in two reporting segments: CommercialSexual Health Business and Research and Development. The CommercialSexual Health Business segment consists of FC2 andthe Company’s commercial product, FC2. The Sexual Health Business also included PREBOOST®. before the sale of the business in December 2020. The Research and Development segment consists of multiple drug products under clinical development. The Company’s Sexual Health Business segment will include any future revenues, cost of sales and selling expenses for TADFIN™, if approved. Costs associated with the development for oncologyof TADFIN™ are currently included in the Research and urology. Development segment. There are no significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of non-operating expenses and income taxes. Our chief operating decision-maker (“CODM”)(CODM) is Mitchell S. Steiner, M.D., our Chairman, President and Chief Executive Officer.
The Company's operating (loss) income (loss) by segment iswas as follows:
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|
|
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|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
|
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|
|
|
|
|
|
|
|
|
|
Sexual health business | $ | 9,929,005 |
| $ | 6,333,886 |
| $ | 19,843,941 |
| $ | 12,302,949 |
Research and development |
| (7,741,348) |
|
| (3,884,272) |
|
| (13,600,185) |
|
| (9,174,131) |
Corporate |
| (3,659,067) |
|
| (2,749,292) |
|
| 11,471,991 |
|
| (5,212,889) |
Operating (loss) income | $ | (1,471,410) |
| $ | (299,678) |
| $ | 17,715,747 |
| $ | (2,084,071) |
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|
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|
|
|
|
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|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| March 31, |
| March 31, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Commercial | $ | 6,186,211 |
| $ | 2,801,740 |
| $ | 11,989,804 |
| $ | 6,160,921 |
Research and development |
| (3,866,775) |
|
| (2,888,361) |
|
| (9,113,156) |
|
| (5,250,184) |
Corporate |
| (2,619,114) |
|
| (2,037,969) |
|
| (4,960,719) |
|
| (4,047,054) |
Operating loss | $ | (299,678) |
| $ | (2,124,590) |
| $ | (2,084,071) |
| $ | (3,136,317) |
All of our net revenues, which are primarily derived from the sale of FC2, are attributed to our Commercialthe Sexual Health Business reporting segment. See Note 4 for additional information regarding our net revenues. Costs related to the office located in London, England are fully dedicated to FC2 and are presented as a component of the CommercialSexual Health Business segment. DepreciationDrug commercialization costs are included in the Research and Development segment. Certain expenses in the three and six months ended March 31, 2020 have been reclassified to conform to the current period presentation. The gain on sale of the PREBOOST® business and depreciation and amortization related to long-lived assets that are not utilized in the production of FC2 are not reported as part of the reporting segments or reviewed by the CODM. These amounts are included in Corporate in the reconciliations above. Total assets are not presented by reporting segment as they are not reviewed by the CODM when evaluating the reporting segments’ performance.
Note 16 – Subsequent Events
There are many uncertainties regarding the current COVID-19 pandemic. The Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and distribution channels. While the pandemic did not materially adversely affect the Company’s financial results and business operations in the three months ended March 31, 2020, significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations; however, we will continue to monitor the COVID-19 situation and its impact on our business closely and expect to reevaluate the timing of our anticipated clinical trials as the impact of COVID-19 on our industry becomes more clear.
The CARES Act established the Paycheck Protection Program (“PPP”), which authorizes forgivable loans to small businesses. Pursuant to the CARES Act, the loan will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. Loans made under the PPP have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty. In April 2020, the Company received loan funding of approximately $540,000 under the PPP. As of the date of this report, the Company has not terminated any employees in the U.S. due to the COVID-19 pandemic. The Company intends to use the proceeds from the PPP to pay salaries for its U.S.-based employees and to pay rent and utilities.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Veru Inc., The Prostate Cancer Company, is an oncology and urology biopharmaceutical company with a focus on developing novel medicines for the management of prostate cancer.and breast cancers.
The Company’s prostate cancer drug pipeline includes VERU-111,sabizabulin, VERU-100 and zuclomiphene citrate, and VERU-100.citrate.
VERU-111 is an oral, next-generation, first-in-class small molecule that targets alpha and beta tubulin subunits to disrupt microtubules in cells to treat metastatic prostate cancer patients whose disease is resistant to both castration and novel androgen-blocking agents (e.g., abiraterone or enzalutamide). VERU-111 is being evaluated in men with metastatic castration and androgen-blocking agent resistant prostate cancer in two portions of an ongoing open label clinical trial: the Phase 1b portion and the Phase 2 portion. Recently we announced positive results from the fully enrolled but ongoing Phase 1b portion of the Phase 1b/2 VERU-111 trial for prostate cancer. The Phase 1b portion of the Phase 1b/2 clinical study enrolled 39 men with metastatic castration-resistant prostate cancer who have also become resistant to at least one novel androgen blocking agent from 7 clinical sites in the United States. A standard 3x3 design was used to establish the maximum tolerated dose (MTD), to select a recommended clinical dose for Phase 2 study, and to assess preliminary evidence of antitumor activity of VERU-111. Oral dosing escalated from 4.5mg to 81mg (7 days of dosing followed by 14 days of no drug each 21-day cycle and expanded to 21 days of continuous dosing per cycle). As for safety, the MTD of VERU-111 was determined to be 72mg (3 of 11 men had reversible Grade 3 diarrhea). No Grade 3 diarrhea was observed at doses less than 72 mg per day. At doses of VERU-111 of 63 mg and lower per day, mild to moderate nausea, vomiting, diarrhea and fatigue were the most common adverse events. There were no reports of neurotoxicity and no neutropenia at doses 63 mg and lower oral daily dosing continuous for 21 days per cycle. Preliminary antitumor activity was assessed by serum PSA and standard local imaging with bone and CT scans. In the eight men that received at least four 21-day cycles of oral VERU-111 at any dose, based upon their 21-day cycle baseline PSA levels, 6/8 (75%) had decreases in their PSA levels, 4 patients (50%) demonstrated a greater than or equal to 30% decline, and 2 patients (25%) had a greater than or equal to 50% decline in serum PSA. Based upon PCWG3 and Response Evaluation Criteria in Solid Tumors (RECIST) 1.1 criteria, objective tumor responses were seen in 2 patients (25%) (soft tissue and bone) and 5/8 patients (63%) had stable disease. Objective tumor responses and PSA declines lasted longer than 12 weeks. The primary endpoint used in pivotal efficacy studies for the treatment of metastatic castration-resistant prostate cancer is median time to cancer progression by imaging (bone and CT scans). In the current study, median duration of response, or time to cancer progression, has not been reached since 7 out of 8 of the men are still being treated on the study with an average duration of response of 10 months (range is 6-14 months). There are an additional 3 subjects on study that have not yet completed four 21-day cycles; therefore, a total of 10 men are still on study. The Phase 2 portion of the trial is currently enrolling men who have metastatic castration resistant prostate cancer and who have also become resistant to novel androgen blocking agents, such as abiraterone or enzalutamide, but prior to proceeding to IV chemotherapy, also referred to as the prechemotherapy stage. In addition, based on the Phase 1b safety and efficacy clinical data, the Company plans to meet with the FDA next quarter to reach agreement on the registration Phase 3 designSabizabulin (VERU-111) for the treatment of men with metastatic castration resistant prostate cancer who have also become resistant to at least one androgen receptor targeting agent
Sabizabulin (VERU‑111) is an oral, first-in-class, new chemical entity that targets and inhibits microtubules to disrupt transport of the androgen receptor into the nucleus (androgen receptor transport disruptor). Open label Phase 1b and Phase 2 clinical studies with sabizabulin in men with metastatic castration and androgen receptor targeting agent resistant prostate cancer are ongoing. The Phase 1b clinical study completed enrollment of 39 men. The Phase 1b study has yielded promising efficacy and safety clinical data. Daily chronic drug administration appears feasible and safe. The Phase 2 clinical study has completed enrollment of 41 men with metastatic castration resistant prostate cancer who have also become resistant to at least one androgen receptor targeting agent, such as abiraterone or enzalutamide, but prior to proceeding to IV chemotherapy. Evidence of tumor efficacy including PSA declines and objective tumor responses (partial and complete response) were observed, and sabizabulin was well tolerated with no neutropenia or neurotoxicity. The safety profile is similar to an androgen receptor targeting agent, enzalutamide or abiraterone. In July 2020, the Company had a meeting with the FDA and received positive input from the FDA on the pivotal Phase 3 trial design for sabizabulin. The indication is for the treatment in men with metastatic castration resistant prostate cancer who have failed one androgen blockingreceptor targeting agent, (enzalutamide or abiraterone). We also planbut prior to presentIV chemotherapy. The Phase 3 VERACITY clinical study is an updateopen label, randomized, multicenter, registration study evaluating sabizabulin 32mg daily dosing versus an alternative androgen receptor targeting agent as the active control (the blood levels of sabizabulin from the Phase 3 32mg drug product dose are similar to the Phase 1b/2 sabizabulin 63mg dosage form). The primary endpoint is radiographic progression-free survival. The sample size for the Phase 3 study will be approximately 245 men with a 2:1 randomization of sabizabulin versus the active control. The Company expects to enroll its first patient in its pivotal VERACITY Phase 3 study in May 2021.
VERU-100 for androgen deprivation therapy of advanced prostate cancer
VERU‑100 is a novel, proprietary long-acting gonadotropin-releasing hormone (GnRH) antagonist peptide three-month subcutaneous depot formulation designed to address the current limitations of commercially available androgen deprivation therapy (ADT). Androgen deprivation therapy is currently the mainstay of advanced prostate cancer treatment and is used as a foundation of treatment throughout the course of the disease even as other endocrine, chemotherapy, or radiation treatments are added or stopped. Specifically, VERU‑100 is a chronic, long-acting GnRH antagonist peptide administered as a small volume, three-month depot subcutaneous injection without a loading dose. VERU‑100 immediately suppresses testosterone with no testosterone surge upon initial or repeated administration, a problem that occurs with currently approved luteinizing hormone-releasing hormone (LHRH) agonists used for ADT. There are no GnRH antagonist depot injectable formulations commercially approved beyond a one-month injection. The Company expects to enroll its first patient in a Phase 2 study to evaluate VERU-100 dosing in 35 men in May 2021, and a Phase 3 registration clinical data at a future major scientific meeting. trial in approximately 100 men is anticipated to begin in the second half of calendar year 2021.
Zuclomiphene citrate for the treatment of men who have hot flashes caused by androgen deprivation therapy for advanced prostate cancer
Zuclomiphene citrate is an oral nonsteroidal estrogen receptor agonist that has successfully completed a Phase 2 trial (Stage 1 testing placebo, Zuclomiphene 10mg, and Zuclomiphene 50 mg)being developed to treat hot flashes, a common side effect caused by androgen deprivation therapy (ADT)ADT in men with advanced prostate cancer. Following an End of Phase 2 meeting with the FDA, the Company plans to advance zuclomiphene citrate to a Phase 3 clinical trial in men with advanced prostate cancer who experience moderate to severe hot flashesflashes.
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The Company’s breast cancer drug pipeline includes enobosarm and sabizabulin.
Enobosarm, selective androgen receptor targeted agonist, for the treatment of androgen receptor positive (AR+), estrogen receptor positive (ER+) and human epidermal growth factor receptor 2 negative (HER2-) metastatic breast cancer (3rd line metastatic setting)
Enobosarm is the first new class of targeting endocrine therapy in advanced breast cancer in decades. Enobosarm is an oral, first-in-class, new chemical entity, selective androgen receptor agonist that targets and activates the androgen receptor (AR) in AR+/ER+/HER2- metastatic breast cancer, which results in tumor suppressor activity without the unwanted masculinizing side effects. Enobosarm has extensive nonclinical and clinical experience having been evaluated in 25 separate clinical studies in approximately 1,450 subjects, including three Phase 2 clinical studies in advanced breast cancer involving more than 250 patients. In the two Phase 2 clinical studies conducted in women with AR+/ER+/HER2- metastatic breast cancer, enobosarm demonstrated significant antitumor efficacy in heavily pretreated cohorts that failed estrogen receptor targeting agents, chemotherapy, and or CDK 4/6 inhibitors and was well tolerated with a potential start datefavorable safety profile. In the fourth quarter of calendar 2020, the FDA agreed to the Phase 3 multicenter, international, open label, and randomized (1:1) ARTEST registration clinical trial design to evaluate the efficacy and safety of enobosarm monotherapy versus physician’s choice of either exemestane or a SERM as an active comparator for the treatment of metastatic AR+/ER+/HER2- breast cancer in lateapproximately 210 patients who have failed a nonsteroidal aromatase inhibitor (anastrozole or letrozole), fulvestrant and a CDK4/6 inhibitor. The primary endpoint is radiographic progression-free survival. The pivotal Phase 3 ARTEST study is anticipated to commence in the second quarter of calendar year 2020.2021.
Enobosarm was also part of the focus of a recent article in Nature Medicine, Volume 27, Issue 2, February 2021, entitled: “The Androgen Receptor is a Tumor Suppressor in Estrogen Receptor-Positive Breast Cancer”. In the Nature Medicine publication, the researchers and authors provided scientific evidence that established that the androgen receptor is a tumor suppressor and that enobosarm, by targeting and activating AR, demonstrates antitumor activity not only in AR+ ER+ metastatic breast cancer that has become resistance to estrogen receptor targeted agents endocrine and CDK4/6 inhibitor treatments, but also that enobosarm in combination with a CDK4/6 inhibitor (e.g., palbociclib) may potentially restore CDK4/6 inhibitor sensitivity in ER+ breast cancer that has become resistant to estrogen receptor targeting agents and CDK4/6 inhibitors.
We intend to conduct a second enobosarm program to evaluate enobosarm combination therapy in a second line metastatic setting. In this program, we plan to conduct a Phase 2 clinical trial to evaluate the efficacy and safety of enobosarm plus CDK4/6 inhibitor (combination therapy) versus an alternative estrogen blocking agent (fulvestrant or an aromatase inhibitor) in subjects with AR+/ER+/HER2- metastatic breast cancer who have failed first line CDK4/6 inhibitor plus an estrogen blocking agent (non-steroidal aromatase inhibitor or fulvestrant). This clinical study in approximately 106 subjects is expected to commence in the third quarter of calendar year 2021.
Sabizabulin for the treatment of taxane resistant metastatic triple negative breast cancer
Metastatic triple negative breast cancer (TNBC) is an aggressive form of breast cancer that occurs in approximately 15% of all breast cancers. This form of breast cancer does not express ER, progesterone receptor (PR), or HER2 and is resistant to endocrine therapies. The first line of treatment usually includes IV taxane chemotherapy. Almost all women will eventually develop taxane resistance. Sabizabulin is an oral, first-in-class, new chemical entity that targets and inhibits microtubules to disrupt the cytoskeleton. Sabizabulin is not a substrate for P-glycoprotein drug resistance protein. Over expression of P-glycoprotein is a common mechanism that results in taxane resistance in TNBC. Preclinical studies in human triple negative breast cancer grown in animal models demonstrate that sabizabulin significantly inhibits cancer proliferation, migration, metastases, and invasion of triple negative breast cancer cells and tumors that have become resistant to paclitaxel (taxane). Using the safety information from the Phase 1b and Phase 2 sabizabulin prostate cancer clinical studies in a total of approximately 80 men, the Company plans to meet with the FDA in calendar year 2021 and to commence a Phase 2b clinical study in the second half of calendar year 2021 to evaluate oral daily dosing of sabizabulin in approximately 200 women with metastatic TNBC that have become resistant to taxane IV chemotherapy.
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VERU-100 is a novel, proprietary peptide formulation for ADT with multiple potential beneficial clinical attributes addressing the shortfalls of current FDA-approved ADT formulationsSabizabulin for the treatment of advanced prostate cancer. VERU-100hospitalized COVID-19 patients at high risk for acute respiratory distress syndrome (ARDS)
Sabizabulin is a long-acting gonadotropin-releasing hormone (GnRH) antagonist designed to be administerednovel once-a-day orally dosed small molecule that has both broad anti-inflammatory and anti-viral properties which may serve as a small volume subcutaneous 3-month depot injection without a loading dose. VERU-100 will immediately suppress testosterone with no testosterone surge upon initial or repeated administration—a problem which occurs with currently approved luteinizing hormone-releasing hormone (LHRH) agonists used for ADT. There are no GnRH antagonists commercially approved beyond a one-month injection. VERU-100 is anticipatedtwo-pronged approach to enter a Phase 2 dose-finding study with a potential start date in the third quartertreatment of calendar year 2020.COVID-19 virus infection and the subsequent debilitating inflammatory effects that can lead to ARDS and death.
Recently the Company announced that it has received FDA permission to initiateWe conducted a double-blind, randomized, placebo-controlled Phase 2 clinical trial to assessevaluating daily oral once-a-day dosing of sabizabulin 18mg versus placebo in approximately 40 hospitalized COVID-19 patients who were at high risk for ARDS. This trial was conducted in 5 sites across the United States. Patients that were hospitalized with documented evidence of COVID-19 infection with symptoms and who were at high risk for ARDS were enrolled. Subjects received either sabizabulin 18mg or placebo as well as standard of care for 21 days or until released from the hospital. The primary efficacy endpoint was the proportion of VERU-111,patients that were alive without respiratory failure at Day 29. On February 8, 2021, we announced positive results from this Phase 2 clinical trial evaluating sabizabulin for the treatment of hospitalized patients with COVID-19 who were high risk for ARDS. For the primary endpoint in hospitalized patients in a microtubule depolymerization agent, in combating COVID-19, the global pandemic disease caused by the novel coronavirus SARS-CoV-2.VERU-111 is an oral, first-in-class microtubule depolymerization agent that targets the colchicine binding site of alpha and beta tubulin subunits to inhibit microtubules and is currently under clinical development in prostate cancer. Drugs that target microtubules have broad antiviral activity by disrupting the intracellular transport of viruses such as SARS CoV-2, along microtubules. Microtubule trafficking is critical for viruses to cause infection. Furthermore, microtubule depolymerization agents that target alpha and beta tubulin subunits of microtubules also have strong anti-inflammatory effects including the potentialmodified intent to treat population, sabizabulin treatment compared to placebo had a statistically significant and clinically meaningful improvement in the cytokine release syndrome (cytokine storm) induced byproportion of patients with treatment failures (death or alive with respiratory failure) being 5.6% in the SARS-CoV-2 viral infection that seems to be associatedsabizabulin treated group (n=18) and 30% in the placebo treated group (n=20) at Day 29. This represents an 81% relative reduction in treatment failures and shows statistical significance with high COVID-19 mortality rates. The Company metp=0.05. Sabizabulin was tolerated with a good safety profile.
In February 2021, the FDA and received agreement on theagreed to advancing sabizabulin into Phase 3 clinical development program for VERU-111 as a potential dual antiviral and anti-inflammatory agent to combat COVID-19 under the new FDA program, Coronavirus Treatment Acceleration Program (CTAP).registration trial. The Phase 23 clinical trial is a double-blind randomized (1:(2:1) placebo-controlled trial evaluating daily oral doses of VERU-111 versus placebo9mg sabizabulin for 21 days versus placebo in 40300 hospitalized patients (VERU-111 20(200 subjects will be treated with sabizabulin and placebo 20 subjects)100 subjects will receive placebo) who tested positive for the SARS-CoV-2 virus and who are at high risk for Acute Respiratory Distress Syndrome (ARDS).ARDS. The primary efficacy endpoint will be the proportion of patients that are alive andat Day 60. Secondary endpoints will include proportion of patients alive without respiratory failure, at Day 29. Secondary endpoints includedays in ICU, days on mechanical ventilations, days in the measured improvements onhospital, and viral load. The Company expects to enroll its first patient in its sabizabulin for COVID-19 Phase 3 pivotal study in May 2021. The Company has selected clinical sites in the WHO Disease Severity Scale (8-point ordinal scale) which captures COVID-19 disease symptomsU.S., Brazil, Argentina, Colombia, and signs including hospitalization to progression of pulmonary symptoms to mechanical ventilation as well as death.Mexico. The Phase 2 COVID-19 study will evaluate an 18mg oral daily dosing single treatment for 21 days. BecauseCompany anticipates completion of the urgent need for effective and timely therapeutics to combat COVID-19,Phase 3 trial during the Company has applied for significant grant funding through both fourth calendar quarter of 2021.
The Biomedical Advanced Research and Development Authority of the USU.S. Department of Health and Human Services (BARDA) and The Defense Advanced Research Projects Agency of the US Department of Defense (DARPA)Veru have had several meetings to expedite the clinical development program of VERU-111 for COVID-19. There can be no assurances that any suchdiscuss possible grant funding will be provided.for the Phase 3 study and manufacturing scale up.
Sexual Health Division
The Company is also advancing newCompany's Sexual Health Division includes a drug formulations in its specialty pharmaceutical pipeline addressing unmet medical needs in urology such ascandidate, TADFIN™, for the treatment of benign prostatic hyperplasia (BPH) and a commercial product, the FC2 Female Condom/FC2 Internal Condom® (FC2), an FDA-approved product for the administrationdual protection against unplanned pregnancy and the transmission of tadalafilsexually transmitted infections.
TADFIN™ (tadalafil 5mg and finasteride 5mg combination formulation dosed dailycapsule) is being developed to treat urinary tract symptoms caused by BPH. Tadalafil (CIALIS®) is currently approved for treatment of benign prostatic hyperplasia (BPH)BPH and erectile dysfunction and finasteride is currently approved for treatment of BPH (finasteride 5mg PROSCAR®) and male pattern hair loss (finasteride 1mg PROPECIA®). The co-administration of tadalafil and finasteride has been shown to be more effective for the treatment of BPH than by finasteride alone. The Company had a successful pre-NDApre-New Drug Application (NDA) meeting with the FDA and the expected submission ofsubmitted the NDA for TADFIN®™ in February 2021. If approved, TADFIN™ is expected to be marketed and distributed by telemedicine (telemedicine being the fourth quarterremote diagnosis and treatment of calendar year 2020 or early 2021.patients by means of telecommunications technology) and telepharmacy groups. The Company is also developing a Tamsulosin XR formulation which is a formulation of tamsulosin, the active ingredient in FLOMAXCompany’s Sexual Health Business segment will include future revenues for TADFIN®™, whichif approved. Costs associated with the Company has designed to avoid the “food effect” inherentdevelopment of TADFIN™ are currently included in currently marketed versions of the drug, allowing for potentially safer administrationour Research and improved patient compliance.Development segment.
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The Company's commercial products include FC2, an FDA-approved product for the dual protection against unintended pregnancy and sexually transmitted infections, and the PREBOOST® 4% benzocaine medicated individual wipe for the treatment of premature ejaculation. The Company’s Female Health Company Division markets and sells FC2 commerciallyin both the commercial sector in the U.S. and in the public health sector both in the U.S. and globally. In the U.S., FC2 is available by prescription through the Company’s multiple telemedicine and internet pharmacy partners and retail pharmacies,channels as well as OTC through the Company’s website at www.fc2.us.com.retail pharmacies. It is also available to public health sector entities such as state departments of health and 501(c)(3) organizations. In the global public health sector, the Company markets FC2 to entities, including ministries of health, government health agencies, U.N. agencies, nonprofit organizations and commercial partners, that work to support and improve the lives, health and well-being of women around the world. PREBOOST® is marketed online in the U.S. through an exclusive marketing arrangement under the Roman® Swipes brand name by Roman Health Ventures Inc. Roman is a leading telemedicine company that sells men’s health products via the internet website www.getroman.com.
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In October 2016, we completed the APP Acquisition. Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling FC2 in the public sector. Most of the Company’s net revenues are currentlyduring the three and six months ended March 31, 2021 and 2020 were derived from sales of FC2 in the commercial and public and commercialhealth sectors.
Recent DevelopmentsSale of PREBOOST® Business
On December 8, 2020, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company sold substantially all of the assets related to the Company's PREBOOST® business. PREBOOST® is a 4% benzocaine medicated individual wipe for the treatment of premature ejaculation and was a commercial product in the Company’s Sexual Health Division during fiscal 2020. The transaction closed on December 8, 2020. The purchase price for the transaction was $20.0 million, consisting of $15.0 million paid at closing, $2.5 million payable 12 months after closing and $2.5 million payable 18 months after closing.
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. For these and other reasons, Veru has decided to postpone initiation of the first Phase 3 trial for zuclomiphene citrate until at least the end of calendar year 2020 or until such time as there is additional clarity and certainty surrounding the impact of the COVID-19 pandemic on the healthcare system.
The Phase 1b portion of our ongoing VERU-111 clinical trial is fully enrolled. As for the Phase 2 portion of the VERU-111 clinical trial, discontinuation would disrupt treatment of patients' advanced prostate cancer. Therefore, the VERU-111 Phase 2 study for metastatic castration resistant prostate cancer is currently enrolling as planned. However, there is a risk that changing circumstances relating to the COVID-19 pandemic may not allow our healthcare clinical trial investigators, their healthcare facilities or other necessary parties to continue to participate in these trials through completion.
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In addition to its impact on our clinical trials,To date, COVID-19 has had, and will likely continuenot impacted the Company’s ability to have, a significant impact onsupply product demand for FC2. At the start of the pandemic, we did experience some temporary disruption to our operations.manufacturing facility due to the implementation of local government policies. On March 16, 2020, the Malaysian government issued an order closing non-essential businesses in that country due to the COVID-19 pandemic. As a result, the sole facility where the Company manufactures FC2 was unable to manufacture or ship product starting March 16, 2020. Because FC2 is a health product, the Company received an exemption to reopen the facility with limited staff to ship existing inventory on March 27, 2020, to reopen for manufacturing with 50% of the regular number of workers and social distancing requirements on April 20, 2020 and to return to 100% of the regular number of workers but with continued social distancing requirements on May 4, 2020. The Company has had a sufficient quantity of FC2 inventory both inside and outside of Malaysia to continue to satisfy customer demand, and withdemand. The Company has adopted measures to protect the employees at its Malaysian facility, to respond in the event an employee at the facility reopening the Company does not expectis determined to have issues with supplytested positive for COVID-19, and to mitigate the impact of FC2.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'sCompany’s Malaysian manufacturing facility is subject to 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. There have been no additional closures of non-essential businesses by the Malaysian government.
The sole supplier of the nitrile polymer sheath for FC2 has recently been prioritizing production ofalso 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 limitedreduced capacity, and the Company may also encounter issues shipping product into key markets.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 and PREBOOST.FC2. For example, sales of FC2 could be impacted in the U.S. prescription marketchannel if insurance coverage is affected by job losses and in the Global Public Sector 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 and six months ended March 31, 2021.
To protect the health and safety of our workforce, we have closed our offices in the United States and the United Kingdom to non-essential staff and our personnel have largely been working remotely. Travel between our facilities in the United States, the United Kingdom and Malaysia has also been restricted. As of the date of this report, our operations have not been significantly impacted by such remote work requirements and travel restrictions.
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.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 more clear.clearer.
Sales of FC2 in the public health and commercial sectors
FC2 PublicCommercial Sector. 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 no copay under the ACA and the laws of 20+ states prior to enactment of the ACA. In 2018, we dissolved our small-scale marketing and sales program to focus our efforts in accessing fast-growing, highly reputable telemedicine firms to bring our much-needed FC2 product to patients with a prescription in a cost-effective and highly convenient manner. As a result of these efforts, the Company now supplies FC2 to telemedicine providers in the U.S. prescription channel. The Company is working to develop supply and distributor relationships with additional telemedicine and other providers.
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FC2 Global Public Health Sector.FC2’s primary use is for the prevention of HIV/AIDS and the transmission of other sexually transmitted diseases and family planning, and the global public health sector has been the Company’s mainan important market for FC2. Within the global public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.
FC2 has been distributed in the U.S. and 149 other countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other sexually transmitted infections and unwantedunintended 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.
The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with global public health sector groups and completing strategic arrangements with companies with the necessary marketing and financial resources and local market expertise.
The Company currently has a limited number of customers for FC2 in the global public health sector who generally purchase in large quantities. Over the past few years, significant customers have included large global agencies, such as UNFPA, USAID, the Brazil Ministry of Health either through UNFPA or Semina Indústria e Comércio Ltda (Semina), the Company's distributor in Brazil, and the Republic of South Africa health authorities that purchase through the Company's various local distributors. Other customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and NGOs.
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Purchasing patterns for FC2 in the public health sector vary significantly from one customer to another and may reflect factors other than simple demand. For example, some governmental agencies purchase FC2 through a formal procurement process in which a tender (request for bid) is issued for either a specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO,the World Health Organization, 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, including administrative actions or appeals. A tender award indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units. Many governmental tenders are stated to be “up to” the maximum number of units, which gives the applicable government agency discretion to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for orders in the tender and there are no guarantees as to the timing or amount of actual orders or shipments. Orders received may vary from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections and changes in demand. Administrative issues, politics, bureaucracy, exchange rate risk, process errors, changes in leadership, funding priorities and/or other pressures may delay or derail the process and affect the purchasing patterns of public health sector customers. As a result, the Company may experience significant quarter-to-quarter sales variances in the global public health sector due to the timing and shipment of large orders of FC2.
On August 27, 2018, the Company announced that through six of its distributors in the Republic of South Africa, the Company had received a tender award to supply 75% of a tender covering up to 120 million female condoms over three years. The Company began shipping units under this tender award in the third quarter of fiscal 2019.2019 and we have shipped approximately 12.2 million units through March 31, 2021.
The In October 2020, the Company classified approximately $1.1was awarded up to 20 million and $300,000 of trade receivables withunits through its distributor in Brazil as long-term asunder the new Brazil female condom tender. These units are expected to be delivered over two years. The Company began shipping units under this tender award in the first quarter of fiscal 2021 and we have shipped approximately 6.9 million units through March 31, 2020 and September 30, 2019, respectively, because payment was expected in greater than one year.2021.
FC2 Commercial Sector.31 In April 2017, the Company launched a small-scale marketing and sales program to support the promotion
FC2 Unit Sales. Details of the quarterly unit sales of FC2 for the last five fiscal years arewere as follows:
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Period |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
|
|
|
|
|
|
|
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|
|
October 1 — December 31 |
| 10,070,700 |
| 7,382,524 |
| 4,399,932 |
| 6,389,320 |
| 15,380,240 |
| 12,318,988 |
| 10,070,700 |
| 7,382,524 |
| 4,399,932 |
| 6,389,320 |
January 1 — March 31 |
| 6,884,472 |
| 9,792,584 |
| 4,125,032 |
| 4,549,020 |
| 9,163,855 |
| 8,189,552 |
| 6,884,472 |
| 9,792,584 |
| 4,125,032 |
| 4,549,020 |
April 1 — June 30 |
| — |
| 10,876,704 |
| 10,021,188 |
| 8,466,004 |
| 10,749,860 |
|
|
| 10,532,048 |
| 10,876,704 |
| 10,021,188 |
| 8,466,004 |
July 1 — September 30 |
| — |
| 9,842,020 |
| 6,755,124 |
| 6,854,868 |
| 6,690,080 |
|
|
| 5,289,908 |
| 9,842,020 |
| 6,755,124 |
| 6,854,868 |
Total |
| 16,955,172 |
| 37,893,832 |
| 25,301,276 |
| 26,259,212 |
| 41,984,035 |
| 20,508,540 |
| 32,777,128 |
| 37,893,832 |
| 25,301,276 |
| 26,259,212 |
Revenues. TheMost of the Company's net revenues are primarilyduring the three and six months ended March 31, 2021 and 2020 were derived from sales of FC2 in the U.S. prescription channel and global public sector and the U.S. prescription channel. Otherhealth sector. The Company also had revenues are from sales of PREBOOST®PREBOOST® (Roman® Swipes). through the date the PREBOOST® business was sold on December 8, 2020. These sales are recognized upon shipment or delivery of the product to the customers depending on contract terms.
The Company’s most significant customers have been telemedicine providers in the U.S. who sell into the prescription channel and global public health sector agencies who purchase and/or distribute FC2 for use in preventing the transmission of HIV/AIDS and/or family planning and, in the U.S., telemedicine providers who sell into the prescription channel.
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The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with global public health sector groups and completing strategic arrangements with companies with the necessary marketing and financial resources and local market expertise.
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 no copay under the Patient Protection and Affordable Care Act (the “ACA”) and the laws of 20+ states prior to enactment of the ACA. The Company supplies FC2 to a leading telemedicine provider, which has become one of our largest customers. The Company has developed and is working to develop additional supply and distributor relationships with telemedicine and other providers.planning.
The Company manufactures FC2 in a leased facility located in Selangor D.E., Malaysia, resulting in a portion of the Company's operating costs being 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 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 the key components for the manufacture of FC2 are essentially available from either multiple sources or multiple locations within a source.
Conducting research and development is central to our business model. Since the completionThe Company’s Research and Development segment includes multiple products and management routinely evaluates 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. Our research and development expenses were $3.9$7.6 million and $2.9$3.9 million for the three months ended March 31, 2021 and 2020, respectively, and 2019, respectively. Our research and development expenses were $9.2$13.3 million and $5.3$9.2 million for the six months ended March 31, 20202021 and 2019,2020, respectively. We expect to continue this trend of increased expenses relating to research and development due to advancement of multiple drug candidates.
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Results of Operations
THREE MONTHS ENDED MARCH 31, 20202021 COMPARED TO THREE MONTHS ENDED MARCH 31, 20192020
The Company generated net revenues of $13.3 million and net loss of $2.8 million, or $0.04 per basic and diluted common share, for the three months ended March 31, 2021, compared to net revenues of $9.9 million and net loss of $0.8 million, or $(0.01) per basic and diluted common share, for the three months ended March 31, 2020, compared to net revenues of $7.0 million and net loss of $4.0 million, or $(0.07) per basic and diluted common share, for the three months ended March 31, 2019.2020. Net revenues increased 43% year34% over year.the prior period.
FC2 net revenues represented 96% of total net revenues for the three months ended March 31, 2020. FC2 net revenues increased 39%40% year over year. There was a 30% decrease19% increase in total FC2 unit sales and an increase in FC2 average sales price per unit of 98%18%. The principal factor for the increase in the FC2 average sales price per unit compared to prior yearperiod was the increasechange in the sales mix with the U.S. prescription channel representing 77% of total FC2 net revenues in the U.S. prescription channel.current year period compared to 73% of total FC2 net revenues in the prior year period. The Company experienced an increase of 168%48% in FC2 net revenues in the U.S. prescription channel and a decreasean increase of 40%18% in FC2 net revenues in the global public health sector.
Cost of sales increaseddecreased to $2.4 million in the three months ended March 31, 2021 from $2.5 million in the three months ended March 31, 2020, from $2.4primarily due to higher labor and transportation costs in the fiscal 2020 period, partially offset by an increase in unit sales.
Gross profit increased to $10.9 million in the three months ended March 31, 2019 primarily due to an increase in labor, transportation, and equipment maintenance costs.
Gross profit increased to2021 from $7.4 million in the three months ended March 31, 2020 from $4.6 million in the three months ended March 31, 2019.2020. Gross profit margin for the 2020fiscal 2021 period was 75%82% of net revenues, compared to 66%75% of net revenues for the 2019fiscal 2020 period. The increase in the gross profit margin is primarily due to thean increase in salesnet revenues in the U.S. prescription channel which is atand a higher average sales price.decrease in labor and transportation costs.
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. The Company is experiencing a significant increase in revenue from sales in the U.S. prescription channel, which is helping grow net revenues quarter to quarter and year to year. The Company anticipates that its largest U.S. telemedicine customer may reduce its orders in the third quarter of fiscal 2020, which could adversely affect net revenues and gross profit margin.
Research and development expenses increased to $3.9$7.6 million in the three months ended March 31, 20202021 from $2.9$3.9 million in the same period in fiscal 2019.2020. The increase is primarily due to increased costs associated with the multiple in-process research and development projects and increased personnel costs.
Selling, general and administrative expenses remained consistent atincreased to $4.8 million in the three months ended March 31, 2021 from $3.8 million in the three months ended March 31, 2020 compared2020. The increase is due primarily to the three months ended March 31, 2019.increased patent-related legal costs and increased personnel costs.
Interest expense, which consists of items related to the Credit Agreement and Residual Royalty Agreement, was $1.3 million in the three months ended March 31, 2021, which is comparable with $1.2 million in the three months ended March 31, 2020, which is comparable with $1.3 million in the three months ended March 31, 2019.2020.
IncomeExpense associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $53,000 in the three months ended March 31, 2021 compared to income of $0.5 million in the three months ended March 31, 2020 compared to expense of $0.6 million in the three months ended March 31, 2019.2020. The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the financial statements included in this report for additional information.
The incomeIncome tax benefitexpense in the second quarter of fiscal 20202021 was $133,000,$22,000, compared to income tax expensebenefit of $25,000$0.1 million in the second quarter of fiscal 2019.2020. The increase in the income tax benefitexpense of $158,000$0.2 million is primarily due to a decreasethe increase in the change in the valuation allowance of $0.9$0.6 million, partially offset by a decreasethe increase in thefederal and state income tax benefit of $0.8$0.4 million relateddue to the decreasean increase in the loss before income taxes during the current period.of $1.9 million.
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SIX MONTHS ENDED MARCH 31, 20202021 COMPARED TO SIX MONTHS ENDED MARCH 31, 20192020
The Company generated net revenues of $28.0 million and net income of $14.4 million, or $0.20 per basic common share and $0.18 per diluted common share, for the six months ended March 31, 2021, compared to net revenues of $20.5 million and net loss of $4.1 million, or $(0.06) per basic and diluted common share, for the six months ended March 31, 2020, compared to net revenues of $13.3 million and net loss of $6.2 million, or $(0.10) per basic and diluted common share, for the six months ended March 31, 2019.2020. Net revenues increased 54% year36% over year.the prior period.
FC2 net revenues represented 97% of total net revenues for the six months ended March 31, 2020. FC2 net revenues increased 51%36% year over year. There was a 1% decrease21% increase in total FC2 unit sales and an increase in FC2 average sales price per unit of 53%12%. The principal factor for the increase in the FC2 average sales price per unit compared to prior yearperiod was the change in the sales mix with the U.S. prescription channel representing 72% of total FC2 net revenues in the current year period compared to 65% of total FC2 net revenues in the prior year period. The Company experienced an increase of 49% in FC2 net revenues in the U.S. prescription channel. The Company experiencedchannel and an increase in FC2 net revenues of 158% in the U.S. prescription channel and a decrease of 15%11% in FC2 net revenues in the global public health sector.
Cost of sales increased to $6.2 million in the six months ended March 31, 2021 from $5.8 million in the six months ended March 31, 2020 from $4.1primarily due to an increase in unit sales partially offset by a decrease in labor, equipment maintenance, and transportation costs.
Gross profit increased to $21.7 million in the six months ended March 31, 2019 primarily due to an increase in labor, transportation, and equipment maintenance costs.
Gross profit increased to2021 from $14.7 million in the six months ended March 31, 2020 from $9.3 million in the six months ended March 31, 2019.2020. Gross profit margin for the fiscal 20202021 period was 72%78% of net revenues, compared to 69%72% of net revenues for the fiscal 20192020 period. The increase in the gross profit margin is primarily due to thean increase in salesnet revenues in the U.S. prescription channel which is atand a higher average sales price.decrease in labor, equipment maintenance, and transportation costs.
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. The Company is experiencing a significant increase in revenue from sales in the U.S. prescription channel, which is helping grow net revenues quarter to quarter and year to year. The Company anticipates that its largest U.S. telemedicine customer may reduce its orders in the third quarter of fiscal 2020, which could adversely affect net revenues and gross profit margin.
Research and development expenses increased to $9.2$13.3 million in the six months ended March 31, 20202021 from $5.3$9.2 million in the same period in fiscal 2019.2020. The increase is primarily due to increased costs associated with the multiple in-process research and development projects and increased personnel costs.
Selling, general and administrative expenses increased to $9.2 million in the six months ended March 31, 2021 from $7.6 million in the six months ended March 31, 2020 from $7.1 million in the six months ended March 31, 2019.2020. The increase is due primarily due to increased personnel, personnelpatent-related legal costs, increased insurance costs, and related benefits. increased personnel costs.
During the first quarter of fiscal 2021, we recorded a pre-tax gain on sale of the 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 consists of items related to the Credit Agreement and Residual Royalty Agreement, was $2.4 million in the six months ended March 31, 2021, which is comparable with $2.3 million in the six months ended March 31, 2020, which is comparable with $2.5 million in the six months ended March 31, 2019.2020.
IncomeExpense associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $0.7 million in the six months ended March 31, 2021 compared to income of $75,000 in the six months ended March 31, 2020 compared to expense of $0.4 million in the six months ended March 31, 2019.2020. The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the financial statements included in this report for additional information.
The incomeIncome tax benefitexpense in the first six months of fiscal 20202021 was $0.2$0.1 million, compared to income tax expensebenefit of $0.1$0.2 million in the first six months of fiscal 2019.2020. The increase in the income tax benefitexpense of $0.3 million is primarily due to the increase in income before income taxes of $18.8 million due to the gain on the sale of the PREBOOST® business resulting in an increase of $4.2 million in income tax expense, partially offset by the effect of common stock purchase warrants exercised of $2.0 million and by a decrease in the change in the valuation allowance of $1.0 million, partially offset by a decrease in the income tax benefit of $0.6 million related to the decrease in the loss before income taxes during the current period and a decrease of $70,000 for the effect of lower foreign income tax rates.
$1.7 million.
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Liquidity and Sources of Capital
Liquidity
Our cash and cash equivalents on hand at March 31, 20202021 was $2.6$136.7 million, compared to $6.3$13.6 million at September 30, 2019.2020. At March 31, 2020,2021, the Company had working capital of $0.6$137.2 million and stockholders’ equity of $31.1$155.5 million compared to working capital of $2.8$12.3 million and stockholders’ equity of $32.3$30.1 million as of September 30, 2019.2020. The decreaseincrease in working capital is primarily due to anthe increase in cash on hand and the current portion of the Credit Agreement liability andnote receivable related to the recognition of a current liability for operating leases as a resultsale of the Company’s adoption of the new lease accounting standard, as describedPREBOOST® business, partially offset by an increase in Note 1 to the financial statements included in this report.accounts payable.
We have incurred quarterly operating losses since the fourth quarter of fiscal 2016 and anticipate that we will continue to consume cash and incur substantial net losses as we develop our drug candidates. Because of the numerous risks and uncertainties associated with the development of pharmaceutical products, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to fund development of our drug candidates and obtain regulatory approvals. Our future capital requirements will depend on many factors. See Part II, Item 1A of this Form 10-Q and Part I, Item 1A, "Risk“Risk Factors - Risks Related to Our Financial Position and Need for Capital"Capital” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019,2020 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 commercial products, and its ability to secure equity financing or other financing alternativesproduct are adequate to fund planned operations of the Company for at least the next 12 months. SuchTo 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 effectiveCompany’s shelf registration statement on Form S-3 (File No. 333-221120) (the “Shelf Registration Statement”). The Company intends to be opportunistic when pursuing equity333-239493) or debt financing which could include selling common stock under the Purchase Agreement with Aspire Capital. See Part II, Item 1A of this Form 10-Q and Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Need for Capital" in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, for a description of certain risks related to our ability to raise capital on acceptable terms.new registration statement.
Operating activities
Operating activities used cash of $1.9 million in the six months ended March 31, 2021. Cash from operating activities included net income of $14.4 million, adjustments to reconcile net income to net cash provided by operating activities totaling a reduction of $15.6 million and changes in operating assets and liabilities of $0.7 million. Adjustments to net income primarily consisted of $18.4 million related to the gain on sale of the PREBOOST® business, $1.8 million of share-based compensation, and $0.7 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 $2.4 million and an increase in inventory of $1.1 million, partially offset by an increase in accounts payable of $2.8 million.
Our operating activities used cash of $4.9 million in the six months ended March 31, 2020. Cash used in operating activities included a net loss of $4.1 million, adjustments for noncash items totaling $4.0 million and changes in operating assets and liabilities of $4.8 million. Adjustments for noncash items primarily consisted of $2.3 million of noncash interest expense, $1.3 million of share-based compensation, and $0.2 million for the write-down of obsolete inventory. The decrease in cash from changes in operating assets and liabilities included an increase in accounts receivable of $1.8 million, an increase in inventories of $2.6 million, an increase in prepaid expenses and other current assets of $1.0 million, and a decrease in accrued expenses and other current liabilities of $0.3 million. These were partially offset by an increase in accounts payable of $1.1 million.
Our operatingInvesting activities used
Net cash of $4.0from investing activities was $15.0 million in the six months ended March 31, 2019. Cash used in operating activities included a net loss of $6.22021, attributed to $15.0 million adjustments for noncash items totaling $4.3 million and changes in operating assets and liabilities of $2.1 million. Adjustments for noncash items primarily consisted of $2.5 million of noncash interest expense related toreceived from the Credit Agreement and Residual Royalty Agreement, $0.9 million of share-based compensation, and $0.4 million of expense due to the increase in fair valuesale of the derivative liabilities. The decrease in cash from changes in operating assets and liabilities included decreases in accounts payable and accrued expenses of $1.0 million and an increase in inventories of $0.7 million.
Investing activitiesCompany’s PREBOOST® business.
Net cash used in investing activities in the six months ended March 31, 2020 was $55,000 and was primarily associated with capital expenditures at our U.K. and Malaysia locations.
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Financing activities
Net cash provided by financing activities in the six months ended March 31, 2021 was $110.0 million and primarily consisted of proceeds from the underwritten public offering of the Company’s common stock, net of fees and costs paid through March 31, 2021, of $108.1 million (see discussion below) and proceeds from stock option exercises of $1.3 million.
Net cash provided by financing activities in the six months ended March 31, 2020 was $1.2 million and consisted of $1.2$1.2 million from the sale of shares under the Purchase Agreement with Aspire Capital (see discussion below), proceeds from the Premium Finance Agreement of $0.8 million, which were used to finance the Company’s directors and officers liability insurance premium, and proceeds from stock option exercises of $0.4 million, less payments on the Credit Agreement (see discussion below) of $0.9 million and payments on the Premium Finance Agreement of $0.3 million.
Net cash provided by financing activities in the six months ended March 31, 2019 was $6.1 million and consisted of net proceeds from the underwritten public offering of the Company’s common stock of $9.1 million (see discussion below) and proceeds from stock option exercises of $0.2 million, less payments on the Credit Agreement totaling $3.2 million.
Sources of Capital
Common Stock Offering
On October 1, 2018,February 22, 2021, we completed an underwritten public offering of 7,142,8577,419,354 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 $1.40$15.50 per share.share. Net proceeds to the Company from this offering were $9.1$107.9 million after deducting underwriting discounts and commissions and costs paidincurred by the Company.Company through March 31, 2021. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Shelf Registration Statement.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 recourse of the Lenders and the Agent for obligations under the Credit Agreement is limited to assets relating to FC2. On May 13, 2019, the Company entered into an amendment to the Credit Agreement (the “Second Amendment”) which included a reduction to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2019, a return to the original percentages to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2020 and an increase to the percentages to be used to calculate the quarterly revenue-based payments due on product revenue from net sales of FC2 during calendar year 2021 and thereafter until the loan has been repaid.
In connection with the Credit Agreement, Veru and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing after the Lenders would have received their return premium based on the return premium and calculation of revenue-based payments under the Credit Agreement without taking into account the amendments effected by the Second Amendment. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties.
The Company made total payments under the Credit Agreement of $0.9$2.5 million and $3.2$0.9 million during the six months ended March 31, 20202021 and 2019,2020, respectively. As a result of the Second Amendment, the Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12-month period subsequent to March 31, 20202021 will be approximately $6.7$4.9 million under the Credit Agreement. The Company also estimates that it will begin making payments under the Residual Royalty Agreement during the 12-month period subsequent to March 31, 2021, and estimates such payments within that period will be approximately $2.8 million.
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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.
During the six months ended As of March 31, 2020, we sold 300,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.2 million. Since inception of the Purchase Agreement through March 31, 2020, we sold 4,017,010 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.8 million. Subsequent to March 31, 2020, we sold 400,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.3 million. As of May 11, 2020,2021, the amount remaining under the 2020 Purchase Agreement was $5.9 million.
U.S. Small Business Administration’s Paycheck Protection Program
In April 2020, the Company was approved for a loan$18.9 million, which is registered under the U.S. Small Business Administration’s (the “SBA”) Paycheck Protection Program established byCompany’s shelf registration statement on Form S-3 (File No. 333-239493). Effective June 26, 2020, upon the CARES Act in the amount of $0.5 million (the “PPP Loan”). The PPP Loan proceeds were received on April 20, 2020. The PPP Loan has a maturity of two years and an interest rate of 1%. Payments on the PPP Loan are deferred for six months. Pursuant to the CARES Act, the PPP Loan will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. Asexecution of the date of this report,2020 Purchase Agreement, the Company has not terminated any employees in the U.S. due to the COVID-19 pandemic. The Company intends to use the proceeds of the PPP Loan to pay salaries for its U.S.-based employees and to pay rent and utilities. The amount of the PPP Loan that might be forgiven is not known at this time.Company’s prior purchase agreement with Aspire Capital was terminated.
Fair Value Measurements
As of March 31, 20202021 and September 30, 2019,2020, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 8 to the financial statements included in this report for additional information.
The fair values of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company determined the fair value of the embedded derivatives at inception and on subsequent valuation dates using a Monte Carlo simulation model. This valuation model incorporates transaction details such as the contractual terms of the instruments and assumptions including projected FC2 revenues, expected cash outflows, expected repayment dates, probability and estimated dates of a change of control, expected volatility, and risk-free interest rates.rates and applicable credit risk. The assumptions used in calculating the fair value of financial instruments represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company’s financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. See Note 3 to the financial statements included in this report for additional information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk was discussed in the “Quantitative and Qualitative Disclosures About Market Risk” section contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020. There have been no material changes to such exposures since September 30, 2019.2020.
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Item 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’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’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 Chief Executive Officer and Chief Financial Officer concluded that the Company’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 Chief Executive Officer and Chief 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 were no changes in the Company’s internal control over financial reporting (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 have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
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.
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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," in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, except for the following additional risk factors. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations, and there is significant uncertainty regarding the COVID-19 pandemic and its impact on the economic environment and our business which could affect the risk factors set forth below and in the Form 10-K.2020.
Due to the COVID-19 pandemic, we may find it difficult to effectively recruit new clinical trial patients in a timely manner and to partner with clinical trial investigators and sites, which could delay or prevent us from proceeding with, or otherwise adversely affect, clinical trials of our drug candidates.
Identifying and qualifying patients to participate in, and partnering with investigators and sites to run, clinical trials of our drug candidates is critical to the timely completion of our clinical trials. Patients may be unwilling to participate in our clinical trials because of the ongoing COVID-19 pandemic. The severe burden on healthcare systems caused by the COVID-19 pandemic has also impaired the ability of many research sites to start new clinical trials or to enroll new patients in clinical trials. The imposed mandatory sheltering in place and social distancing restrictions may delay the recruitment of patients and impede their ability to effectively participate in such trials. Significant fees may also be owed to contract research organizations associated with starting and stopping clinical trials, typically more so than delaying the start of a clinical trial. For these and other reasons, the Company has made the decision to postpone initiation of the first Phase 3 trial for zuclomiphene citrate until at least the end of calendar year 2020 or until such time as there is additional clarity and certainty surrounding the impact of the COVID-19 pandemic on the healthcare system. We plan to continue the Phase 1b portion of our ongoing VERU-111 clinical trial, which is fully enrolled, and to continue enrolling for the Phase 2 portion of the VERU-111 clinical trial as discontinuation would disrupt treatment of patients' advanced prostate cancer. Patients enrolling in our VERU-111 clinical trial have not been able to access hospitals for imaging scans due to COVID-19. If they continue to lack such access, our VERU-111 clinical trial could be delayed.
There is a risk that changing circumstances relating to the COVID-19 pandemic may not allow our healthcare clinical trial investigators, their healthcare facilities or other necessary parties to continue to participate in our clinical trials through completion or may delay the initiation of planned clinical trials. Any delays related to clinical trials could result in increased costs, delays in advancing our drug candidates, delays in testing the effectiveness of our drug candidates or termination of the clinical trials altogether.
Disruptions at the FDA caused by the COVID-19 pandemic could delay or prevent new drugs from being developed, approved or commercialized in a timely manner or at all, or otherwise prevent the FDA from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
Disruptions at the FDA caused by the COVID-19 pandemic may slow the time necessary for new drugs to be reviewed and/or approved, which would adversely affect our business. In response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products through April 2020. On March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. The FDA has also prioritized the review of submissions relating to COVID-19. The FDA may adopt other restrictions or policy measures in response to the COVID-19 pandemic or issue guidance materially affecting the conduct of clinical trials. If global health concerns continue to prevent the FDA from conducting its regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
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The COVID-19 pandemic has disrupted, and may continue to disrupt, our operations and the operations of our suppliers and customers.
In December 2019, a novel strain of coronavirus was reported to have emerged in Wuhan, China. COVID-19, the disease caused by the coronavirus, has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to the COVID-19 outbreak. Theoutbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen.
If COVID-19 continues to spread and to affect economic activity in the United States and other markets in which we conduct business, we may experience disruptions that could severely impact our business, including:
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Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, and it is possible that its effect on our business and operations will significantly worsen in the future.
COVID-19 and its impact on the economic environment and capital markets could adversely affect our access to capital when needed.
We expect to incur significant expenditures over the next several years to support our preclinical and clinical development activities, particularly with respect to clinical trials for certain of our drug candidates and to commence the commercialization of our drug candidates. Market volatility resulting from the COVID-19 pandemic or other factors could adversely affect our ability to access capital as and when needed and could also adversely affect the terms of a financing. If sales of FC2 decline due to the current economic environment, supply constraints or other issues, we may need additional financing to make up for reduced cash flows from our FC2 business. If adequate funds are not available on commercially acceptable terms when needed, we may be forced to delay, reduce or terminate some of our research and development activities or we may be unable to take advantage of future business opportunities.
Our pursuit of a COVID-19 treatment candidate is at an early stage. We may be unable to produce a drug that successfully treats the virus in a timely manner, if at all.
We recently announced that we have received FDA permission to initiate a Phase 2 clinical trial to assess the efficacy of VERU-111, a microtubule depolymerization agent, in combating COVID-19. Our development of a COVID-19 treatment is in its early stages, and we may be unable to produce a drug that successfully treats the virus in a timely manner, if at all. We are also committing financial resources and personnel to the development of a COVID-19 treatment which may cause delays in or otherwise negatively impact our other development programs, despite uncertainties surrounding the longevity and extent of coronavirus as a global health concern. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could rapidly dissipate or against which our treatment, if developed, may not be partially or fully effective.
Government entities may take actions that directly or indirectly have the effect of limiting opportunities for VERU-111 as a COVID-19 treatment.
Various government entities, including the U.S. government, are offering incentives, grants and contracts to encourage additional investment by commercial organizations into preventative and therapeutic agents against COVID-19, which may have the effect of increasing the number of competitors and/or providing advantages to competitors. Accordingly, there can be no assurance that we will be able to successfully establish a competitive market share if we develop a COVID-19 treatment. COVID-19 treatments may also be subject to government pricing controls, which could adversely affect the profitability of any COVID-19 treatment we are able to develop and commercialize.
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We may not be entitled to forgiveness of our recently received PPP Loan, and our application for the PPP Loan could in the future be determined to have been impermissible or could result in damage to our reputation.
In April 2020, we received proceeds of approximately $540,000 from a loan under the Paycheck Protection Program of the CARES Act, a portion of which may be forgiven, which we intend to use to retain employees, maintain payroll and make lease and utility payments. The PPP Loan matures in April 2022 and bears annual interest at a rate of 1.0%. Commencing in November 2020, we are required to pay the lender equal monthly payments of principal and interest as required to fully amortize by April 2022 any principal amount outstanding on the PPP Loan as of October 2020. A portion of the PPP Loan may be forgiven by the SBA upon our application beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven is reduced if our full-time headcount declines or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA.
In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act. The certification described above does not contain any objective criteria and is subject to interpretation. However, on April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties, or damages or could be required to repay the PPP Loan in its entirety. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
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3.9 | |
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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, 3.7 and 3.8). |
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4.2 | Articles II, VII and XI of the Amended and Restated By-Laws (included in Exhibit 3.9). |
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32.1 | |
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101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, |
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| 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: May 13, 202012, 2021
/s/ Mitchell S. Steiner
Mitchell S. Steiner
Chairman, Chief Executive Officer and President
DATE: May 13, 202012, 2021
/s/ Michele Greco
Michele Greco
Chief Financial Officer and Chief Administrative Officer
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