UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended DecemberMarch 31 2017, 2023
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file numberFile Number 1-13602
Veru Inc.
(Exact Name of registrantRegistrant as specifiedSpecified in its charter)Charter)
Wisconsin | 39-1144397 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
1000, Miami, FL |
| |
(Address of | (Zip Code) | |
305-509-6897
(Registrant’s telephone number, including area code)Telephone Number, Including Area Code)
N/A
(Former Name, or Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | VERU | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒x No ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting | |
| Emerging growth |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as determined by Rule 12b-2 of the Exchange Act). Yes ☐¨ No ☒x
As of February 13, 2018,May 9, 2023, the registrant had 53,512,94689,236,732 shares of $0.01 par value common stock outstanding.
VERU INC.
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PART I. FINANCIAL INFORMATION | |
6 | |
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Unaudited Condensed Consolidated | 8 |
9 | |
Notes to Unaudited Condensed Consolidated Financial Statements | |
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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 | |
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PART II. OTHER INFORMATION | |
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43 | |
45 |
Certain statements included in this quarterly report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about our financial condition or business, our development and commercialization plans relating to our product candidates and products, including any potential development or commercialization of sabizabulin for certain COVID-19 patients and other acute respiratory distress syndrome (ARDS) indications and of enobosarm for certain breast cancer patients, future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, royalty payments, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, future ordering patterns of our customers, objectives of management, business strategies, clinical trial timing, plans and plans,results, the achievement of clinical and commercial milestones, the advancement of our technologies and our products and drug candidates, and other statements that are not historical facts. Forward-looking statements can be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect, " "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "should, " "will," "would"“anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “opportunity,” “plan,” “predict,” “potential,” “estimate,” “should,” “will,” “would” or the negative of these terms or other words of similar meaning. These statements are based upon the Company'sCompany’s current plans and strategies and reflect the Company'sCompany’s current assessment of the risks and uncertainties related to its business and are made as of the date of this report. The Company cautions readers that forward-lookingThese statements involveare inherently subject to known and unknown risks and uncertainties. You should read these statements carefully because they discuss our future expectations or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results to differ materially from those currently anticipated include the following:
potential delays in the timing of and results from clinical trials and studies, including potential delays in the recruitment of patients and their ability to effectively participate in such trials and studies, and the risk that such results will not support marketing approval, emergency use authorization, or commercialization in the United States or in any foreign country;
potential delays in the timing of any submission to the U.S. Food and Drug Administration (the “FDA”) or any other regulatory authority around the world and potential delays in, or failure to obtain, from any such regulatory authority approval of products under development or approval of any emergency use authorization applications the Company may submit for sabizabulin for certain COVID-19 patients, including the risk of a delay or failure in reaching agreement with the FDA on the design of any clinical trial, including any post-approval or post-authorization study, or in obtaining authorization to commence a clinical trial or commercialize a product candidate in the U.S. or elsewhere;
potential delays in the timing of approval by the FDA or any other regulatory authority of the release of manufactured lots of approved products;
clinical trial results supporting any potential regulatory approval or authorization of any of our products, including sabizabulin for the treatment of certain COVID-19 patients, may not be replicated in clinical practice;
clinical results or early data from clinical trials may not be replicated or continue to occur in additional trials or may not otherwise support further development in the specified product candidate or at all;
risks related to our ability to obtain sufficient financing on acceptable terms when needed to fund product development and our operations, including our ability to secure timely grant or other funding to develop, manufacture or distribute sabizabulin as a potential COVID-19 treatment;
risks related to the development of our product portfolio, including clinical trials, regulatory approvals and time and cost to bring any of our product candidates to market, and risks related to efforts of our collaborators such as in the development of a companion diagnostic for enobosarm;
our pursuit of a COVID-19 treatment candidate is still in development and we may be unable to develop a drug that successfully treats the virus in a timely manner, if at all;
risks related to our commitment of financial resources and personnel to the development of a COVID-19 treatment which may cause delays in or otherwise negatively impact our other development programs or our working capital, despite uncertainties about the longevity and extent of COVID-19 as a global health concern and the possibility that as vaccines and other treatments become widely distributed the need for new COVID-19 treatment candidates may be reduced or eliminated;
risks related to our ability to scale up and manufacture sabizabulin in sufficient quantities as a COVID-19 treatment if we receive an emergency use authorization in the U.S. or elsewhere;
government entities may take actions that directly or indirectly have the effect of limiting opportunities for sabizabulin as a COVID-19 treatment, including favoring other treatment alternatives or imposing price controls on COVID-19 treatments;
government entities in the U.S. or elsewhere have and may continue to declare the COVID-19 pandemic emergency over and, if sabizabulin is authorized in the U.S. or elsewhere for the treatment of certain COVID-19 patients under an Emergency Use Authorization or similar regime outside the U.S., such termination of the pandemic emergency may affect our ability to continue to market sabizabulin;
product demand and market acceptance of our commercial products and our products in development, if approved;
risks related to our ability to obtain insurance reimbursement from private payors or government payors, including Medicare and Medicaid, for our approved or authorized products, including, if authorized, sabizabulin for the treatment of certain COVID-19 patients, and similar risks relating to market or political acceptance of any potential or actual pricing for any such products;
some of our products are in development and we may fail to successfully commercialize such products;
risks related to any potential new telehealth platform developed or used by us in commercializing our current product or potential future products, including potential regulatory uncertainty around such platforms;
risks related to intellectual property, including the uncertainty of obtaining intellectual property protections and in enforcing them, the possibility of infringing a third party’s intellectual property, and licensing risks;
competition from existing and new competitors including the potential for reduced sales, pressure on pricing and increased spending on marketing;
risks related to compliance and regulatory matters, including costs and delays resulting from extensive government regulation and reimbursement and coverage under healthcare insurance and regulation as well as potential healthcare reform measures;
the risk that we will be affected by regulatory and legal developments, including a reclassification of products or repeal or modification of part or all of the Patient Protection and Affordable Care Act;
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, manufacturing partner business changes, physical damage to our or third parties’ facilities, product testing, transportation delays or regulatory or other governmental actions, and the duration and impact of any such disruptions;
our reliance on major customers and risks related to delays in, or failure to make, payment of accounts receivable by major customers;
risks from rising costs of raw materials and our ability to pass along increased costs to our customers;
risks related to our growth strategy;
our continued ability to attract and retain highly skilled and qualified personnel;
the costs and other effects of litigation, governmental investigations, legal and administrative cases and proceedings, settlements and investigations;
government contracting risks, including the appropriations process and funding priorities, potential bureaucratic delays in awarding contracts, process errors, politics or other pressures, and the risk that government tenders and contracts may be subject to cancellation, delay, restructuring or substantial delayed payments;
a governmental tender award indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units, and as a result government ministries or other public health sector customers may order and purchase fewer units than the full maximum tender amount;
our ability to identify, successfully negotiate and complete suitable acquisitions, out-licensing transactions, in-licensing transactions or other strategic initiatives and to realize any potential benefits of such transactions or initiatives;
our ability to successfully integrate acquired businesses, technologies or products; and
our ability to achieve the necessary shareholder vote to increase the number of authorized shares of our common stock.
All forward-looking statements in this report should be considered in the context of the risks and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following:
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Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk“Risk Factors,"” in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and Part II, Item 1A of this Form 10-Q.2022. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.report except as required by applicable law.
PART I.FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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| December 31, 2017 |
| September 30, 2017 | ||
ASSETS |
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Current Assets: |
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Cash | $ | 3,572,350 |
| $ | 3,277,602 |
Accounts receivable, net |
| 3,000,308 |
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| 3,555,350 |
Inventory, net |
| 3,067,036 |
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| 2,767,924 |
Prepaid expenses and other current assets |
| 625,497 |
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| 697,097 |
TOTAL CURRENT ASSETS |
| 10,265,191 |
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| 10,297,973 |
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LONG-TERM ASSETS |
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PLANT AND EQUIPMENT |
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Equipment, furniture and fixtures |
| 4,069,810 |
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| 4,067,896 |
Leasehold improvements |
| 287,686 |
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| 287,686 |
Less: accumulated depreciation and amortization |
| (3,844,272) |
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| (3,800,043) |
Plant and equipment, net |
| 513,224 |
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| 555,539 |
Other trade receivables (Note 5) |
| — |
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| 7,837,500 |
Other assets |
| 159,662 |
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| 156,431 |
Deferred assets |
| 423,001 |
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| — |
Deferred income taxes |
| 12,124,000 |
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| 8,827,000 |
Intangible assets, net |
| 20,684,175 |
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| 20,752,991 |
Goodwill |
| 6,878,932 |
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| 6,878,932 |
TOTAL ASSETS | $ | 51,048,185 |
| $ | 55,306,366 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Accounts payable | $ | 2,517,371 |
| $ | 2,685,718 |
Accrued expenses and other current liabilities |
| 2,383,628 |
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| 1,441,359 |
Unearned revenue |
| 990,016 |
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| 1,014,517 |
Accrued compensation |
| 338,136 |
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| 345,987 |
TOTAL CURRENT LIABILITIES |
| 6,229,151 |
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| 5,487,581 |
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LONG-TERM LIABILITIES |
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Other liabilities (Note 5) |
| — |
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| 1,233,750 |
Deferred rent |
| 68,446 |
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| 131,830 |
TOTAL LIABILITIES |
| 6,297,597 |
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| 6,853,161 |
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Commitments and contingencies (Note 10) |
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STOCKHOLDERS' EQUITY |
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Preferred stock |
| — |
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| — |
Common stock |
| 556,967 |
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| 553,922 |
Additional paid-in-capital |
| 91,102,159 |
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| 90,550,669 |
Accumulated other comprehensive loss |
| (581,519) |
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| (581,519) |
Accumulated deficit |
| (38,520,414) |
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| (34,263,262) |
Treasury stock, at cost |
| (7,806,605) |
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| (7,806,605) |
TOTAL STOCKHOLDERS' EQUITY |
| 44,750,588 |
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| 48,453,205 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 51,048,185 |
| $ | 55,306,366 |
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See notes to unaudited condensed consolidated financial statements. |
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March 31, | September 30, | ||||
2023 | 2022 | ||||
Assets | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 23,498,371 | $ | 80,190,675 | |
Accounts receivable, net | 4,205,967 | 3,550,895 | |||
Inventories, net | 7,665,194 | 8,618,944 | |||
Prepaid research and development costs | 5,787,224 | 10,444,587 | |||
Prepaid expenses and other current assets | 2,131,521 | 1,964,373 | |||
Total current assets | 43,288,277 | 104,769,474 | |||
Plant and equipment, net | 1,519,789 | 1,185,766 | |||
Operating lease right-of-use assets | 4,675,739 | 4,786,915 | |||
Deferred income taxes | 13,070,469 | 12,965,985 | |||
Intangible assets, net | 41,667 | 3,977,381 | |||
Goodwill | 6,878,932 | 6,878,932 | |||
Other assets | 778,697 | 1,561,564 | |||
Total assets | $ | 70,253,570 | $ | 136,126,017 | |
Liabilities and Stockholders' Equity | |||||
Current liabilities: | |||||
Accounts payable | $ | 17,237,474 | $ | 22,003,394 | |
Accrued research and development costs | 13,786,241 | 9,071,503 | |||
Accrued compensation | 2,986,624 | 5,986,557 | |||
Accrued expenses and other current liabilities | 2,811,453 | 2,249,995 | |||
Residual royalty agreement liability, short-term portion | 1,354,823 | 1,169,095 | |||
Operating lease liability, short-term portion | 1,083,183 | 957,085 | |||
Total current liabilities | 39,259,798 | 41,437,629 | |||
Residual royalty agreement liability, long-term portion | 10,257,325 | 9,656,441 | |||
Operating lease liability, long-term portion | 3,987,612 | 4,093,667 | |||
Deferred income taxes | — | 81,067 | |||
Other liabilities | 32,933 | 18,577 | |||
Total liabilities | 53,537,668 | 55,287,381 | |||
Commitments and contingencies (Note 12) |
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Stockholders' equity: | |||||
Preferred stock; no shares issued and outstanding at March 31, 2023 and September 30, 2022 | — | — | |||
Common stock, par value $0.01 per share; 154,000,000 shares authorized, 84,760,736 and 82,692,598 shares issued and 82,577,032 and 80,508,894 shares outstanding at March 31, 2023 and September 30, 2022, respectively | 847,607 | 826,926 | |||
Additional paid-in-capital | 265,465,702 | 253,974,032 | |||
Accumulated other comprehensive loss | (581,519) | (581,519) | |||
Accumulated deficit | (241,209,283) | (165,574,198) | |||
Treasury stock, 2,183,704 shares, at cost | (7,806,605) | (7,806,605) | |||
Total stockholders' equity | 16,715,902 | 80,838,636 | |||
Total liabilities and stockholders' equity | $ | 70,253,570 | $ | 136,126,017 | |
See notes to unaudited condensed consolidated financial statements. | |||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Net revenues | $ | 6,585,967 | $ | 13,028,394 | $ | 9,093,761 | $ | 27,163,526 | |||
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Cost of sales | 2,493,892 | 1,853,116 | 4,299,631 | 4,146,166 | |||||||
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Gross profit | 4,092,075 | 11,175,278 | 4,794,130 | 23,017,360 | |||||||
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Operating expenses: | |||||||||||
Research and development | 22,864,633 | 15,541,104 | 41,608,982 | 25,622,265 | |||||||
Selling, general and administrative | 12,834,494 | 7,401,138 | 30,380,359 | 14,126,344 | |||||||
Provision for (recovery of) credit losses | 3,911,714 | (2,000) | 3,911,714 | (4,000) | |||||||
Impairment of intangible assets | 3,900,000 | — | 3,900,000 | — | |||||||
Total operating expenses | 43,510,841 | 22,940,242 | 79,801,055 | 39,744,609 | |||||||
Operating loss | (39,418,766) | (11,764,964) | (75,006,925) | (16,727,249) | |||||||
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Non-operating income (expenses): | |||||||||||
Interest expense | (697,693) | (1,212,702) | (1,570,923) | (2,371,384) | |||||||
Change in fair value of derivative liabilities | 1,200,000 | (1,229,000) | 530,000 | (1,438,000) | |||||||
Other income, net | 56,994 | 1,386 | 277,926 | 66,002 | |||||||
Total non-operating income (expenses) | 559,301 | (2,440,316) | (762,997) | (3,743,382) | |||||||
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Loss before income taxes | (38,859,465) | (14,205,280) | (75,769,922) | (20,470,631) | |||||||
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Income tax (benefit) expense | (66,559) | (27,450) | (134,837) | 87,205 | |||||||
Net loss | $ | (38,792,906) | $ | (14,177,830) | $ | (75,635,085) | $ | (20,557,836) | |||
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Net loss per basic and diluted common shares outstanding | $ | (0.48) | $ | (0.18) | $ | (0.94) | $ | (0.26) | |||
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Basic and diluted weighted average common shares outstanding | 80,834,453 | 80,052,504 | 80,695,046 | 80,037,675 | |||||||
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See notes to unaudited condensed consolidated financial statements. | |||||||||||
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| Three Months Ended | ||||
| December 31, | ||||
| 2017 |
| 2016 | ||
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Net revenues | $ | 2,586,613 |
| $ | 3,243,599 |
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Cost of sales |
| 1,272,574 |
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| 1,591,315 |
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Gross profit |
| 1,314,039 |
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| 1,652,284 |
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Operating expenses: |
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Research and development |
| 2,038,786 |
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| 171,100 |
Selling, general and administrative |
| 2,947,697 |
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| 2,529,504 |
Loss on settlement of accounts receivable |
| 3,764,137 |
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| — |
Business acquisition |
| — |
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| 826,370 |
Total operating expenses |
| 8,750,620 |
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| 3,526,974 |
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Operating loss |
| (7,436,581) |
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| (1,874,690) |
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Non-operating expenses: |
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Interest and other expense, net |
| (13,169) |
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| (9,621) |
Foreign currency transaction loss |
| (53,455) |
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| (11,939) |
Total non-operating expenses |
| (66,624) |
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| (21,560) |
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Loss before income taxes |
| (7,503,205) |
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| (1,896,250) |
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Income tax benefit |
| (3,246,053) |
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| (530,069) |
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Net loss | $ | (4,257,152) |
| $ | (1,366,181) |
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Net loss per basic and diluted common share outstanding | $ | (0.08) |
| $ | (0.04) |
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Basic and diluted weighted average common shares outstanding |
| 53,154,076 |
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| 30,976,140 |
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See notes to unaudited condensed consolidated financial statements. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||
| Additional | Other | Treasury | ||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stock, | ||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | at Cost | Total | ||||||||||||
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Balance at September 30, 2022 | 82,692,598 | $ | 826,926 | $ | 253,974,032 | $ | (581,519) | $ | (165,574,198) | $ | (7,806,605) | $ | 80,838,636 | ||||||
Share-based compensation | — | — | 4,845,269 | — | — | — | 4,845,269 | ||||||||||||
Issuance of shares pursuant to share-based awards | 114,234 | 1,142 | 255,990 | — | — | — | 257,132 | ||||||||||||
Net loss | — | — | — | — | (36,842,179) | — | (36,842,179) | ||||||||||||
Balance at December 31, 2022 | 82,806,832 | 828,068 | 259,075,291 | (581,519) | (202,416,377) | (7,806,605) | 49,098,858 | ||||||||||||
Share-based compensation | — | — | 3,837,598 | — | — | — | 3,837,598 | ||||||||||||
Issuance of shares pursuant to share-based awards | 33,891 | 339 | 79,139 | — | — | — | 79,478 | ||||||||||||
Sale of shares under common stock purchase agreement | 1,920,013 | 19,200 | 2,552,351 | — | — | — | 2,571,551 | ||||||||||||
Amortization of deferred costs | — | — | (78,677) | — | — | — | (78,677) | ||||||||||||
Net loss | — | — | — | — | (38,792,906) | — | (38,792,906) | ||||||||||||
Balance at March 31, 2023 | 84,760,736 | $ | 847,607 | $ | 265,465,702 | $ | (581,519) | $ | (241,209,283) | $ | (7,806,605) | $ | 16,715,902 | ||||||
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Balance at September 30, 2021 | 82,153,452 | $ | 821,535 | $ | 241,658,711 | $ | (581,519) | $ | (81,798,178) | $ | (7,806,605) | $ | 152,293,944 | ||||||
Share-based compensation | — | — | 1,880,428 | — | — | — | 1,880,428 | ||||||||||||
Issuance of shares pursuant to share-based awards | 79,334 | 793 | 209,076 | — | — | — | 209,869 | ||||||||||||
Net loss | — | — | — | — | (6,380,006) | — | (6,380,006) | ||||||||||||
Balance at December 31, 2021 | 82,232,786 | 822,328 | 243,748,215 | (581,519) | (88,178,184) | (7,806,605) | 148,004,235 | ||||||||||||
Share-based compensation | — | — | 2,124,941 | — | — | — | 2,124,941 | ||||||||||||
Issuance of shares pursuant to share-based awards | 17,267 | 173 | 46,924 | — | — | — | 47,097 | ||||||||||||
Net loss | — | — | — | — | (14,177,830) | — | (14,177,830) | ||||||||||||
Balance at March 31, 2022 | 82,250,053 | $ | 822,501 | $ | 245,920,080 | $ | (581,519) | $ | (102,356,014) | $ | (7,806,605) | $ | 135,998,443 | ||||||
See notes to unaudited condensed consolidated financial statements. | |||||||||||||||||||
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| Accumulated |
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| |
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|
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|
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| Additional |
| Other |
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|
|
| Treasury |
|
|
| |||
| Preferred |
| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Stock, |
|
|
| ||||||||
| Stock |
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| at Cost |
| Total | |||||||
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|
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|
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|
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|
|
Balance at September 30, 2017 | $ | — |
| 55,392,193 |
| $ | 553,922 |
| $ | 90,550,669 |
| $ | (581,519) |
| $ | (34,263,262) |
| $ | (7,806,605) |
| $ | 48,453,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
| — |
| — |
|
| — |
|
| 207,454 |
|
| — |
|
| — |
|
| — |
|
| 207,454 |
Shares issued in connection with common stock purchase agreement |
| — |
| 304,457 |
|
| 3,045 |
|
| 344,036 |
|
| — |
|
| — |
|
| — |
|
| 347,081 |
Net loss |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (4,257,152) |
|
| — |
|
| (4,257,152) |
Balance at December 31, 2017 | $ | — |
| 55,696,650 |
| $ | 556,967 |
| $ | 91,102,159 |
| $ | (581,519) |
| $ | (38,520,414) |
| $ | (7,806,605) |
| $ | 44,750,588 |
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|
See notes to unaudited condensed consolidated financial statements. | ||||||||||||||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended | |||||
March 31, | |||||
2023 | 2022 | ||||
OPERATING ACTIVITIES | |||||
Net loss | $ | (75,635,085) | $ | (20,557,836) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||
Depreciation and amortization | 128,843 | 90,289 | |||
Impairment of intangible assets | 3,900,000 | — | |||
Provision for credit losses | 3,911,714 | (4,000) | |||
Noncash change in right-of-use assets | 376,072 | 229,767 | |||
Noncash interest expense, net of interest paid | 1,316,612 | 882,305 | |||
Share-based compensation | 8,682,867 | 4,005,369 | |||
Deferred income taxes | (185,551) | 5,165 | |||
Change in fair value of derivative liabilities | (530,000) | 1,438,000 | |||
Provision for obsolete inventory | 192,135 | 12,552 | |||
Changes in current assets and liabilities: | |||||
Increase in accounts receivable | (3,852,786) | (764,466) | |||
Decrease (increase) in inventories | 761,615 | (853,762) | |||
Decrease (increase) in prepaid expenses and other assets | 4,480,405 | (1,358,084) | |||
(Decrease) increase in accounts payable | (4,765,920) | 4,108,300 | |||
Increase in accrued expenses and other current liabilities | 1,374,233 | 378,567 | |||
Decrease in operating lease liabilities | (244,853) | (216,635) | |||
Net cash used in operating activities | (60,089,699) | (12,604,469) | |||
INVESTING ACTIVITIES | |||||
Cash proceeds from sale of PREBOOST® business | — | 2,500,000 | |||
Capital expenditures | (427,152) | (487,434) | |||
Net cash (used in) provided by investing activities | (427,152) | 2,012,566 | |||
FINANCING ACTIVITIES | |||||
Proceeds from stock option exercises | 336,610 | 256,966 | |||
Proceeds from sale of shares under common stock purchase agreement | 2,571,551 | — | |||
Proceeds from premium finance agreement | 1,425,174 | — | |||
Installment payments on premium finance agreement | (508,788) | — | |||
Cash paid for debt portion of finance lease | — | (9,093) | |||
Net cash provided by financing activities | 3,824,547 | 247,873 | |||
Net decrease in cash | (56,692,304) | (10,344,030) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 80,190,675 | 122,359,535 | |||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 23,498,371 | $ | 112,015,505 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for interest | $ | 254,311 | $ | 1,489,079 | |
Schedule of non-cash investing and financing activities: | |||||
Right-of-use asset recorded in exchange for lease liabilities | $ | 264,896 | $ | 4,392,583 | |
Amortization of deferred costs related to common stock purchase agreement | $ | 78,677 | $ | — | |
See notes to unaudited condensed consolidated financial statements. | |||||
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|
|
| Three Months Ended | ||||
| December 31, | ||||
| 2017 |
| 2016 | ||
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|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
Net loss | $ | (4,257,152) |
| $ | (1,366,181) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 44,229 |
|
| 89,284 |
Amortization of intangible assets |
| 68,816 |
|
| 26,729 |
Share-based compensation |
| 207,454 |
|
| 317,311 |
Warrants issued |
| — |
|
| 542,930 |
Deferred income taxes |
| (3,297,000) |
|
| (591,573) |
Loss on settlement of accounts receivable |
| 3,764,137 |
|
| — |
Other |
| (5,000) |
|
| 4,469 |
Changes in current assets and liabilities, net of effects of acquisition of a business: | |||||
Decrease in accounts receivable |
| 3,226,930 |
|
| 2,391,226 |
Decrease in income tax receivable |
| — |
|
| 191 |
(Increase) decrease in inventory |
| (299,112) |
|
| 111,404 |
Decrease (increase) in prepaid expenses and other assets |
| 68,369 |
|
| (75,378) |
Decrease in accounts payable |
| (168,347) |
|
| (522,125) |
Decrease in unearned revenue |
| (24,501) |
|
| — |
Increase in accrued expenses and other current liabilities |
| 967,839 |
|
| 237,678 |
Net cash provided by operating activities |
| 296,662 |
|
| 1,165,965 |
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
Capital expenditures |
| (1,914) |
|
| (65,623) |
Net cash used in investing activities |
| (1,914) |
|
| (65,623) |
|
|
|
|
|
|
Net increase in cash |
| 294,748 |
|
| 1,100,342 |
CASH AT BEGINNING OF PERIOD |
| 3,277,602 |
|
| 2,385,082 |
CASH AT END OF PERIOD | $ | 3,572,350 |
| $ | 3,485,424 |
|
|
|
|
|
|
Schedule of noncash investing and financing activities: |
|
|
|
|
|
Issuance of common stock in connection with the APP Acquisition | $ | — |
| $ | 1,826,097 |
Issuance of Series 4 Preferred Stock in connection with the APP Acquisition | $ | — |
| $ | 17,981,883 |
Reduction of accrued expense upon issuance of shares | $ | — |
| $ | 22,176 |
Shares issued in connection with common stock purchase agreement | $ | 347,081 |
| $ | — |
Increase in deferred assets from accrued expenses | $ | 75,920 |
| $ | — |
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements. |
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -– Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements for Veru Inc. (“we,” “our,” “us,” “Veru” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)(SEC) for reporting of interim financial information. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)(U.S. GAAP) have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2022. The accompanying condensed consolidated balance sheet as of September 30, 20172022 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations and cash flows for the three and six months ended DecemberMarch 31, 20172023 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2018.2023.
The preparation of our unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of only normally recurring adjustments) necessary to present fairly the financial position and results of operations as of the dates and for the periods presented.
Principles of Consolidationconsolidation and Naturenature of Operations
operations: Veru Inc. is referred to in these notes collectively with its subsidiaries as “we,” “our,” “us,” “Veru” or the “Company.” The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Veru International Holdco Inc., Aspen Park Pharmaceuticals, Inc. (APP) and The Female Health Company Limited, andLimited; The Female Health Company Limited’s wholly owned subsidiaries,subsidiary, The Female Health Company (UK) plc (The Female Health Company Limited and The Female Health Company (UK) plc, collectively, the “U.K. subsidiary”); The Female Health Company (UK) plc’s wholly owned subsidiary, The Female Health Company (M) SDN.BHD.SDN.BHD (the “Malaysia subsidiary”); and Veru International Holdco Inc.’s wholly owned subsidiaries, Veru Biopharma UK Limited, Veru Biopharma Europe Limited, and Veru Biopharma Netherlands B.V. All significant intercompany transactions and accounts have been eliminated in consolidation. Prior toThe Company is a late clinical stage biopharmaceutical company focused on developing novel medicines for the completiontreatment of breast cancer and for SARS-Cov-2 and other viral ARDS-related diseases. Our drug development program includes sabizabulin, a microtubule disrupter, for the treatment of hospitalized COVID-19 patients at high risk for ARDS and other viral-related ARDS, and enobosarm, a selective androgen receptor targeting agonist, for the management of advanced breast cancer. The Company also has the FC2 Female Condom/FC2 Internal Condom® (FC2), an FDA-approved commercial product for the dual protection against unplanned pregnancy and the transmission of sexually transmitted infections. The Company had ENTADFI® (finasteride and tadalafil) capsules for oral use (ENTADFI), a new treatment for benign prostatic hyperplasia that was approved by the FDA in December 2021. We sold substantially all of the acquisition (the APP Acquisition) of APP through the merger of a wholly owned subsidiary of the Company into APP, the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer health care product, the FC2 female condom. The completion of the APP Acquisition transitioned the Company into a biopharmaceutical company with multiple drug products under clinical development and commercialization focused in urology and oncology. Nearly allassets related to ENTADFI on April 19, 2023. See Note 15 for additional information. Most of the Company’s net revenues during the three and six months ended DecemberMarch 31, 20172023 and 20162022 were derived from sales of FC2. The Female Health Company Limited is the holding company of The Female Health Company (UK) plc, which is located
Other comprehensive loss: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in London, England (collectively the U.K. subsidiary). The Female Health Company (M) SDN.BHD leases a manufacturing facility locatednet loss. Although certain changes in Selangor D.E., Malaysia (the Malaysia subsidiary). The Company headquarters is located in Miami, Florida in a leased office facility.
FC2 has been distributed in either or both commercial (private sector)assets and public health sector markets in 144 countries. It is marketed to consumers in 25 countries through distributors, public health programs, and/or retailers and in the U.S. by prescription.
Cash concentration: The Company’s cash is maintained primarily in three financial institutions, located in Chicago, Illinois, London, England and Kuala Lumpur, Malaysia, respectively.
Accounts receivable and concentration of credit risk: Accounts receivableliabilities, such as foreign currency translation adjustments, are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a periodic basis.
The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable is affected by the mix of purchasers within the period. As is typical in the
8
Company's business, extended credit terms may occasionally be offeredreported as a sales promotion or for certain sales. The Company has agreed to credit terms of up to 150 days with our distributor in the Republic of South Africa. For the most recent order of 15 million units under the Brazil tender, the Company has agreed to up to 360 day credit terms with our distributor in Brazil subject to earlier payment upon receipt of payment by the distributor from the Brazilian Government. See discussion of receivables from our distributor in Brazil in Note 5. For the past twelve months, the Company's average days’ sales outstanding was approximately 303 days.
Inventory: Inventories are valued at the lower of cost or net realizable value. The cost is determined using the first-in, first-out (FIFO) method. Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date. Write-downs of inventories establish a new cost basis which is not increased for future increases in the net realizable value of inventories or changes in estimated obsolescence.
Foreign currency translation and operations: Effective October 1, 2009, the Company determined that there were significant changes in facts and circumstances, triggering an evaluation of its subsidiaries’ functional currency. The evaluation indicated that the U.S. dollar is the currency with the most significant influence upon the subsidiaries. Because all of the U.K. subsidiary's future sales and cash flows would be denominated in U.S. dollars following the October 2009 cessation of production of the Company’s first generation product, FC1, the U.K. subsidiary adopted the U.S. dollar as its functional currency effective October 1, 2009. As the Malaysia subsidiary is a direct and integralseparate component of the U.K. parent’s operations, it, too, adopted the U.S. dollar as its functional currency asequity section of October 1, 2009. The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. The cumulative foreign currency translation loss included in accumulated other comprehensive loss was $581,519 as of December 31, 2017 and September 30, 2017. Assets located outside of the U.S. totaled approximately $4,640,000 and $5,600,000 at December 31, 2017 and September 30, 2017, respectively.
Equipment, furniture and fixtures: Depreciation and amortization are computed using primarily the straight-line method. Depreciation and amortization are computed over the estimated useful lives of the respective assets which range as follows:
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Depreciation on leased assets is computed over the lesser of the remaining lease term or the estimated useful lives of the assets. Depreciation on leased assets is included with depreciation on owned assets.
Patents and trademarks: The costs for patents and trademarks are expensed when incurred.
Financial instruments: Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us as of the reporting dates. Accordingly, the estimates presented in the accompanying unaudited condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss. For the three and six months ended March 31, 2023 and 2022, comprehensive loss is equivalent to the reported net loss.
Recent accounting pronouncements not yet adopted: We have reviewed all recently issued accounting pronouncements and have determined that such standards that are not yet effective will not have a material impact on our financial statements areor do not necessarily indicativeotherwise apply to our operations.
Note 2 – Liquidity
The Company anticipates that we will continue to consume cash and incur losses as we develop and commercialize our drug candidates. Because of the numerous risks and uncertainties associated with the development of pharmaceutical products, the Company is unable to estimate the exact amounts that couldof capital outlays and operating expenditures necessary to fund development of our drug candidates and obtain regulatory approvals. The Company’s future capital requirements will depend on many factors.
The Company believes its current cash position, cash expected to be realized on dispositiongenerated from sales of FC2, cash to be received from the sale of ENTADFI (see note 15), and its ability to secure equity financing or other financing alternatives will be adequate to fund planned operations of the financial instruments.Company for the next 12 months. To the extent the Company may need additional capital for its operations or the conditions for raising capital are favorable, the Company may access financing alternatives that may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company’s current effective shelf registration statements on Form S-3 (File No. 333-239493 and File No. 333-270606) or under a new 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) or its common stock purchase agreement with Lincoln Park Capital Fund, LLC (see note 15).
Note 3 – Fair Value Measurements
FASB ASCAccounting Standards Codification (ASC) Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The Company currently doesthree levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not have any assetsactive; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments with primarily unobservable value drivers.
As of March 31, 2023 and September 30, 2022, the Company’s financial liabilities measured at fair value on a recurring basis, aswhich consisted of December 31, 2017. Substantially allembedded derivatives, were classified within Level 3 of the Company’s cash, as well as restricted cash, are held in demand deposits with three financial institutions. The Company has no financial instruments for which the carrying value is materially different than fair value.
9
Non-financial assets such as intangible assets, goodwill and property, plant, and equipment are evaluated for impairment annually or when indicators of impairment exist and are measured at fair value only if an impairment charge is recorded. Non-financial assets such as identified intangible assets acquired in connectionhierarchy.
The following table provides a reconciliation of the beginning and ending liability balance associated with the APP Acquisition areembedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2023 and 2022:
Six Months Ended | |||||
March 31, | |||||
2023 | 2022 | ||||
Beginning balance | $ | 4,294,000 | $ | 7,851,000 | |
Change in fair value of derivative liabilities | (530,000) | 1,438,000 | |||
Ending balance | $ | 3,764,000 | $ | 9,289,000 | |
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 provision in the Residual Royalty Agreement. See Note 8 for additional information. There is no current observable market for these types of derivatives. The Company estimates the fair value of the embedded derivative within the Residual Royalty Agreement by using a scenario-based method, whereby different scenarios are valued and probability weighted. The scenario-based valuation model incorporates transaction details such as the contractual terms of the instrument and assumptions including projected FC2 revenues, expected cash outflows, probability and estimated dates of a change of control, risk-free interest rates and applicable credit risk. A significant increase in projected FC2 revenues or a significant increase in the probability or acceleration of the timing of a change of control event, in isolation, would result in a significantly higher fair value measurement of the liability associated with the embedded derivative.
The following tables present quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 inputs,of the fair value hierarchy as of March 31, 2023 and September 30, 2022:
Valuation Methodology | Significant Unobservable Input | March 31, 2023 | September 30, 2022 | |||
Scenario-Based | Estimated change of control dates | June 2024 to June 2026 | September 2023 to September 2025 | |||
Discount rate | 11.9% to 12.7% | 13.6% to 14.2% | ||||
Probability of change of control | 20% to 90% | 20% to 90% |
Note 4 – Revenue from Contracts with Customers
The Company generates nearly all its revenue from direct product sales. Revenue from direct product sales is generally recognized when the customer obtains control of the product, which include discounted cash flow methodologies,occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Sales taxes and other similar techniques,taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue.
The amount of consideration the Company ultimately receives varies depending upon sales discounts, and other incentives that the Company may offer, which are accounted for as variable consideration when thereestimating the amount of revenue to recognize. The estimate of variable consideration requires significant judgment. The Company includes estimated amounts in the transaction price to the extent it is limited market activityprobable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and the determination of fair value requireswhether to include estimated amounts in the transaction price are based largely upon an assessment of current contract sales terms and historical payment experience.
Product returns are typically not significant judgmentbecause returns are generally not allowed unless the product is damaged at time of receipt.
The Company’s revenue is from sales of FC2 in the U.S. prescription channel and direct sales of FC2 in the global public health sector, and also included sales of ENTADFI. The following table presents net revenues from these three categories:
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
FC2 | |||||||||||
U.S. prescription channel | $ | 4,146,160 | $ | 11,590,466 | $ | 4,309,164 | $ | 23,164,732 | |||
Global public health sector | 2,434,287 | 1,437,928 | 4,771,284 | 3,998,794 | |||||||
Total FC2 | 6,580,447 | 13,028,394 | 9,080,448 | 27,163,526 | |||||||
ENTADFI | 5,520 | — | 13,313 | — | |||||||
Net revenues | $ | 6,585,967 | $ | 13,028,394 | $ | 9,093,761 | $ | 27,163,526 | |||
The following table presents net revenues by geographic area:
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
United States | $ | 4,787,258 | $ | 11,846,960 | $ | 5,596,635 | $ | 23,755,485 | |||
South Africa | 1,328,400 | * | 1,329,678 | * | |||||||
Other | 470,309 | 1,181,434 | 2,167,448 | 3,408,041 | |||||||
Net revenues | $ | 6,585,967 | $ | 13,028,394 | $ | 9,093,761 | $ | 27,163,526 | |||
*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 estimation.
Research and development costs: Research and development expenses include salaries and benefits, clinical trials costs and contract services. Research and development expenses are chargediii) the product is delivered to operations as they are incurred.
The Company records estimated coststhe customer or distributor, in accordance with the terms of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials and contract manufacturing activities. These costs are a significant componentagreement. Some of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimatescontracts require the customer to make advanced payments prior to transferring control of the work completed and in accordance with agreements established with its third-party service providers underproducts. These advanced payments create a contract liability for the service agreements.Company. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled and the rate of patient enrollments may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. Research and development costs are expensed as incurred.
The Company follows the provisions of FASB ASC Topic 730, Research and Development, which requires the Company to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, the Company would be required to expense the related capitalized advance payments. The Company had no capitalized nonrefundable advance payments as of December 31, 2017 or September 30, 2017, and had no refundable advance payments as of December 31, 2017 and September 30, 2017.
Restricted cash: Restricted cash relates to security provided to onebalances of the Company’s U.K. banks for performance bonds issued in favor of customers. The Company has a facility of $250,000 for such performance bonds. Such security has been extended infrequently and only on occasions where it has been a contract term expressly stipulated as an absolute requirement by the customer or its provider of funds. The expiration of the bond is defined by the completion of the event such as, but not limited to, a period of time after the product has been distributed or expiration of the product shelf life. Restricted cash was approximately $140,000 at December 31, 2017 and September 30, 2017, and isliability, included in cashaccrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheets.
Revenue recognition: The Company recognizes revenue from product sales when each of the following conditions has been met: an arrangement exists, delivery has occurred, there is a fixed price,sheets, were approximately $335,000 and collectability is reasonably assured.
Unearned revenue: FC2 is distributed in the U.S. prescription channel principally through the retail pharmacy, which initiates through large pharmaceutical wholesalers in the U.S. Unearned revenue as of December$342,000 at March 31, 20172023 and September 30, 2017 was $990,016 and $1,014,517, respectively, and was comprised mainly of sales made to wholesalers. We lack the experiential data which would allow us to estimate returns; therefore, as of December 31, 2017 and September 30, 2017, we determined that we do not yet meet the criteria for the recognition of revenue at the time of shipment to certain wholesalers as allowances for returns cannot be reasonably estimated. Accordingly, the Company deferred recognition of revenue on prescription products sold to wholesale distributors until the right of return no longer exists, which occurs at the earlier of the time the prescription products were dispensed through patient prescriptions or expiration of the right of return. 2022, respectively.
Intangible Assets: Our intangible assets arose from the APP Acquisition on October 31, 2016. These intangible assets are carried at cost less accumulated amortization and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
10
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. We determined the fair value of intangible assets, including in-process research and development ("IPR&D”), using the “income method.” This method starts with a forecast of net cash flows, risk adjusted for estimated probabilities of technical and regulatory success and adjusted to present value using an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets are valued from a market participant view which might be different than our specific views. The valuation process is very complex and requires significant input and judgment using internal and external sources. Although a valuation is required to be finalized within a one-year period, it must consider all and only those facts and evidence which existed at the acquisition date. The most complex and judgmental matters applicable to the valuation process are summarized below:
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Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development costs,
11
inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation.
Considering the high risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. IPR&D is closely monitored and assessed each period for impairment.
Goodwill: Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired in connection with the APP Acquisition. All goodwill resides in the Company’s Research and Development reporting unit.
Goodwill is tested at least annually for impairment or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors include our share price, our financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test previously performed.
The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value; however, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material.
Share-based compensation: The Company accounts for share-based compensation expense for equity awards exchanged for services over the vesting period based on the grant-date fair value. In many instances, the equity awards are issued upon the grant date subject to vesting periods. In certain instances, the equity awards provide for future issuance contingent on future continued employment or performance of services as of the issuance date.
Advertising: The Company's policy is to expense advertising costs as incurred. Advertising costs were $23,640 and $17,941 for the three months ended December 31, 2017 and 2016, respectively.
Income taxes: The Company files separate income tax returns for its foreign subsidiaries. FASB ASC Topic 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also provided for carryforwards for income tax purposes. In addition, the amount of any future tax benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized.
Other comprehensive loss: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net loss. Although certain changes in assets and liabilities, such as foreign currency translation adjustments, are reported as a separate component of the equity section of the accompanying condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss.
12
The U.S. parent company and its U.K. subsidiary routinely purchase inventory produced by its Malaysia subsidiary for sale to their respective customers. These intercompany trade accounts are eliminated in consolidation. The Company’s policy and intent is to settle the intercompany trade account on a current basis. Since the U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currencies effective October 1, 2009, no foreign currency gains or losses from intercompany trade are recognized. In the three months ended December 31, 2017 and 2016, comprehensive loss is equivalent to the reported net loss.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606). This new accounting guidance on revenue recognition provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. ASU 2014-09 will be effective for the Company beginning on October 1, 2018. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We have not yet selected a transition method, and we are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This new accounting guidance more clearly articulates the requirements for the measurement and disclosure of inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This new accounting guidance requires the measurement of inventory at the lower of cost or net realizable value. ASU 2015-11 was effective for the Company beginning on October 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning on October 1, 2019. Early adoption is permitted. We are currently evaluating the effect of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this Update simplify the income tax effects, minimum statutory tax withholding requirements and impact of forfeitures related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 was effective for the Company beginning on October 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The purpose of ASU 2016-18 is to clarify guidance and presentation related to restricted cash in the statements of cash flows as well as increased disclosure requirements. It requires beginning-of-period and end-of-period total amounts shown on the statements of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. ASU 2016-18 will be effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual periods. Early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of ASU 2017-04 is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect Update No. 2017-04 to have a material effect on our financial position or results of operations.
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In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Update No. 2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material effect on our financial position or results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The purpose of ASU 2017-09 is to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 will be effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual or interim period for which financial statements have not been issued or made available for issuance. The adoption of ASU 2017-09 is not expected to have a material effect on our financial position or results of operations.
Note 2 - APP Acquisition
On October 31, 2016, as part of the Company's strategy to diversify its product line to mitigate the risks of being a single product company, the Company completed the APP Acquisition through the merger of a wholly owned subsidiary of the Company into APP. The completion of the APP Acquisition transitioned us from a single product company selling only the FC2 Female Condom® to a biopharmaceutical company with multiple drug products under clinical development and commercialization.
The Company incurred $826,370 in acquisition-related costs in the three months ended December 31, 2016, which are presented on a separate line item in the accompanying unaudited condensed consolidated statement of operations.
As of the date of the APP Acquisition, APP had developed technology consisting of PREBOOST® medicated wipes for prevention of premature ejaculation. IPR&D represents incomplete research and development projects at APP as of the date of the APP Acquisition. The fair value of the developed technology and IPR&D were determined using the income approach, which was prepared based on forecasts by management.
Purchase price in excess of assets acquired and liabilities assumed was recorded as goodwill. Goodwill from the APP Acquisition principally relates to intangible assets that do not qualify for separate recognition, our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction. Goodwill is not tax deductible for income tax purposes and was assigned to the Research and Development reporting segment.
In connection with the APP Acquisition, a consolidated complaint has been filed against the Company and its directors alleging breach of fiduciary duty. The Company intends to vigorously defend this lawsuit. See Note 10 for additional detail.
Note 3 - Earnings per Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net income by the weighted average number of common shares outstanding during the period after giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options, stock appreciation rights and warrants, and the vesting of unvested restricted stock and restricted stock units. Due to our net loss for the periods presented, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Notes 7 and 8 for a discussion of our dilutive potential common shares.
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Note 4 - Inventory
Inventory consists of the following components at December 31, 2017 and September 30, 2017:
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| December 31, 2017 |
| September 30, 2017 | ||
FC2 |
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Raw material | $ | 554,737 |
| $ | 530,384 |
Work in process |
| 121,137 |
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| 90,164 |
Finished goods |
| 2,631,155 |
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| 2,427,386 |
Inventory, gross |
| 3,307,029 |
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| 3,047,934 |
Less: inventory reserves |
| (272,980) |
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| (312,997) |
FC2, net |
| 3,034,049 |
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| 2,734,937 |
PREBOOST® |
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Finished goods |
| 32,987 |
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| 32,987 |
Inventory, net | $ | 3,067,036 |
| $ | 2,767,924 |
Note 5 -– Accounts Receivable and Concentration of Credit Risk
The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable are affected by the mix of purchasers within the period. As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion or for certain sales. For sales to the Company’s distributor in Brazil, the Company has agreed to credit terms of up to 90 days subsequent to clearance of the product by the Ministry of Health in Brazil. The Company classified approximately $0.7 million of trade receivables with its distributor in Brazil as long-term as of September 30, 2022, because payment was expected in greater than one year. The long-term portion of trade receivables is included in other assets on the accompanying unaudited condensed consolidated balance sheet.
The components of accounts receivable consistconsisted of the following at DecemberMarch 31, 20172023 and September 30, 2017: 2022:
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| December 31, 2017 |
| September 30, 2017 | ||
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Trade receivables |
| $ | 2,905,094 |
| $ | 11,330,814 |
Other receivables |
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| 128,317 |
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| 100,139 |
Accounts receivable, gross |
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| 3,033,411 |
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| 11,430,953 |
Less: allowance for doubtful accounts |
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| (33,103) |
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Accounts receivable, net |
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| 3,000,308 |
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| 11,392,850 |
Less: long-term trade receivables |
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| (7,837,500) |
Current accounts receivable, net |
| $ | 3,000,308 |
| $ | 3,555,350 |
March 31, | September 30, | ||||
2023 | 2022 | ||||
Trade receivables, gross | $ | 8,141,573 | $ | 4,289,892 | |
Less: allowance for credit losses | (3,923,857) | (12,143) | |||
Less: allowance for sales returns and payment term discounts | (11,749) | (12,854) | |||
Less: long-term trade receivables* | — | (714,000) | |||
Accounts receivable, net | $ | 4,205,967 | $ | 3,550,895 | |
On December 27, 2017, we entered into a settlement agreement with Semina, our distributor*Included in Brazil, pursuant to which Semina has made a payment of $2.25 million and is obligated to make a second payment of $1.5 million by February 28, 2018, to settle net amounts due to us totaling $7.5 million. The amounts owed to us relate to outstanding accounts receivable for sales to Semina for the 2014 Brazil Tender totaling $8.9 million, $7.8 million of which was classified as a long term trade receivable and $1.1 million as a current account receivableother assets on the accompanying condensed consolidated balance sheet as of September 30, 2017. These receivables were net of payables owed to Semina by us totaling $1.4 million, $1.2 million of which was classified as a long term liability and $0.2 million classified as a current liability on the accompanying condensed consolidated balance sheet as of September 30, 2017. The settlement was not related to our belief in the ultimate collectability of the receivables or in the creditworthiness of Semina. The result of the settlement was a net loss of approximately $3.76 million, which is presented as a separate line item in the accompanying unaudited condensed consolidated statement of operations for the three months ended Decemberbalance sheets
At March 31, 2017.
At December 31, 20172023 and at September 30, 2017, Semina’s2022, no customers had a current accounts receivable balance that represented 15 percent and 11 percentgreater than 10% of current assets, respectively. No other single customer’sassets.
At March 31, 2023, three customers had an accounts receivable balance accounted for moregreater than 10 percent10% of current assets at the end of those periods. At December 31, 2017, Semina’snet accounts receivable, balance represented 50 percentrepresenting 84% of the Company’s accounts receivable balance. At September 30, 2017, Semina’snet accounts receivable and long-term othertrade receivables in the aggregate. At September 30, 2022, two customers had an accounts receivable balance represented 78 percentgreater than 10% of the Company’snet accounts receivable and long-term othertrade receivables, balance. representing 83% of net accounts receivable and long-term trade receivables in the aggregate.
For the three months ended DecemberMarch 31, 2017 and 2016,2023, there were four andtwo customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 75% of the Company’s net revenues in the aggregate, including The Pill Club that represented 59% of the Company’s net revenues in the aggregate. For the three months ended March 31, 2022, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 83% of the Company’s net revenues in the aggregate, including The Pill Club that represented 41% of the Company’s net revenue in the aggregate.
For the six months ended March 31, 2023, there were three customers who eachwhose individual net revenue to the Company exceeded 10 percent10% of the Company’s net revenues, respectively.representing 69% of the Company’s net revenues in the aggregate, including The Pill Club that represented 43% of the Company’s net revenues in the aggregate. For the six months ended March 31, 2022, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 81% of the Company’s net revenues in the aggregate, including The Pill Club that represented 40% of the Company’s net revenues in the aggregate.
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The Company maintains an allowance for doubtful accountscredit losses for estimated losses resulting from the inability of its customers to make required payments on accounts receivable. Management determines the allowance for doubtful accountscredit losses 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. In the case of a bankruptcy filing or other similar event indicating the collectability of specific customer accounts is no longer probable, a specific allowance for credit losses may be recorded to reduce the related receivable to the amount expected to be recovered. Accounts receivable are written-offcharged-off when deemed uncollectible. During the quarter ended March 31, 2023, the Company recorded a provision for credit losses of $3.9 million related to the total amount of receivables due from The Pill Club due to uncertainty related to their financial condition. On April 18, 2023, The Pill Club filed for Chapter 11 bankruptcy.
The table below sets forthsummarizes the components ofchange in the allowance for doubtful accounts at Decembercredit losses for the six months ended March 31, 20172023 and 2016:2022:
Six Months Ended March 31, | |||||
2023 | 2022 | ||||
Beginning balance | $ | 12,143 | $ | 20,643 | |
Charges to expense, net of recoveries | 3,911,714 | (4,000) | |||
Ending balance | $ | 3,923,857 | $ | 16,643 | |
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Fiscal | Balance at |
| Provision Charges |
| Write offs/ |
| Balance at | ||||
Year | October 1 |
| to Expenses |
| Recoveries |
| December 31 | ||||
2017 | $ | 38,103 |
| $ | — |
| $ | — |
| $ | 38,103 |
2018 | $ | 38,103 |
| $ | — |
| $ | (5,000) |
| $ | 33,103 |
Recoveries of accounts receivable previously written-offcharged off are recorded when received. TheIn the global public health sector, the Company’s customers are primarily large global agencies, non-government organizations, ministries of health and other governmental agencies, which purchase and distribute the female condomFC2 for use in HIV/AIDS prevention and family planning programs. In the U.S., the Company’s customers include telemedicine providers who sell into the prescription channel.
Note 6 - Revolving Line– Balance Sheet Information
Inventories
Inventories are valued at the lower of Credit cost or net realizable value. The cost is determined using the first-in, first-out (FIFO) method. Inventories are also written down for management’s estimates of product which will not sell prior to its expiration date. Write-downs of inventories establish a new cost basis which is not increased for future increases in the net realizable value of inventories or changes in estimated obsolescence.
Inventories consisted of the following at March 31, 2023 and September 30, 2022:
March 31, | September 30, | ||||
2023 | 2022 | ||||
Raw material | $ | 1,438,804 | $ | 1,662,712 | |
Work in process | 715,480 | 872,596 | |||
Finished goods | 5,716,317 | 6,099,343 | |||
Inventories, gross | 7,870,601 | 8,634,651 | |||
Less: inventory reserves | (205,407) | (15,707) | |||
Inventories, net | $ | 7,665,194 | $ | 8,618,944 | |
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, 2023 and September 30, 2022:
Estimated | March 31, | September 30, | |||||
Useful Life | 2023 | 2022 | |||||
Plant and equipment: | |||||||
Manufacturing equipment | 5 - 8 years | $ | 3,281,354 | $ | 2,902,715 | ||
Office equipment, furniture and fixtures | 3 - 10 years | 1,488,987 | 1,440,475 | ||||
Leasehold improvements | 3 - 8 years | 484,460 | 484,460 | ||||
Total plant and equipment | 5,254,801 | 4,827,650 | |||||
Less: accumulated depreciation and amortization | (3,735,012) | (3,641,884) | |||||
Plant and equipment, net | $ | 1,519,789 | $ | 1,185,766 | |||
Depreciation expense was approximately $48,000 and $30,000 for the three months ended March 31, 2023 and 2022, respectively, and approximately $93,000 and $55,000 for the six months ended March 31, 2023 and 2022, respectively. Plant and equipment included $525,000 and $276,000 at March 31, 2023 and September 30, 2022, respectively, for deposits on equipment, furniture, and leasehold improvements, which have not been placed into service; therefore, the Company has not started to record depreciation expense.
Note 7 – Intangible Assets and Goodwill
Intangible Assets
The gross carrying amounts and net book value of intangible assets were as follows at March 31, 2023:
Gross Carrying | Accumulated | Net Book | ||||||
Amount | Amortization | Value | ||||||
Intangible asset with finite life: | ||||||||
Covenants not-to-compete | $ | 500,000 | $ | 458,333 | $ | 41,667 | ||
Indefinite-lived intangible assets: | ||||||||
Acquired in-process research and development assets | — | — | — | |||||
Total intangible assets | $ | 500,000 | $ | 458,333 | $ | 41,667 | ||
The gross carrying amounts and net book value of intangible assets were as follows at September 30, 2022:
Gross Carrying | Accumulated | Net Book | ||||||
Amount | Amortization | Value | ||||||
Intangible asset with finite life: | ||||||||
Covenants not-to-compete | $ | 500,000 | $ | 422,619 | $ | 77,381 | ||
Indefinite-lived intangible assets: | ||||||||
Acquired in-process research and development assets | 3,900,000 | — | 3,900,000 | |||||
Total intangible assets | $ | 4,400,000 | $ | 422,619 | $ | 3,977,381 | ||
Amortization expense was approximately $18,000 for the three months ended March 31, 2023 and 2022 and approximately $36,000 for the six months ended March 31, 2023 and 2022.
During the second quarter of fiscal 2023, the Company announced its strategic decision to refocus its drug development efforts on those drug candidates that it believes have the best opportunity to lead to long-term success and shareholder value creation. As part of this strategic decision, the Company has indefinitely ceased development of sabizabulin for prostate cancer and zuclomiphene. As of March 31, 2023, the Company has no current plans that would invest funds in the development of these two assets or that would lead to the Company deriving value from these two assets, which has met the criteria for abandonment under the accounting standards. This resulted in writing off the carrying amount of these two acquired in-process research and development assets and recording an impairment charge of $3.9 million during the quarter ended March 31, 2023.
Goodwill
The carrying amount of goodwill at March 31, 2023 and September 30, 2022 was $6.9 million. There was no change in the balance during the six months ended March 31, 2023 and 2022. The Company’s goodwill is assigned to the Research and Development reporting unit, which had a negative carrying amount as of March 31, 2023.
Note 8 – Debt
SWK Residual Royalty Agreements
On March 5, 2018, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with BMO Harris Bank N.A. expired the financial institutions party thereto from time to time (the “Lenders”) and SWK Funding LLC, as agent for the Lenders (the “Agent”), for a synthetic royalty financing transaction. On and subject to the terms of the Credit Agreement, the Lenders provided the Company with a term loan of $10.0 million, which was advanced to the Company on December 29, 2017. No amounts were outstandingthe date of the Credit Agreement. The Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement. The Agent has released its security interest in Company collateral previously pledged to secure its obligations under the Credit Agreement.
In connection with the Credit Agreement, the Company and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Residual Royalty Agreement, or (ii) mutual agreement of the parties. If a change of control or sale of the FC2 business occurs, the Agent will receive a payment that is the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five.
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 Residual Royalty Agreement, equal to the fair value of the respective change of control provisions, was allocated to an embedded derivative liability. The derivative liability is adjusted to fair market value at each reporting period.
At March 31, 2023 and September 30, 2017 or when it expired2022, the Residual Royalty Agreement liability consisted of the following:
March 31, | September 30, | ||||
2023 | 2022 | ||||
Residual royalty agreement liability, fair value at inception | $ | 346,000 | $ | 346,000 | |
Add: accretion of liability using effective interest rate | 11,521,831 | 9,950,908 | |||
Less: cumulative payments | (4,019,683) | (3,765,372) | |||
Residual royalty agreement liability, excluding embedded derivative liability | 7,848,148 | 6,531,536 | |||
Add: embedded derivative liability at fair value (see Note 3) | 3,764,000 | 4,294,000 | |||
Total residual royalty agreement liability | 11,612,148 | 10,825,536 | |||
Residual royalty agreement liability, short-term portion | (1,354,823) | (1,169,095) | |||
Residual royalty agreement liability, long-term portion | $ | 10,257,325 | $ | 9,656,441 | |
As the Company has repaid the original principal of $10.0 million advanced in connection with the Credit Agreement and the Residual Royalty Agreement, payments under the Residual Royalty Agreement are classified as interest payments and included in operating activities on the accompanying unaudited condensed consolidated statements of cash flows. The short-term portion of the Residual Royalty Agreement liability represents the aggregate of the estimated quarterly payments on the Residual Royalty Agreement payable during the 12-month period subsequent to the balance sheet date.
Interest expense on the accompanying unaudited condensed consolidated statements of operations relates to the accretion of the liability for the Residual Royalty Agreement. The accretion of the liability is based on projected FC2 revenues. Subsequent to March 31, 2023, the Company learned of The Pill Club’s bankruptcy filing, which results in uncertainty whether sales to The Pill Club will continue in the future. A decrease in our projected FC2 revenues may result in a decreased Residual Royalty Agreement liability in future periods.
Premium Finance Agreement
On November 1, 2022, the Company entered into a Premium Finance Agreement to finance $1.4 million of its directors and officers liability insurance premium at an annual percentage rate of 6.3%. The financing is payable in eleven monthly installments of principal and interest, beginning on December 29, 2017.1, 2022. The balance of the insurance premium liability is $0.9 million as of March 31, 2023 and is included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheet.
Note 7 -9 – Stockholders’ Equity
Preferred Stock
The Company has 5,000,000 authorized shares designated as Class A Preferred Stock with a par value of $.01$0.01 per share. There are 1,040,000 shares of Class A Preferred Stock -– Series 1 authorized; 1,500,000 shares of Class A Preferred Stock-Stock – Series 2 authorized; 700,000 shares of Class A Preferred Stock -– Series 3 authorized; and 548,000 shares of Class A Preferred Stock-Stock – Series 4 (the Series“Series 4 Preferred Stock)Stock”) authorized. In connection with the completion of the APP Acquisition (see Note 2), a total of 546,756 shares of Series 4 Preferred Stock were issued to the former APP stockholders as of October 31, 2016, and all of the outstanding shares of Series 4 Preferred automatically converted into shares of the Company’s common stock effective July 31, 2017. There were no other shares of Class A Preferred Stock of any series issued and outstanding at DecemberMarch 31, 2017 or2023 and September 30, 2017.2022. 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 DecemberMarch 31, 2017 or2023 and September 30, 2017.2022, and there was no activity during the six months ended March 31, 2023 and 2022.
Common Stock Purchase WarrantsShelf Registration Statements
In connection with the closing of the APP Acquisition,March 2023, the Company issuedfiled a warrant to purchase up to 2,585,379 sharesshelf registration statement on Form S-3 (File No. 333-270606) with a capacity of $200 million, which was declared effective by the Company's common stock to Torreya Capital, the Company's financial advisor (the Financial Advisor Warrant). The Financial Advisor Warrant has a five-year term, a cashless exercise feature and a strike price equal to $1.93 per share, the average price of the Company's common stock for the ten-day period preceding the original announcement of the APP AcquisitionSEC on April 6, 2016. The fair value14, 2023. As of March 31, 2023, $16.1 million remained available under the Financial Advisor Warrant of $542,930 was estimated at the October 31, 2016 date of grant using the Black-Scholes option pricing model assuming expected volatility of 47.2 percent, a risk-free interest rate of 1.31 percent, an expected life of five years, no dividend yield, and the closing price of the Company's common stockCompany’s 2020 shelf registration statement on October 31, 2016 of $0.95. The Financial Advisor Warrant vested upon issuance. Half of the shares subject to the Financial Advisor Warrant, or 1,292,690 shares, are locked-up for a period of 18 months from the issuance date. The Financial Advisor Warrant is recorded as a component of additional paid-in-capital and the related expense is included in business acquisition expenses in the accompanying unaudited condensed consolidated statement of operations for the three months ended December 31, 2016.Form S-3 (File No. 333-239493).
16
Aspire Capital Purchase Agreement
On December 29, 2017,June 26, 2020, the Company entered into a common stock purchase agreement (the “2020 Purchase Agreement)Agreement”) with Aspire Capital Fund, LLC (Aspire Capital) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time in its sole discretion during the 36-month term of the 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $15.0$23.9 million of the Company’s common stock in the aggregate. Concurrently with entering into the 2020 Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the Registration“Registration Rights Agreement)Agreement”), in which the Company agreed to prepare and file under the Securities Act and under its current registration statement on Form S-3 (File No. 333-221120), aof 1933 (the “Securities Act”) one or more prospectus supplement for the sale or potential sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the 2020 Purchase Agreement.
Under the 2020 Purchase Agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a Purchase Notice)“Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 200,000 shares of the Company’s common stock per business day up to $15.0 million of the Company’s common stock in the aggregate at a per share price (the "Purchase Price"“Purchase Price”) equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date or the average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date.
In addition, on any date on which the Company submits a Purchase Notice to Aspire Capital in an amount equal to 200,000 shares and the closing sale price of our common stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a VWAP“VWAP Purchase Notice)Notice”) directing Aspire Capital to purchase an amount of common stock equal to up to 30% of the aggregate shares of the common stock traded on its principal market on the next trading day (the VWAP“VWAP Purchase Date)Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the VWAP Purchase Date.
During the six months ended March 31, 2023, we sold 1,920,013 shares of common stock to Aspire Capital under the 2020 Purchase Agreement resulting in proceeds to the Company of $2.6 million. As a result of these sales, we recorded approximately $79,000 of deferred costs to additional paid-in capital.
Since inception of the 2020 Purchase Agreement through March 31, 2023, we have sold 3,564,750 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.6 million. As of March 31, 2023, the amount remaining under the 2020 Purchase Agreement was $16.3 million, which is registered under the Company’s shelf registration statement on Form S-3 (File No. 333-239493). Subsequent to March 31, 2023, we sold 859,700 shares of common stock to Aspire Capital under the 2020 Purchase Agreement resulting in proceeds to the Company of $0.8 million.
In consideration for entering into the 2020 Purchase Agreement and concurrently with the execution of the 2020 Purchase Agreement, the Company issued to Aspire Capital 304,457212,130 shares of the Company’s common stock. The shares of common stock issued as consideration were valued at $347,081.$681,000, based on the closing price per share of the Company’s common stock on the date the shares were issued. This amount and related expenses of $75,920 have been$50,000, which total approximately $731,000, were recorded as deferred costs. The unamortized amount of deferred costs related to the 2020 Purchase Agreement of $500,000 and $578,000 at March 31, 2023 and September 30, 2022, respectively, is included in deferredother assets on the accompanying unaudited condensed consolidated balance sheet at December 31, 2017. As of the date of filing this Quarterly Report with the SEC, no shares of the Company’s common stock have been sold to Aspire Capital under the Purchase Agreement.sheets.
Note 810 – Share-based Compensation
We allocate share-based compensation expense to cost of sales, selling, general and administrative expense, and research and development expense based on the award holder’s employment function. For the three and six months ended DecemberMarch 31, 20172023 and 2016,2022, we recorded share-based compensation expenses as follows:
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Cost of sales | $ | 87,356 | $ | 24,572 | $ | 151,364 | $ | 45,648 | |||
Selling, general and administrative | 2,903,812 | 1,588,043 | 6,515,911 | 2,983,601 | |||||||
Research and development | 846,430 | 512,326 | 2,015,592 | 976,120 | |||||||
Share-based compensation | $ | 3,837,598 | $ | 2,124,941 | $ | 8,682,867 | $ | 4,005,369 | |||
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.
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
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|
|
|
|
|
|
Cost of sales |
| $ | 2,373 |
| $ | — |
Selling, general and administrative |
|
| 176,229 |
|
| 317,311 |
Research and development |
|
| 28,852 |
|
| — |
|
| $ | 207,454 |
| $ | 317,311 |
Equity Plans
In June 2022, the Company’s board of directors adopted the Company’s 2022 Employment Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq listing rules. The Inducement Plan is used exclusively for the issuance of equity awards to certain new hires who satisfied the requirements to be granted inducement grants under Nasdaq rules as an inducement material to the individual’s entry into employment with the Company. The Company reserved 4,000,000 shares of common stock under the Inducement Plan and as of March 31, 2023, 3,895,250 shares remain available for issuance under the Inducement Plan.
In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (as amended, the “2018 Plan”). On March 29, 2022, the Company’s stockholders approved an increase in the number of shares that may be issued under the 2018 Plan to 18.5 million. As of March 31, 2023, 4,349,265 shares remain available for issuance under the 2018 Plan.
In July 2017, the Company’s stockholders approved the Company's 2017 Equity Incentive Plan.Plan (the “2017 Plan”). A total of 4.7 million shares are authorized for issuance under the 2017 Plan. As of March 31, 2023, 6,792 shares remain available for issuance under the 2017 Equity Incentive Plan. As of December 31, 2017, a total of 4,096,356 shares had been granted under the 2017 Equity Incentive Plan and not forfeited or are subject to outstanding commitments to issue shares under the 2017 Equity Incentive Plan, of which 3,716,356 shares were in the form of stock options, 190,000 shares were in the form of stock appreciation rights and 190,000 shares were in the form of restricted stock units. The 2017 Equity Incentive Plan replaced the Company's 2008 Stock Incentive Plan (the “2008 Plan”), and no further awards will be made under the 2008 Stock Incentive Plan.
17
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. The Company recognized a reduction in share-based compensation expense of $1.4 million during the three and six months ended March 31, 2023 for stock options forfeited during the period. The reduction in share-based compensation expense during the three and six months ended March 31, 2022 for stock options forfeited was immaterial.
The following table outlines the weighted average assumptions for options granted during the three and six months ended DecemberMarch 31, 20172023 and 2016:2022:
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Weighted Average Assumptions: | |||||||||||
Expected volatility | 102.90% | 76.12% | 98.49% | 77.27% | |||||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% | |||||||
Risk-free interest rate | 3.84% | 2.50% | 4.24% | 1.44% | |||||||
Expected term (in years) | 5.6 | 6.0 | 6.0 | 6.0 | |||||||
Fair value of options granted | $ | 3.63 | $ | 3.49 | $ | 9.10 | $ | 5.40 | |||
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|
Weighted Average Assumptions: |
|
| 2017 |
|
| 2016 |
Expected Volatility |
|
| 60.60% |
|
| 43.76% |
Expected Dividend Yield |
|
| 0.00% |
|
| 0.00% |
Risk-free Interest Rate |
|
| 2.24% |
|
| 1.62% |
Expected Term (in years) |
|
| 5.7 |
|
| 6.0 |
Fair Value of Options Granted |
| $ | 0.65 |
| $ | 0.41 |
During the three and six months ended DecemberMarch 31, 20172023 and 2016,2022, the Company used historical volatility of our common stock over a period equal to the expected life of the options to estimate their fair value. The dividend yield assumption is based on the Company’s recent history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.
The expected term of the options represents the estimated period of time until exercise and is based on the simplified method. To value options granted for actual share-based compensation, the Company used the Black-Scholes option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments.
The following table summarizes the stock options outstanding and exercisable at DecemberMarch 31, 2017: 2023:
Weighted Average | |||||||||
Remaining | Aggregate | ||||||||
Number of | Exercise Price | Contractual Term | Intrinsic | ||||||
Shares | Per Share | (years) | Value | ||||||
Outstanding at September 30, 2022 | 14,263,470 | $ | 5.00 | ||||||
Granted | 2,736,775 | $ | 11.38 | ||||||
Exercised | (148,125) | $ | 2.27 | ||||||
Forfeited and expired | (799,231) | $ | 11.73 | ||||||
Outstanding at March 31, 2023 | 16,052,889 | $ | 5.78 | 7.05 | $ | 28,260 | |||
Exercisable at March 31, 2023 | 9,652,972 | $ | 2.96 | 5.89 | $ | 28,260 | |||
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| Weighted Average |
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| |||
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|
| Remaining |
| Aggregate | |
| Number of |
| Exercise Price |
| Contractual Term |
| Intrinsic | ||
| Shares |
| Per Share |
| (years) |
| Value | ||
Outstanding at September 30, 2017 | 2,830,805 |
| $ | 1.27 |
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|
|
Granted | 1,183,051 |
|
| 1.15 |
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|
|
Exercised | — |
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| — |
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|
|
Forfeited | — |
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| — |
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|
|
Outstanding at December 31, 2017 | 4,013,856 |
| $ | 1.24 |
| 9.46 |
| $ | 76,680 |
Exercisable at December 31, 2017 | 288,750 |
| $ | 1.90 |
| 6.50 |
| $ | 36,100 |
The aggregate intrinsic valuevalues in the table above isare before income taxes based onand represent the number of in-the-money options outstanding or exercisable multiplied by the closing price per share of the Company’s closingcommon stock price of $1.14 on the last trading day of business for the threequarter ended March 31, 2023 of $1.16, less the respective weighted average exercise price per share at period end.
The total intrinsic value of options exercised during the six months ended DecemberMarch 31, 2017. 2023 and 2022 was approximately $486,000 and $489,000, respectively. Cash received from options exercised during the six months ended March 31, 2023 and 2022 was approximately $337,000 and $257,000, respectively.
As of DecemberMarch 31, 2017,2023, the Company had unrecognized compensation expense of approximately $2.0$38.7 million related to unvested stock options. This expense is expected to be recognized over approximately 3a weighted average period of 2.0 years.
Restricted Stock Appreciation Rights
The Company has issued restricted stock to employees, directors and consultants. Such issuances may have vesting periods that range from one to three years. All such shares of restricted stock vest and all such shares must be issued pursuant to the vesting period noted, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting date.
18
A summary of the non-vested stock activity for the three months ended December 31, 2017 is presented in the table below:
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|
| Weighted Average |
|
| |
|
|
| Grant Date |
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| |
| Shares |
| Fair Value |
| Vesting Period | |
Outstanding at September 30, 2017 | 198,750 |
| $ | 0.99 |
|
|
Granted | — |
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|
Vested | (190,000) |
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|
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|
|
Forfeited | — |
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|
|
Outstanding at December 31, 2017 | 8,750 |
| $ | 1.82 |
| April 2018 |
As of December 31, 2017, there was approximately $4,000 of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over the next 0.3 years.
Restricted Stock Units
In connection with the closing of the APP Acquisition, the Company issued 50,000 and 140,000 restricted stock units to an employee and an outside director, respectively, that vestour acquisition of Aspen Park Pharmaceuticals, Inc. on October 31, 2018. The restricted stock units will be settled in common stock issued under the 2017 Equity Incentive Plan. As of December 31, 2017, there was approximately $100,000 of unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over the next 0.8 years.
Stock Appreciation Rights
In connection with the closing of the APP Acquisition,2016 (the “APP Acquisition”), the Company issued stock appreciation rights based on 50,000 and 140,000 shares of the Company’s common stock to an employee and an outside director, respectively, that vestvested on October 31, 2018. The stock appreciation rights have a ten-year term and an exercise price per share of $0.95, which was the closing price of aper share of the Company’s common stock as quoted on NASDAQNasdaq on the trading day immediately preceding the date of the completion of the APP Acquisition. TheUpon exercise, the stock appreciation rights will be settled in common stock issued under the 2017 Equity Incentive Plan. As of DecemberMarch 31, 2017, there was approximately $54,000 of unrecognized compensation cost related to non-vested2023, vested stock appreciation rights based on 50,000 shares of common stock remain outstanding.
Note 11 – Leases
The Company has operating leases for its office, manufacturing and warehouse space, and office equipment. The Company’s leases have remaining lease terms of less than one year to seven years, which include the option to extend a lease when the Company is expectedreasonably certain to beexercise that option. Certain of our lease agreements include variable lease payments for common area maintenance, real estate taxes, and insurance or based on usage for certain equipment leases. For one of our office space leases, the Company entered into a sublease, for which it receives sublease income. Sublease income is recognized overas a reduction to operating lease costs as the next 0.8 years.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. The Company does not have any leases that have not yet commenced as of March 31, 2023.
The Company leases approximately 6,400 square feet of office space located in London, England. The lease was effective in August 2020 with a five year term and a tenant’s option to cancel after three years with no penalty to the Company. At the time the lease commenced, it was reasonably certain that the Company would exercise that option. The option to exercise required 6 months of notice on February 28, 2023. At that time, the Company determined that it would not exercise the option to cancel and recorded an adjustment of $265,000 to its lease liabilities and right-of-use asset to reflect the additional lease term.
The components of the Company’s lease cost were as follows for the three and six months ended March 31, 2023 and 2022:
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Finance lease cost: | |||||||||||
Amortization of right-of-use assets | $ | — | $ | 1,453 | $ | — | $ | 3,631 | |||
Interest on lease liabilities | — | 147 | — | 403 | |||||||
Operating lease cost | 279,450 | 182,845 | 560,901 | 313,955 | |||||||
Short-term lease cost | 10,999 | 12,934 | 21,100 | 25,705 | |||||||
Variable lease cost | 52,552 | 46,737 | 102,643 | 92,756 | |||||||
Sublease income | (44,845) | (44,845) | (89,689) | (89,689) | |||||||
Total lease cost | $ | 298,156 | $ | 199,271 | $ | 594,955 | $ | 346,761 | |||
19
Note 9 - Industry Segments and Financial Information about Foreign and Domestic Operations
The Company currently operatespaid cash of $482,000 and $293,000 for amounts included in two reporting segments: Commercialthe measurement of operating lease liabilities during the six months ended March 31, 2023 and Research2022, respectively.
The Company’s operating lease right-of-use assets and Development. Therethe related lease liabilities are no significant inter-segment sales. We evaluatepresented as separate line items on the performanceaccompanying unaudited condensed consolidated balance sheets as of each segmentMarch 31, 2023 and September 30, 2022.
Other information related to the Company’s leases as of March 31, 2023 and September 30, 2022 was as follows:
March 31, | September 30, | ||
2023 | 2022 | ||
Operating Leases | |||
Weighted-average remaining lease term | 6.2 | 6.8 | |
Weighted-average discount rate | 7.8% | 7.6% |
The Company’s lease agreements do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes. Our chief operating decision-maker (CODM) is Mitchell Steiner, M.D., our President and Chief Executive Officer.
Information about the Company's operations by segment and geographic area is as follows (in thousands):
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|
|
|
| For the three months ended December 31, | ||||
| 2017 |
| 2016 | ||
Operating (loss) income: | (In thousands) | ||||
Commercial | $ | 143 |
| $ | 948 |
Research and Development |
| (2,032) |
|
| (159) |
Corporate |
| (5,548) |
|
| (2,664) |
| $ | (7,437) |
| $ | (1,875) |
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|
|
Revenues: |
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|
|
|
|
United States | $ | 994 |
| $ | 358 |
South Africa |
| 318 |
|
| 636 |
Zimbabwe |
| 300 |
|
| 516 |
Peru |
| 282 |
|
| — |
Cameroon |
| — |
|
| 891 |
Other |
| 693 |
|
| 843 |
| $ | 2,587 |
| $ | 3,244 |
All of our revenues are attributedinformation available at lease commencement in order to our Commercial reporting segment. Amounts relateddiscount lease payments to long-lived assets, depreciation and amortization, and income taxes are not reported as part of the reporting segments or reviewed by the CODM. These amounts are included in Corporate in the reconciliations above.present value.
Note 10 -12 – Contingent Liabilities
The testing, manufacturing and marketing of consumer products by the Company and the clinical testing of our product candidates entail an inherent risk that product liability claims will be asserted against the Company. The Company maintains product liability insurance coverage for claims arising from the use of its products. The coverage amount is currently $10$30.0 million.
LitigationLegal Proceedings
In connection with the APP Acquisition, two purported derivative andOn December 5, 2022, a putative class action lawsuits werecomplaint was filed againstin federal district court for the Company in the Circuit CourtSouthern District of Cook County, Illinois, which were captioned GlotzerFlorida (Ewing v. The Female Health Company,Veru Inc., et al., Case No. 2016-CH-13815,1:22-cv-23960) against the Company and Schartz v. Parrish, et al., Case No. 2016-CH-14488. On Januarycertain of its current officers and directors (the "Ewing Complaint"). The Ewing Complaint alleges that certain public statements about sabizabulin as a treatment for COVID-19 between May 11, 2022 and November 9, 2017 these two lawsuits were consolidated. On March 31, 2017, the plaintiffs filed a consolidated complaint. The consolidated complaint named as defendants Veru, the members of our board of directors prior to the closing2022 violated Sections 10(b) and 20(a) of the APP AcquisitionSecurities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company believes that the members of our board of directors after the closing of the APP Acquisition. The consolidated complaint alleges, among other things, that our directors breached their fiduciary duties, or aided and abetted such breaches, by consummating the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements and by causing us to issue the shares of our common stock and Series 4 Preferred Stock to the former stockholders of APP pursuant to the APP Acquisition in order to evade the voting requirements of the Wisconsin Business Corporation Law. The consolidated complaint also alleges that Mitchell S. Steiner, a director and the President and Chief Executive Officer of Veru and a co-founder of APP, and Harry Fisch, a director of Veru and a co-founder of APP, were unjustly enriched in receiving shares of our common stock and Series 4 Preferred Stockallegations asserted in the APP Acquisition. Based on these allegations, the consolidated complaint seeks equitable relief, including rescission of the APP Acquisition, money damages, disgorgement of the shares of our common stock and Series 4 Preferred Stock issued to Dr. Steiner and Dr. Fisch, and costs and expenses of the litigation, including attorneys' fees. On May 5, 2017, the defendants filed a motion to dismiss the consolidated
20
complaint. On August 15, 2017, the court entered an order dismissing without prejudice the claims that the post-acquisition directors aided and abetted the alleged breaches of fiduciary duties by the pre-acquisition directors and that Dr. Steiner and Dr. Fisch were unjustly enriched. The court did not dismiss the claims that the pre-acquisition directors breached their fiduciary duties and the claims that Veru consummated the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements, and the action is continuing as to those claims. Veru believes that this action isEwing Complaint are without merit, and the Company intends to vigorously defend the lawsuit. There can be no assurance that the Company will be successful. At this time, the Company is vigorously defending itself. No amount has been accrued for possibleunable to estimate potential losses, relatingif any, related to this litigation as any such losses are not both probable and reasonably estimable.the lawsuit.
License and Purchase Agreements
From time to time, we license or purchase rights to technology or intellectual property from third parties. These licenses and purchase agreements require us to pay upfront payments as well as development or other payments upon successful completion of preclinical, clinical, regulatory or revenue milestones. In addition, these agreements may require us to pay royalties on sales of products arising from the licensed or acquired technology or intellectual property. Because the achievement of thesefuture milestones is not reasonably estimable, we have not recorded a liability inon the accompanying unaudited condensed consolidated financial statements for any of these contingencies.
In connectionCollaborative Arrangements
On January 31, 2022, the Company entered into a Clinical Trial Collaboration and Supply Agreement (the “Lilly Agreement”) with Eli Lilly and Company (“Lilly”). Under the Company's acquisition ofLilly Agreement, the Company is sponsoring a clinical trial in which both the Company’s enobosarm compound and Lilly’s compound are being dosed in combination. The Company is conducting the research at its own cost and Lilly is contributing its compound towards the study at no cost to the Company. The parties will continue to hold exclusive rights to all intellectual property relating solely to their own respective compounds. The Company will provide to Lilly copies of clinical data relating to the clinical trial and certain rights associated with Solifenacin DRGto use the clinical data. Veru maintains full exclusive, global commercialization rights to the enobosarm compound.
The terms of the Lilly Agreement meet the criteria under ASC Topic 808, Collaborative Arrangements (“ASC 808”), as both parties are active participants in the activity and Tadalafil/Finasteride combination capsules in December 2017,are exposed to the risks and rewards dependent on the commercial success of the activity. ASC 808 does not provide guidance on how to account for the activities under the collaboration, and the Company willdetermined that Lilly did not meet the definition of a customer under ASC 606, Revenue from Contracts with Customers. The Company has concluded that ASC 730, Research and Development, should be obligated to make upfront payments totaling $500,000applied by March 2018,analogy. There is no financial statement impact for the Lilly Agreement as well as future installment paymentsthe value of the drug supply received from Lilly is offset against the drug supply cost within research and milestone payments. The $500,000 is included in accrued expenses on the accompanying condensed consolidated balance sheet as of December 31, 2017.development expense.
Note 11 -13 – Income Taxes
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of its assets and liabilities, and for net operating loss (NOL) and tax credit carryforwards.
On December 22, 2017, significant changes were enacted to the U.S. tax law pursuant to H.R.1. “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income, deductions, credits and business-related exclusions.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), directing registrants to consider the impact of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.
In accordance with SAB 118, the Company’s income tax provision as of December 31, 2017 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discreet items resulting directly from the enactment of the Tax Act based on the information available, prepared or analyzed (including computations) in reasonable detail.
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21
The Tax Act imposes a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. The one-time transition tax is based on total post-1986 foreign earnings and profits (“E&P”) which a tax payer has previously deferred from U.S. income taxes. The Company has no post-1986 foreign E&P which it has previously deferred.
Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretations, and rule-making from the Internal Revenue Service, the SEC, the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that state jurisdictions will continue to determine and announce their conformity to the Tax Act which would have an impact on the annual effective tax rate.
The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to our attention that would indicate that a revision to our estimates is necessary. In evaluating the Company’s ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country-by-country basis, including past operating results, forecast of future taxable income, and the potential Section 382 limitation on the net operating loss carryforwards due to a change in control. In determining future taxable income, management makes assumptions to forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the forecasts of the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Company’s business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis. From fiscal year 2006 through fiscal year 2016, the Company has annually generated taxable income on a consolidated basis. In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for each tax jurisdiction.
As of December 31, 2017,September 30, 2022, the Company had U.S. federal and state net operating lossNOL carryforwards of approximately $12,100,000$112.5 million and $15,351,000,$50.9 million, respectively, for income tax purposes with $29.7 million and $28.4 million, respectively, expiring in years 2023 to 2042 and $82.8 million and $22.5 million, respectively, which can be carried forward indefinitely. As of September 30, 2022, the Company also had U.S. federal research and development tax credit carryforwards of $8.5 million, expiring in years 2038to 2037.2042. The Company’s U.K. subsidiary has U.K. net operating lossNOL carryforwards of approximately $62,223,000$63.1 million as of December 31, 2017,September 30, 2022, which can be carried forward indefinitely to be used to offset future U.K. taxable income.
The Tax Cuts and Jobs Act of 2017, which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 of the Internal Revenue Code (“Section 174”) effective for the Company October 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years, for U.S.-based research, and over 15 years, for foreign-based research. As of March 31, 2023, we recorded a decrease to income tax benefit and an increase to deferred tax assets, before applying a valuation allowance, of approximately $8.2 million as a result of the amended provision under Section 174. Because the Company has a full valuation allowance recorded against U.S. deferred tax assets, the net impact to income tax benefit and deferred tax assets from the amended provision under Section 174 is zero.
A reconciliation of income tax (benefit) expense and the amount computed by applying the U.S. statutory federal income tax rate of 21% to incomeloss before income taxes is as follows:
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| Three Months Ended | ||||
| December 31, | ||||
| 2017 |
| 2016 | ||
Income tax benefit at statutory rates | $ | (2,551,000) |
| $ | (645,000) |
Effect of change in U.S. tax rate |
| (187,000) |
|
| — |
State income tax benefit, net of federal benefits |
| (563,000) |
|
| (96,000) |
Non-deductible business acquisition expenses |
| — |
|
| 111,000 |
Non-deductible expenses - other |
| 4,000 |
|
| 1,000 |
Effect of lower foreign income tax rates |
| 29,405 |
|
| 81,736 |
Other |
| 21,542 |
|
| 17,195 |
Income tax benefit | $ | (3,246,053) |
| $ | (530,069) |
Three Months Ended | Six Months Ended | ||||||||||
March 31, | March 31, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Income tax benefit at U.S. federal statutory rates | $ | (8,160,487) | $ | (2,983,109) | $ | (15,911,684) | $ | (4,298,833) | |||
State income tax benefit, net of federal benefit | (631,855) | (230,978) | (1,232,019) | (332,853) | |||||||
Non-deductible expenses | 334,113 | 102,733 | 447,569 | 359,929 | |||||||
Effect of stock options exercised | (19,887) | — | 63,849 | (23,350) | |||||||
U.S. research and development tax credit | (1,330,000) | (913,000) | (2,420,000) | (2,876,430) | |||||||
Effect of foreign income tax rates | (19,026) | (9,677) | (99,136) | (39,438) | |||||||
Effect of global intangible low taxed income | — | (75,278) | — | 12,989 | |||||||
Change in valuation allowance | 9,767,083 | 4,043,065 | 19,023,202 | 7,132,661 | |||||||
Other, net | (6,500) | 38,794 | (6,618) | 152,530 | |||||||
Income tax (benefit) expense | $ | (66,559) | $ | (27,450) | $ | (134,837) | $ | 87,205 | |||
Significant components of the Company’s deferred tax assets and liabilities are as follows:
March 31, | September 30, | ||||
2023 | 2022 | ||||
Deferred tax assets: | |||||
Federal net operating loss carryforwards | $ | 28,569,803 | $ | 23,627,461 | |
State net operating loss carryforwards | 3,233,713 | 2,850,956 | |||
Foreign net operating loss carryforwards – U.K. | 16,003,790 | 15,773,497 | |||
Foreign capital allowance – U.K. | 128,490 | 128,490 | |||
U.S. research and development tax credit carryforwards | 10,901,789 | 8,481,789 | |||
U.S. research and development expense | 8,228,433 | — | |||
Accrued compensation | 622,992 | 1,227,290 | |||
Share-based compensation | 5,981,261 | 4,325,354 | |||
Interest expense | 2,463,631 | 2,206,484 | |||
Change in fair value of derivative liabilities | 100,687 | 220,607 | |||
Other, net – U.K. | 265,631 | 265,631 | |||
Other, net – Malaysia | 4,979 | — | |||
Other, net – U.S. | 970,352 | 81,507 | |||
Gross deferred tax assets | 77,475,551 | 59,189,066 | |||
Valuation allowance for deferred tax assets | (64,395,654) | (45,372,452) | |||
Net deferred tax assets | 13,079,897 | 13,816,614 | |||
Deferred tax liabilities: | |||||
In-process research and development | — | (882,427) | |||
Covenant not-to-compete | (9,428) | (17,508) | |||
Other, net - Malaysia | — | (17,641) | |||
Other, net – U.S. | — | (14,120) | |||
Net deferred tax liabilities | (9,428) | (931,696) | |||
Net deferred tax asset | $ | 13,070,469 | $ | 12,884,918 | |
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| December 31, |
| September 30, | ||
Deferred tax assets: | 2017 |
| 2017 | ||
Federal net operating loss carryforwards | $ | 4,063,000 |
| $ | 4,075,000 |
State net operating loss carryforwards |
| 1,703,000 |
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| 963,000 |
AMT credit carryforward |
| 533,000 |
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| 533,000 |
Foreign net operating loss carryforwards – U.K. |
| 10,578,000 |
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| 10,578,000 |
Foreign capital allowance – U.K. |
| 108,000 |
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| 108,000 |
UK bad debts |
| 2,000 |
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| 2,000 |
Restricted stock – U.K. |
| 1,000 |
|
| 1,000 |
US unearned revenue |
| 282,000 |
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| 409,000 |
US deferred rent |
| 20,000 |
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| 76,000 |
Share-based compensation |
| 335,000 |
|
| 447,000 |
Foreign tax credits |
| 1,820,000 |
|
| 1,797,000 |
Other, net - U.S. |
| 71,000 |
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| 82,000 |
Gross deferred tax assets |
| 19,516,000 |
|
| 19,071,000 |
Valuation allowance for deferred tax assets |
| (2,144,000) |
|
| (2,144,000) |
Net deferred tax assets |
| 17,372,000 |
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| 16,927,000 |
Deferred tax liabilities: |
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In process research and development |
| (4,562,000) |
|
| (7,000,000) |
Developed technology |
| (575,000) |
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| (900,000) |
Covenant not-to-compete |
| (106,000) |
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| (200,000) |
Other |
| (5,000) |
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Net deferred tax liabilities |
| (5,248,000) |
|
| (8,100,000) |
Net deferred tax asset | $ | 12,124,000 |
| $ | 8,827,000 |
The deferred tax amounts have been classified inon the accompanying unaudited condensed consolidated balance sheets as follows:
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| December 31, |
| September 30, | ||
| 2017 |
| 2017 | ||
Long-term deferred tax asset - U.S. | $ | 3,579,000 |
| $ | 282,000 |
Long-term deferred tax asset - U.K. |
| 8,545,000 |
|
| 8,545,000 |
Total long-term deferred tax asset | $ | 12,124,000 |
| $ | 8,827,000 |
March 31, | September 30, | ||||
2023 | 2022 | ||||
Deferred tax asset – U.K. | $ | 13,065,490 | $ | 12,965,985 | |
Deferred tax asset – Malaysia | 4,979 | — | |||
Total deferred tax asset | $ | 13,070,469 | $ | 12,965,985 | |
Deferred tax liability – U.S. | $ | — | $ | (63,426) | |
Deferred tax liability – Malaysia | — | (17,641) | |||
Total deferred tax liability | $ | — | $ | (81,067) | |
Note 14 – Net Loss Per Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net income by the weighted average number of common shares outstanding during the period after giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and stock appreciation rights. Due to our net loss for the periods presented, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. See Note 10 for a discussion of our potentially dilutive common shares.
Note 12 - Intangible Assets
Intangible assets acquired in the APP Acquisition included IPR&D, developed technology consisting of PREBOOST® medicated wipes for prevention of premature ejaculation and covenants not-to-compete.
The gross carrying amounts and net book value of intangible assets are as follows at December 31, 2017:
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| Gross Carrying |
| Accumulated |
| Net Book | |||
| Amount |
| Amortization |
| Value | |||
Intangible assets with finite lives: |
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Developed technology - PREBOOST® | $ | 2,400,000 |
| $ | 132,492 |
| $ | 2,267,508 |
Covenants not-to-compete |
| 500,000 |
|
| 83,333 |
|
| 416,667 |
Total intangible assets with finite lives |
| 2,900,000 |
|
| 215,825 |
|
| 2,684,175 |
Acquired in-process research and development assets |
| 18,000,000 |
|
| — |
|
| 18,000,000 |
Total intangible assets | $ | 20,900,000 |
| $ | 215,825 |
| $ | 20,684,175 |
The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2017:
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| Gross Carrying |
| Accumulated |
| Net Book | |||
| Amount |
| Amortization |
| Value | |||
Intangible assets with finite lives: |
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Developed technology - PREBOOST® | $ | 2,400,000 |
| $ | 81,533 |
| $ | 2,318,467 |
Covenants not-to-compete |
| 500,000 |
|
| 65,476 |
|
| 434,524 |
Total intangible assets with finite lives |
| 2,900,000 |
|
| 147,009 |
|
| 2,752,991 |
Acquired in-process research and development assets |
| 18,000,000 |
|
| — |
|
| 18,000,000 |
Total intangible assets | $ | 20,900,000 |
| $ | 147,009 |
| $ | 20,752,991 |
Intangible assets are carried at cost less accumulated amortization. Amortization is recorded over the projected related revenue stream for the PREBOOST® developed technology over the next 10 years and 7 years for the covenants not-to-compete, and the amortization expense is recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations. The IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval, the IPR&D assets will then be accounted for as finite-lived intangible assets and amortized on a straight-line basis over their respective estimated useful lives.
Amortization expense was $68,816 and $26,729 for the three months ended December 31, 2017 and 2016, respectively. Based on finite-lived intangible assets recorded as of December 31, 2017, the estimated future amortization expense is as follows:
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| Estimated | |
Year Ending September 30, | Amortization Expense | |
2018 | $ | 206,446 |
2019 |
| 309,234 |
2020 |
| 316,368 |
2021 |
| 323,706 |
2022 |
| 331,316 |
Thereafter |
| 1,197,105 |
Total | $ | 2,684,175 |
Note 13 -15 – Subsequent Events
WeFrost Gamma Investments Trust Stock Purchase Agreement
On April 12, 2023, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Frost Gamma Investments Trust (FGI), pursuant to which, on the date thereof, the Company issued and sold 5,000,000 shares of the Company’s common stock to FGI at a price of $1.00 per share, for a total investment of $5,000,000. The shares of common stock issued to FGI pursuant to the Stock Purchase Agreement were not registered under the Securities Act. The Company is obligated to file a registration statement under the Securities Act within 45 days after the date of the Stock Purchase Agreement to register the resale of the shares of common stock issued to FGI.
Sale of ENTADFI
On April 19, 2023, the Company entered into an asset purchase agreement to sell substantially all of the assets related to ENTADFI® (finasteride and tadalafil) capsules for oral use, a new treatment for benign prostatic hyperplasia that was approved by the FDA in December 2021, with Blue Water Vaccines Inc. (“BWV”). The transaction closed on April 19, 2023. The purchase price for the transaction was $20.0 million, consisting of $6.0 million paid at closing, $4.0 million payable by September 30, 2023, $5.0 million payable 12 months after closing, and $5.0 million payable by September 30, 2024, plus up to $80.0 million based on BWV’s net revenues from ENTADFI after closing (the “Milestone Payments”). The Company believes that the probability of receiving any Milestone Payments is remote. The Company will determine the gain on sale of ENTADFI based on the purchase price of $20.0 million. The Company expects to record a gain of approximately $17.7 million on the transaction.
Lincoln Park Capital Fund LLC Purchase Agreement
On May 2, 2023, the Company entered into a purchase agreement (the “Lincoln Park Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), which provides that the Company may sell to Lincoln Park up to $100,000,000 of shares (the “Purchase Shares”) of the Company’s common stock over the 36 month term of the Lincoln Park Purchase Agreement.
Under the Lincoln Park Purchase Agreement, the Company has the right, but not the obligation, on any business day selected by the Company (the “Purchase Date”), provided that on such day the closing sale price per share of the Company’s common stock is above the Floor Price, as defined in the Lincoln Park Purchase Agreement, to require Lincoln Park to purchase up to 225,000 shares of the Company’s common stock (the “Regular Purchase Amount”) at the Purchase Price (as defined below) per purchase notice (each such purchase, a “Regular Purchase”) provided, however, that (1) the limit on the Regular Purchase Amount will be increased to 250,000 shares, if the closing sale price of the Company’s common stock on the applicable Purchase Date is not below $6.00 and to 275,000 shares, if the closing sale price of the Company’s common stock on the applicable Purchase Date is not below $8.00. Lincoln Park’s committed obligation under each Regular Purchase shall not exceed $2,500,000 or 2,000,000 Purchase Shares per each Regular Purchase. The purchase price for Regular Purchases (the “Purchase Price”) shall be equal to the lesser of: (i) the lowest sale price of the Company’s common stock during the Purchase Date, or (ii) the average of the three lowest closing sale prices of the Company’s common stock on the 10 consecutive business days ending on the business day immediately preceding such Purchase Date. The Company shall have evaluated eventsthe right to submit a Regular Purchase notice to Lincoln Park as often as every business day. A Regular Purchase notice is delivered to Lincoln Park after the market has closed (i.e., after 4:00 P.M. Eastern Time) so that the Purchase Price is always fixed and known at the time the Company elects to sell shares to Lincoln Park.
In addition to Regular Purchases and provided that the Company has directed a Regular Purchase in full, the Company in its sole discretion may require Lincoln Park on each Purchase Date to purchase on the following business day (“Accelerated Purchase Date”) up to the lesser of (i) three (3) times the number of shares purchased pursuant to such Regular Purchase or (ii) 30% of the trading volume on the Accelerated Purchase Date (the “Accelerated Purchase”) at a purchase price equal to the lesser of 97% of (i) the closing sale price on the Accelerated Purchase Date, or (ii) the Accelerated Purchase Date’s volume weighted average price (the “Accelerated Purchase Price”).
The Company may also direct Lincoln Park, on any business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder have been properly delivered to Lincoln Park in accordance with the Lincoln Park Purchase Agreement, to make additional purchases upon the same terms as an Accelerated Purchase (an “Additional Accelerated Purchase”).
The purchase price of Regular Purchases, Accelerated Purchases and Additional Accelerated Purchases and the minimum closing sale price for a Regular Purchase will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction occurring during the business days used to compute the purchase price. The aggregate number of shares that the Company can sell to Lincoln Park under the Lincoln Park Purchase Agreement may in no case exceed 17,678,502 shares (subject to adjustment as described above) of the Company’s common stock (which is equal to approximately 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the Lincoln Park Purchase Agreement) (the “Exchange Cap”), unless (i) shareholder approval is obtained to issue Purchase Shares above the Exchange Cap, in which case the Exchange Cap will no longer apply, or (ii) the average price of all applicable sales of the Company’s common stock to Lincoln Park under the Lincoln Park Purchase Agreement equals or exceeds $1.26 per share (subject to adjustment as described above) (which represents the Minimum Price, as defined under Nasdaq Listing Rule 5635(d), on the Nasdaq Capital Market immediately preceding the signing of the Lincoln Park Purchase Agreement, such that the transactions that occurred subsequentcontemplated by the Lincoln Park Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules).
The Lincoln Park Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty, by giving one business day notice to December 31, 2017 throughLincoln Park to terminate the Lincoln Park Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s common stock. On the date the financial statements wereCompany executed the Lincoln Park Purchase Agreement, we also issued 800,000 shares of the Company’s common stock to Lincoln Park as an initial fee for potential recognition or disclosure inits commitment to purchase shares of the accompanying unaudited condensed consolidated financial statements. We did not identify any events or transactions that should be recognized or disclosed inCompany’s common stock under the accompanying unaudited condensed consolidated financial statements.Lincoln Park Purchase Agreement, and we are obligated to issue $1,000,000 of shares of the Company’s common stock at the time Lincoln Park’s purchases cumulatively reach an aggregate amount of $50,000,000 of Purchase Shares (together the “Commitment Shares”).
The issuance of the Purchase Shares and Commitment Shares have been registered pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-270606).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Veru Inc. is a late clinical stage biopharmaceutical company focused on urologydeveloping novel medicines for the treatment of breast cancer and oncology.for SARS-Cov-2 and other viral acute respiratory distress syndrome (ARDS)-related diseases. Our drug development program includes enobosarm, a selective androgen receptor agonist, for the management of advanced breast cancer, and sabizabulin, a microtubule disruptor, for the treatment of hospitalized COVID-19 patients at high risk for ARDS and other viral-related ARDS. The Company does business as both "Veru" and "The Female Health Company." On July 31, 2017, the Company changed its corporate name from The Female Health Company to Veru Inc.
Veru utilizes the U.S. Food and Drug Administration's (the FDA) 505(b)(2) regulatory approval pathway to develop and commercialize drug candidates. The FDA's 505(b)(2) regulatory approval pathway is designed to allow for potentially expedited, lower cost and lower risk regulatory approval based on previously established safety, efficacy, and manufacturing information on a drug thatalso has been already approved by the FDA for the same or a different indication. Veru is developing drug candidates under the 505(b)(1) pathway as well, which is the traditional full new drug application (NDA) pathway that requires a complete preclinical, clinical, and manufacturing application. The Company is currently developing the following drugan FDA-approved commercial product, candidates: Tamsulosin DRS slow release granules and Tamsulosin XR capsules for lower urinary tract symptoms of benign prostatic hyperplasia (BPH or enlarged prostate), Solifenacin DRG, slow release granules, for overactive bladder (urge incontinence, urgency, or frequency of urination), Tadalafil/finasteride combination capsule for restricted urination because of an enlarged prostate; VERU-944 (cis-clomiphene citrate) for hot flashes in men associated with prostate cancer hormone treatment, VERU-722 (fixed ratio clomiphene citrate) for male infertility and VERU-111 a novel oral anti-tubulin cancer therapy targeting alpha & beta tubulin for a variety of malignancies, including metastatic prostate, breast, endometrial and ovarian cancers.
To help support these clinical development programs, the Company markets and sells the PREBOOST® medicated individual wipe, which is a male genital desensitizing drug product for the prevention of premature ejaculation and is being co-promoted with Timm Medical Technologies, Inc., and also markets and sells the FC2 Female Condom® (Internal Condom) (FC2), for the dual protection against unplanned pregnancy and sexually transmitted infections.
On March 14, 2023, at the Oppenheimer 33rd Annual Healthcare Conference, the Company presented its updated strategy as part of the Company’s ongoing effort to (i) refocus its drug development efforts on those drug candidates which it believes have the best opportunity to lead to long-term success and shareholder value creation and (ii) conserve cash, including a reduction in personnel and certain other measures to reduce costs. The presentation included a description of the Company’s refocused research and development strategy which includes the following: (i) plans for an amended ongoing Phase 2b/3 study of enobosarm and abemaciclib combination in the US marketsecond line metastatic setting for AR+ ER+ HER2- metastatic breast cancer patients, with the Company’s clinical trial collaboration partner, Eli Lilly & Company, supplying abemaciclib, (ii) a planned Phase 3 study of enobosarm in bone-only non-measurable metastatic ER+ HER2- breast cancer, and (iii) plans for continued development of sabizabulin in a Phase 3 COVID-19 confirmatory study in hospitalized moderate to severe COVID-19 patients at high risk for ARDS, with future planned development of sabizabulin in a Phase 3 clinical study in hospitalized influenza patients at high risk for ARDS. In addition, the Company announced that Veru is reserving sabizabulin for clinical development only in infectious disease indications, and accordingly, has terminated the Phase 3 VERACITY trial of sabizabulin in certain prostate cancer patients. Further, Phase 2 development of the VERU-100 asset will be paused with efforts to find a potential suitable development partner for VERU-100 to share the costs of such future development. The zuclomiphene development program has been stopped.
Oncology Program:
The Company’s oncology drug pipeline has two clinical development programs for enobosarm, oral selective androgen receptor agonist, for the treatment of metastatic breast cancer.
Enobosarm is the first new class of endocrine therapy in advanced breast cancer in decades. Enobosarm is an oral, first-in-class, new chemical entity, selective androgen receptor agonist that activates the androgen receptor (AR) in AR+ ER+ HER2- metastatic breast cancer, which results in tumor suppressor activity without the unwanted masculinizing side effects and changes in hematocrit. Enobosarm has extensive nonclinical and clinical experience having been evaluated in 25 separate clinical studies in approximately 1,450 subjects dosed, 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 blocking agents, chemotherapy, and/or CDK 4/6 inhibitors and was well tolerated with a favorable safety profile.
In preclinical studies, metastatic breast cancer tissue samples taken from patients who have metastatic breast cancer that had become resistant to CDK4/6 inhibitors and estrogen blocking agents were grown in mice. In these mice, treatment with enobosarm in combination with a CDK 4/6 inhibitor suppressed the growth of human metastatic breast cancer greater than either drug alone. Interestingly, CDK 4/6 inhibitor treatment caused the metastatic breast cancer tissue to make higher amounts of AR which may explain the synergy of combining a CDK 4/6 inhibitor with enobosarm, a selective AR agonist.
Phase 2b/3 clinical ENABLAR-2 study – Enobosarm + abemaciclib combination as a 2nd line treatment in AR+ ER+ HER2- metastatic breast cancer. On March 30, 2023, the Company met with the FDA to gain further agreement on Phase 2b/3 clinical trial design and program. The Phase 2b/3 study has been amended to accommodate the FDA’s latest recommendations to support registration. In the first stage, the dose of enobosarm in the abemaciclib combination is being optimized and safety of the combination therapy is being assessed in 3 arms of 40 patients each: abemaciclib + enobosarm 9mg combination therapy, abemaciclib + enobosarm 1mg combination therapy, and an estrogen blocking agent (control arm). In Stage 2 of the Phase 2b/3 study, we plan to enroll approximately 210 subjects in a multicenter, open label, randomized (1:1), active control clinical study, to evaluate the efficacy and safety of enobosarm plus abemaciclib combination therapy versus an alternative estrogen blocking agent (fulvestrant or an aromatase inhibitor) in subjects with AR+ ER+ HER2- metastatic breast cancer who have failed palbociclib (a CDK4/6 inhibitor) plus an estrogen blocking agent (non-steroidal aromatase inhibitor or fulvestrant). In January 2022, Veru entered into a clinical trial collaboration and supply agreement through which Eli Lilly and Company supplies abemaciclib for the ENABLAR-2 trial.
Planned Phase 2b/3 clinical study evaluating enobosarm monotherapy for the treatment of bone-only non-measurable ER+HER2- metastatic breast cancer. Bone is the most frequent site of breast cancer metastasis, with bone metastases noted in 60–80% of metastatic breast cancer patients. Patients with bone-only metastasis are a unique subpopulation of metastatic breast cancer representing up to 51% of patients with metastatic breast cancer. Although a significant number of patients, bone-only metastatic breast cancer patients have very limited therapeutic options. Enobosarm inhibits breast cancer growth and builds and heals bone by increasing both cortical and trabecular bone. Further, enobosarm increases muscle mass and improves physical function which may reduce skeletal related events. Accordingly, enobosarm could be a potential therapeutic option for women with bone-only non-measurable metastatic breast cancer. The Company is planning a clinical development program to evaluate enobosarm monotherapy in bone-only non-measurable metastatic breast cancer.
Infectious Disease Program:
Viral infections can trigger the immune system to release an overwhelming amount of inflammatory proteins known as a cytokine storm. The cytokine storm causes tissue damage in the lungs leading to Acute Respiratory Distress Syndrome (ARDS). Patients who develop ARDS have a high mortality rate. Viral induced ARDS remains a significant unmet medical need with limited treatment options. Common viral infections that cause ARDS include COVID-19, influenza, and respiratory syncytial virus (RSV). Other virus infections that may also lead to ARDS and death posing a global public health threat to society include smallpox and Ebola viruses. A single outbreak involving any one of these viruses would be an immediate global emergency with limited existing options available for treatment. Sabizabulin, as a host targeted antiviral and broad-spectrum anti-inflammatory agent, has the potential to address the virus infection and the inflammation caused by the cytokine storm that causes ARDS, multi-organ failure, and death.
COVID-19 virus: The Company is developing sabizabulin 9mg, which has both host targeted antiviral and broad anti-inflammatory properties, as a two-pronged approach to the treatment of hospitalized moderate to severe hospitalized COVID-19 patients at high risk for ARDS and death.
In the current endemic phase, COVID-19 infection is estimated to be the 4th leading cause of death in the United States. ARDS remains a frequent serious complication of severe COVID-19 infection. It has been reported that up to 33% of hospitalized patients with COVID-19 have ARDS, and 75% to 92% of patients admitted to the intensive care unit with COVID-19 have ARDS. The mortality rate of COVID-19 associated ARDS is 45%, and among patients who died from COVID-19, there is a 90% incidence of ARDS. As the COVID-19 endemic continues, there also is a need to remain vigilant and focused on preparedness for the next wave of infections involving new viral strains. COVID-19 will be a problem for the foreseeable future, and there is a need for effective therapies, especially for those hospitalized patients with moderate-to-severe COVID-19 infection at high risk for ARDS.
The Company has completed positive Phase 2 and positive Phase 3 COVID-19 clinical trials evaluating sabizabulin in hospitalized moderate to severe COVID-19 patients at high risk for ARDS and death. The Phase 3 clinical study was a double-blind, randomized, placebo-controlled study in 204 hospitalized moderate to severe COVID-19 patients at high risk for ARDS. The primary endpoint was the proportion of patients that died by Day 60. Based on a planned interim analysis of the first 150 patients randomized, the Independent Data Monitoring Committee unanimously recommended that the study be stopped for clear evidence of clinical efficacy and identified no safety concerns. In the interim analysis, treatment with sabizabulin 9 mg once daily resulted in a clinically meaningful and statistically significant 55.2% relative reduction in deaths compared to placebo.
On May 10, 2022, the Company had a pre-emergency use authorization (EUA) meeting with the FDA to discuss the submission of an EUA application for sabizabulin COVID-19 treatment. On June 7, 2022, the Company submitted a request for FDA emergency use authorization for sabizabulin in adult hospitalized moderate to severe COVID-19 patients at high risk for ARDS and death. On July 6, 2022, the Company announced the publication of the interim efficacy and full safety clinical results from the Phase 3 COVID-19 study of sabizabulin in The New England Journal of Medicine Evidence.
On February 28, 2023, the FDA notified the Company that it has declined to grant at this time the Company’s request for Emergency Use Authorization for sabizabulin to treat hospitalized moderate to severe COVID-19 patients who are at high risk for ARDS. In communicating its decision, the FDA stated that despite the FDA declining to issue an EUA for sabizabulin at this time, the FDA remains committed to working with the Company in the development of sabizabulin. Separately on February 16, 2023, the FDA also provided comments on a confirmatory Phase 3 study protocol submitted by the Company for hospitalized moderate to severe COVID-19 patients at risk for ARDS and death that could support a new EUA request to the FDA. In regard to study design, the FDA stated that strong consideration should be given to appropriate time frames for interim analyses so that, should a strong efficacy signal again be observed, the trial could be stopped in an efficient time frame.
On April 27, 2023, the Company met with the FDA and reached agreement on the design of the Phase 3 confirmatory COVID-19 clinical trial to evaluate sabizabulin treatment of hospitalized moderate to severe COVID-19 patients who are at high risk for ARDS and the path forward to submit a new EUA application and/or NDA. The FDA agreed to a confirmatory Phase 3, randomized (1:1), multicenter, global, efficacy and safety study of sabizabulin 9mg oral daily dose plus standard of care treatment versus placebo plus standard of care treatment in 408 hospitalized adult patients with moderate to severe SARS-CoV-2 infection who are at high risk for ARDS. The indication (patient population) for sabizabulin will be expanded to include all hospitalized moderate to severe COVID-19 patients: WHO-4 (passive, low flow oxygen), WHO-5 (forced, high flow oxygen), or WHO-6 (mechanical ventilation) without a requirement to have a comorbidity. The primary efficacy endpoint will be all-cause mortality at Day 60, secondary endpoints include days in the hospital, days in the ICU, days on mechanical ventilation, and proportion of patients alive without respiratory failure, and an exploratory endpoint will be the presence of long COVID-19 symptoms at Day 180. In order to get a potentially efficacious drug to patients in an efficient time frame, two planned interim efficacy analyses will be conducted: first planned interim analysis is expected to occur when 204 patients (50%) have completed the Day 60 primary efficacy endpoint, and the second planned interim analysis is expected to occur when 290 patients (71%) have completed the Day 60 primary efficacy endpoint. If either of the interim efficacy analyses meets the statistical significance criteria, the trial could be stopped for efficacy. Should the pre-specified primary efficacy endpoint analysis demonstrate a statistically significant effect on all-cause mortality favoring sabizabulin, the Company may consider a new request for an EUA or a submission of an NDA, as the Company would potentially have two adequate and well controlled trials for review. As the program has Fast Track designation, a rolling NDA submission is a possibility for sabizabulin. The Phase 3 confirmatory COVID-19 clinical trial is expected to begin enrollment in second half of 2023, and the first planned interim efficacy analysis is anticipated to be conducted in 2024.
On January 30, 2023, the White House Office of Management and Budget announced that the Biden administration plans to terminate the COVID-19 national and public health emergencies on May 11, 2023 (the “May 11 Termination”). The FDA’s authority to issue emergency use authorizations stems from a separate emergency declaration by the Secretary of the Department of Health and Human Services regarding medical countermeasures in the fight against COVID-19. This separate HHS emergency currently remains in effect. The FDA announced on January 31, 2023 that the May 11 Termination would not impact the FDA’s ability to authorize new treatments for emergency use, that existing EUAs would remain in effect and that it may continue to issue new EUAs when criteria for issuance are met.
The UK’s Medicine and Healthcare Products Regulatory Agency (MHRA) informed the Company on July 25, 2022, that the sabizabulin marketing authorization application will receive expedited review. On July 27, 2022, sabizabulin triggered Article 18 in the European Union (EU) in which the European Medicines Agency (EMA) will evaluate sabizabulin to allow emergency use drug access to the EU Member States. On August 22, 2022, Australia’s Therapeutic Goods Administration (TGA) determined that sabizabulin treatment in hospitalized COVID-19 patients at high risk for ARDS qualifies for an expedited, provisional registration regulatory pathway. Sabizabulin for COVID-19 has also been under regulatory review by the ACCESS Consortium made up of MHRA, TGA, and Swissmedic. At this time, the Company believes that it is most likely that all ex-US regulatory authorities, like the FDA, will require some level of additional data, including from the confirmatory Phase 3 study before granting emergency, conditional, and/or other authorization of sabizabulin for COVID-19.
Influenza virus: The Company plans to expand the clinical development of sabizabulin 9mg in a Phase 3 clinical study for the treatment of hospitalized influenza patients at high risk for ARDS and death.
On April 4, 2023, the Company announced results from a preclinical study of sabizabulin demonstrating robust anti-inflammatory activity with improved outcomes in an H1N1 Influenza-Induced Pulmonary Inflammation Mouse ARDS Model conducted by a team of researchers at Labcorp Early Development Laboratories, Ltd, United Kingdom. Sabizabulin treatment resulted in a statistically significant decrease in the total number of inflammatory cells and the reduction in key cytokines and chemokines in lung fluid. Clinically, sabizabulin treatment resulted in a reduction in the severity of lung inflammation by histopathology and a dose-dependent improvement of lung function. Oral administration of 2 mg/kg sabizabulin resulted in the reduction of the clinical signs and body weight loss associated with H1N1 infection. The Company expects to submit the full data set for presentation in future scientific meetings and peer-reviewed publications.
These preclinical data suggest that sabizabulin has the potential to be a treatment for hospitalized influenza patients at high risk for ARDS and death. Pathogenesis and mortality rates for hospitalized influenza patients who develop ARDS are similar to COVID-19-associated ARDS, representing a high unmet need with very limited treatment options. According to CDC, the influenza burden estimates in the United States were up to 630,000 hospitalizations and up to 55,000 deaths in the past 6 months. Accordingly, Veru is planning a double-blind randomized placebo-controlled Phase 3 clinical trial evaluating sabizabulin in hospitalized adult influenza patients at high risk for ARDS.
Smallpox and Ebola viruses: The Company is planning pre-IND meetings with FDA to discuss the development of sabizabulin for smallpox and Ebola viruses under the Animal Rules FDA regulatory approval pathway.
On April 11, 2023, Veru announced positive results from a preclinical in vitro study evaluating the effects of sabizabulin against prototypical poxvirus, vaccinia virus, which demonstrated that sabizabulin prevented both the release of poxvirus from infected cells and the spread of poxvirus to healthy cells conducted by a team of researchers led by Brian M. Ward, Ph.D., Associate Professor of Microbiology and Immunology, University of Rochester School of Medicine and Dentistry, Rochester, New York. The Company expects to submit the full data set for presentation in future scientific meetings and peer-reviewed publications.
Sabizabulin, as a host targeted antiviral and broad anti-inflammatory agent, may be useful as a novel treatment not only against smallpox and other poxviruses, but also may reduce the hyperactive immune response triggered by poxviruses that is responsible for severe pneumonia, ARDS, multi-organ failure, and death. Based on the preclinical data, the Company plans to expand the sabizabulin program to include other serious virus infections that pose a global public health threat to society. The Company plans to have pre-IND meetings with the FDA to discuss Animal Rule regulatory requirements for assessing the efficacy of sabizabulin for smallpox virus as well as Ebola virus. Clinical human efficacy trials of drugs for preventing or treating smallpox and Ebola viruses are not feasible and challenge studies in healthy subjects are unethical. Therefore, drugs for these indications are generally developed and approved under a regulatory pathway commonly referred to as the Animal Rule (21 CFR part 314, subpart I, for drugs and 21 CFR part 601, subpart H, for biologics). FDA may grant marketing approval based on adequate and well-controlled animal efficacy studies when the results of those studies establish that the drug is reasonably likely to produce clinical benefit in humans.
Sexual Health Program
The Company's sexual health program consists of FC2, an FDA-approved commercial product for the dual protection against unplanned pregnancy and sexually transmitted infections.
The Company sells FC2 in both the commercial sector and in the public health sector both in the U.S. and globally. In the U.S., FC2 is available by prescription through multiple telemedicine and otherinternet pharmacy channels as well as retail pharmacies. The Company has launched its own dedicated direct to patient telemedicine and pharmacy services portal/platform to continue to drive sales channelsgrowth. FC2 is also available to public health sector entities such as state departments of health and through The Female Health Company Division in501(c)(3) organizations. In the global public health sector. The Female Healthsector, the Company Division markets FC2 to entities, including ministries of health, government health agencies, U.N. agencies, nonprofit organizations and commercial partners, that work to support and improve the lives, health and well-being of women around the world.
On October 31, 2016, as partSale of the Company's strategy to diversify its product line to mitigate the risks of being a single product company, the Company completed its acquisition (the APP Acquisition) of Aspen Park Pharmaceuticals, Inc. (APP) through the merger of a wholly owned subsidiary of the Company into APP. The completion of the APP Acquisition transitioned us from a single product company selling only the FC2 Female Condom® to a biopharmaceutical company with multiple drug products under clinical development and commercialization.ENTADFI
On August 12, 2016, the FDA agreed that the Company's Tamsulosin DRS medication qualifies for the expedited 505(b)(2) regulatory approval pathway. In March 2017, the Company initiated a bioequivalence clinical study for Tamsulosin DRS and in April 2017 announced the successful completion of Stage 1 of the bioequivalence clinical study, which selected the optimal formulation of our proprietary Tamsulosin DRS product. In October 2017, the Company initiated Stage 2 of the bioequivalence clinical study of Tamsulosin DRS and in November 2017 announced the results of Stage 2 of the bioequivalence clinical study. During the Stage 2 bioequivalence clinical study, dosing with Tamsulosin DRS fasted and Tamsulosin DRS fed were successfully shown to be bioequivalent with FLOMAX fed based on AUC, which is the key determinant of drug exposure over time. The Tamsulosin DRS formulation still needs to meet the remaining bioequivalence criterion for peak value (Cmax). The Company intends to initiatehad another FDA-approved product, ENTADFI® (finasteride and tadalafil) capsules for oral use, a new bioequivalence study after adjusting the formulation to address Cmax and expects this study to be completed in the first half of calendar 2018. The Company plans to develop Tamsulosin XR (extended release) capsules (tamsulosin HCl extended release capsules) as well. The Company does not believe that the new bioequivalence study and capsule formulation development will affect the timing of its planned submission of an NDA for Tamsulosin DRS granules and Tamsulosin XR capsules and, if the new bioequivalence study is successful, plans to submit the NDA in 2018.
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On December 6, 2016, the Company presented an overview of its drug candidate for male infertility, VERU-722, at the meeting of the Bone, Reproductive and Urologic Drugs (BRUD) FDA Advisory Committee at the invitation of the FDA. At the meeting, the committee discussed appropriate clinical trial design features, including acceptable endpoints for demonstrating clinical benefit, for drugs intended to treat secondary hypogonadism (low testosterone levels) while preserving or improving testicular function, including spermatogenesis. At the meeting, the FDA Advisory Committee provided guidance for clinical trial design and endpoints, and agreed with the intended patient population to treat, recommended a short-term study, and supported the use of improvement of semen quality for such clinical endpoints as avoidance of aggressive assisted reproductive procedures such as in vitro fertilization or pregnancy. Based on this advice, the Company is considering advancing VERU-722 into Phase 2 clinical trial in men with testicular dysfunction (oligospermia (low sperm count) and secondary hypogonadism) as a cause of male factor infertility.
On May 13, 2017, the Company announced positive results of a clinical study of its novel PREBOOST® product. The PREBOOST® clinical study enrolled 26 men aged 18 years or older in a heterosexual, monogamous relationship, with PE, defined as reported poor control over ejaculation, personal distress related to ejaculation and average IELT of two minutes or less on stopwatch measurement. After treatment with PREBOOST®, 82 percent of men were no longer considered to have premature ejaculation with an increase on average of 5 minutes. Results showed that treatment was well tolerated. Therefore, the results of the study showed that PREBOOST® prolonged time to ejaculation, supporting the clinical validity of PREBOOST® for the prevention of premature ejaculation. The Company launched the product in the United States in January 2017 and in October 2017 entered into a co-promotion and distribution agreement with Timm Medical Technologies, Inc.
On May 24, 2017, the Company announced that, following a Pre-IND meeting with the FDA, it plans to advance VERU-944 (cis-clomiphene citrate), oral agent being evaluated for the treatment of hot flashes in men receiving hormone therapy, androgen deprivation therapy (ADT), for advanced prostate cancer into Phase 2 clinical trial utilizing the 505(b)(2) regulatory pathway. Approximately 80% of men receiving one of the common forms of ADT, including LUPRON® (Leuprolide), ELIGARD® (Leuprolide), and FIRMAGON®(degarelix), experience hot flashes and 30-40% will suffer from moderate to severe hot flashes. An investigational new drug application (IND) is expected to be filed with the FDA in the first half of calendar 2018.
On December 11, 2017, the Company announced that it has acquired world-wide rights to a novel, proprietary oral granule formulation for solifenacin from Camargo Pharmaceuticals Services, LLC. Solifenacin is the active ingredient in a leading drug VESIcare® for the treatment of overactive bladder in men and women. Solifenacin Delayed Release Granule (DRG) formulation addresses the large population of men and women who have overactive bladder (OAB) and who have dysphagia, or difficulty swallowing tablets. In a Pre-IND meeting, the FDA confirmed that a single bioequivalence study and that no additional nonclinical, clinical efficacy and/or safety studies will be required to support the approval of Solifenacin DRG product for the treatment of overactive bladder. The Company plans to complete the Solifenacin DRG bioequivalence study in 2018 and to file the NDA in 2019.
On December 15, 2017, the Company acquired world-wide rights to Tadalafil-Finasteride combination capsules formulation from Camargo Pharmaceuticals Services, LLC. Tadalafil-Finasteride combination capsules (tadalafil 5mg and finasteride 5mg) is a new, proprietary formulation that addresses the large population of men who have lower urinary tract symptoms and restricted urinary stream because of an enlarged prostate. Tadalafil 5mg is a phosphodiesterase 5 (PDE5) inhibitor marketed under CIALIS® for benign prostatic hyperplasia and erectile dysfunction and finasteride 5mg is a Type 2, 5-alpha reductase inhibitor marketed under PROSCAR® to decrease size the prostate, prevent urinary retention and the need for prostate surgery in men who have an enlarged prostate. In a Pre-IND meeting held in November 2017, the FDA agreed that a single a bioequivalence study and no additional nonclinical, clinical efficacy and safety studies will be required to support the approval of Tadalafil-Finasteride combination capsules via a 505(b)(2) regulatory pathway. The Company plans to complete the bioequivalence study in 2018 and to file the NDA in 2019.
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Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling the Female Condom (FC2). FC2 is the only currently available female-controlled productwas approved for market by the FDA and cleared byin December 2021. This product was part of the World Health Organization (WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy and sexually transmitted infections (STIs), including HIV/AIDS andCompany’s sexual health program. On April 19, 2023, the Zika virus. NearlyCompany entered into an Asset Purchase Agreement with Blue Water Vaccines Inc. (BWV) to sell substantially all of the Company’sassets related to ENTADFI. The transaction closed on April 19, 2023. The purchase price for the transaction was $20.0 million, consisting of $6.0 million paid at closing, $4.0 million payable by September 30, 2023, $5.0 million payable 12 months after closing, and $5.0 million payable by September 30, 2024, plus up to $80.0 million based on BWV’s net revenues for the three months ended December 31, 2017 and 2016 were derived from sales of FC2.ENTADFI after closing.
FC2’s primary use is for disease prevention and family planning, and the public health sector is the Company’s main market. Within the public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.Consolidated Operations:
FC2 has been distributed in 144 countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other STIs and unwanted pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries can be volatile and result in unpredictable delays in program development, tender applications and processing orders.
FC2 has a relatively small customer base, with a limited number of customers who generally purchase in large quantities. Over the past few years, major customers have included large global agencies, such as UNFPA and USAID. Other customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and NGOs.
Purchasing patterns for FC2 vary significantly from one customer to another, and may reflect factors other than simple demand. For example, some governmental agencies purchase FC2 through a formal procurement process in which a tender (request for bid) is issued for either a specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited period of time in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful bidder. The entire tender process, from publication to award, may take many months to complete. A tender award indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units. Many governmental tenders are stated to be “up to” the maximum number of units, which gives the applicable government agency discretion to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for orders in the tender and there are no guarantees as to the timing or amount of actual orders or shipments. Orders received may vary from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections and changes in demand. Administrative issues, politics, bureaucracy, process errors, changes in leadership, funding priorities and/or other pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may experience significant quarter-to-quarter sales variations due to the timing and shipment of large orders of FC2.
In April 2017, the Company launched a small scale marketing and sales program to support the promotion of FC2 in the US market. The commercial team developed a plan to confirm the “proof of concept” that FC2 represented a significant business opportunity. This required changes in the distribution process for FC2 in the US. As part of this reorganization the Company announced new distribution agreements with three of the country's largest distributors that support the pharmaceutical industry. This newly developed network now allows up to 98% of major retail pharmacies the ability to make FC2 available to their customers. In addition to the distribution system, the Company expanded sales and market access efforts that resulted in FC2 now being available through the following access points: community-based organizations, by prescription, utilizing the telemedicine “HeyDoctor” App, through 340B covered entities, college and universities and our patient assistance program. We continue to increase healthcare provider awareness, education and acceptance which has resulted in more women utilizing FC2 in the US. We believe that the initial results from these efforts support the US market opportunity and that we will continue to see increased utilization of FC2.
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Details of the quarterly unit sales of FC2 for the last five fiscal years are as follows:
|
|
|
|
|
|
Period | 2018 | 2017 | 2016 | 2015 | 2014 |
October 1 – December 31 | 4,399,932 | 6,389,320 | 15,380,240 | 12,154,570 | 11,832,666 |
January 1 - March 31 |
| 4,549,020 | 9,163,855 | 20,760,519 | 7,298,968 |
April 1 - June 30 |
| 8,466,004 | 10,749,860 | 14,413,032 | 13,693,652 |
July 1 - September 30 |
| 6,854,868 | 6,690,080 | 13,687,462 | 9,697,341 |
Total | 4,399,932 | 26,259,212 | 41,984,035 | 61,015,583 | 42,522,627 |
Revenues. The Company's revenues are primarily derived from sales of FC2 in the U.S. prescription channel and global public sector andhealth sector. These sales are recognized upon shipment or delivery of the product to its customers. Other sales are from FC2the customers depending on contract terms.
The Company’s most significant customer base is telemedicine providers in the U.S. who sell into the prescription channel in the US and sales of PREBOOST; however, these sales were not material to our results for the three months ended December 31, 2017.
The Company is working to further develop a global market and distribution network for FC2 by maintaining relationships with public health sector groups and completing partnership arrangements with companies with the necessary marketing and financial resources and local market expertise.
The Company’s most significant customers have been either global public health sector agencies or those who facilitate their purchasespurchase and/or distribution ofdistribute FC2 for use in preventing the transmission of HIV/AIDS prevention and/or family planning. We are seeing an increase in U.S. public sector revenues.
The Company's fourPill Club has historically been our largest customers currently are UNFPA, USAID, Barrs Medical (PTY) Ltdtelehealth customer for FC2, accounting for 44% of our net revenues (including 58% of our U.S. prescription channel revenue) in fiscal 2022 and Semina.43% of our net revenues (including 57% of our U.S. prescription channel revenue) in fiscal 2021. We sell FC2 to The Pill Club at a wholesale price pursuant to purchase orders received from The Pill Club from time to time. The Pill Club takes title to FC2 and then acts as a distributor of FC2. The Pill Club is solely responsible for its interactions with health care providers and patients (including, without limitation, the conduct of the telehealth physician-patient interactions), pricing of the FC2 products that it distributes, and legal and regulatory compliance. We have no oversight of The Pill Club’s operations.
On February 7, 2023, the California Attorney General announced a settlement with The Pill Club over a number of alleged improper actions by The Pill Club, including alleged overbilling for FC2. Notwithstanding the statements in the California Attorney General’s press release, California’s allegations against The Pill Club, according to the Brazil Ministrypublicly available Settlement Agreement executed as of Health either through UNFPAJanuary 18, 2023, involved not only billing related to FC2 but also billing related to emergency contraceptives, improper coding of asynchronous telemedicine visits, and billing for prescriptions sent to California patients by a Texas pharmacy not then-licensed to provide pharmacy services to California patients.
While the California Attorney General’s allegations included The Pill Club’s practices with respect to sales of FC2 by The Pill Club, we were not involved in such business practices and no claims against Veru have been made by the California Attorney General. However, to the extent that the settlement adversely affects The Pill Club’s FC2 sales, our business may be adversely affected.
As a result of the settlement, The Pill Club has informed us that it expects to modify some of its business practices regarding its sales of FC2 to patients, notwithstanding that The Pill Club did not agree that it had violated any laws in the Settlement Agreement. It is not clear to Veru at this time when such new business model will be in operation in California or Semina.in any other states. The Pill Club filed for Chapter 11 bankruptcy on April 18, 2023, which increases the uncertainty regarding The Pill Club’s future operations and its financial resources to continue large purchases of FC2. Such changes may make it difficult to restore The Pill Club’s ordering patterns in future periods, and as a result net revenues from sales of FC2 may not return to past levels.
In 2017,We also have a concentration of accounts receivable with The Pill Club, which totals $3.9 million as of March 31, 2023. During the quarter ended March 31, 2023, the Company began expanding accessrecorded a provision for credit losses for the entire amount of these receivables, due to the uncertainty as to whether or when The Pill Club would pay these amounts. Veru had been making significant efforts to obtain clarity from The Pill Club on when this payment would be made. On March 29, 2023, The Pill Club refused delivery of a shipment of FC2 for which it had previously submitted a binding purchase order and which it was contractually bound to accept. On March 30, 2023, the Company provided written notice to The Pill Club that the Company believed The Pill Club was in default for the past due payment and the refused shipment. These breaches remained uncured 10 calendar days after the default notice and accordingly, the Company’s contract with The Pill Club for the sale of FC2 automatically terminated by its terms. The Pill Club’s Chapter 11 bankruptcy filing was on April 18, 2023, after the termination of the Company’s contract with The Pill Club.
Due to The Pill Club’s recent Chapter 11 bankruptcy and the termination of our contract with The Pill Club, we expect that our revenue from The Pill Club will be substantially reduced or possibly eliminated. It is possible that individual purchases of FC2 could be made by The Pill Club from time to time but any such potential purchases would be outside of the existing contract if that contract terminates.
In February 2022, the Company received a tender award to supply 57% of a tender covering up to 120 million female condoms over three years in the U.S. by making it available by prescription. With a prescription, FC2 is covered by most insurance companies with $0 copay.Republic of South Africa (the “2022 South Africa Tender”). The Company also hired a small sales force to help educate doctors, pharmacists, clinics and student health centers onbegan shipping units under the benefits2022 South Africa Tender in the second quarter of FC2 and how to prescribe it. In the U.S., FC2 is sold to major distributors and sold direct to city and state public health departments and non-profit organizations.fiscal 2023.
Because theThe Company manufactures FC2 in a leased facility located in Selangor D.E., Malaysia, resulting in a portion of the Company's operating costs arebeing denominated in foreign currencies. While a materialsignificant portion of the Company's future unit sales are likely to be in foreign markets, all sales are denominated in the U.S. dollar. Effective October 1, 2009, the Company’s U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currency, further reducing the Company’s foreign currency risk.
The Company relies on supply for its principal raw material for FC2 from one supplier who is a technical market leader in synthetic polymers. The supplier has recently indicated that it intends to close the facility where our specialty grade of nitrile is currently manufactured at the end of our current fiscal year. We intend to move to an alternative grade of nitrile, which will require us to incur costs to formulate and test the alternative grade and seek FDA approval of the alternative grade. The supplier has stated that it will assist in providing continuity of supply while we transfer to the standardized grade of nitrile. We have sufficient inventory in the U.S. to cover all the expected demand from the U.S. prescription channel while this transfer occurs. Additionally, we plan to build sufficient inventory to cover any gap of supply resulting from such a transfer or change in raw material grade. However, if this transfer or change of raw material grade results in an interruption of supply of FC2, we may not have sufficient supply to fulfill orders in the global public health sector.
Operating Expenses. The Company manufactures FC2 at its facility located in Selangor D.E., Malaysia.Malaysian facility. The Company's cost of sales consists primarily of direct material costs, direct labor costs and indirect production and distribution costs. Direct material costs include raw materials used to make FC2, principally a nitrile polymer. Indirect production costs include logistics, quality control and maintenance expenses, as well as costs for electricity and other utilities. All of the key components for the manufacture of FC2 are essentially available from either multiple sources or multiple locations within a source.
We have recently seen increases in the cost of the nitrile polymer used to produce FC2, as well as transportation, and may experience increases in other material costs due to the impact of COVID-19 and increased inflation. Our costs of sales and gross margins may be adversely impacted if we are unable to pass along cost increases to our customers.
Conducting research and development is central to our business model. Since the completiononcology and infectious disease programs. The Company has several products under development 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. In fiscal 2018, weOur research and development expenses were $22.9 million and $15.5 million for the three months ended March 31 2023 and 2022, respectively, and $41.6 million and $25.6 million for the six months ended March 31, 2023 and 2022, respectively. We expect to increase our expenses relating tocontinue this trend of investing significant resources in research and development due to advancement of multipleseveral drug candidates.candidates at the same time.
Results of Operations
THREE MONTHS ENDED DECEMBERMARCH 31, 20172023 COMPARED TO THREE MONTHS ENDEDDECEMBER MARCH 31,, 2016 2022
The Company generated net revenues of $2,586,613$6.6 million and net loss of $4,257,152,$38.8 million, or $(0.08)$(0.48) per basic and diluted common share, for the three months ended DecemberMarch 31, 2017,2023, compared to net revenues of $3,243,599$13.0 million and net loss of $1,366,181,$14.2 million, or $(0.04)$(0.18) per basic and diluted common share, for the three months ended DecemberMarch 31, 2016.
2022. Net revenues decreased $656,986, or 20 percent, on a 31 percent decrease in unit sales49% compared to the prior period.
Most of the Company’s net revenues for the three months ended DecemberMarch 31, 2017, compared with the same period last year. The principal factor2023 and 2022 were derived from sales of FC2 in the U.S. prescription channel and global public health sector. There was a decrease isin the period to period impact of the timing of shipments for key customers. The FC2 average sales price per unit increased 16 percentof 61%. The principal factor for the decrease in the FC2 average sales price per unit compared to prior period was the change in the sales mix with the sameU.S. prescription channel representing 63% of total FC2 net revenues in the current year period lastcompared to 89% in the prior year period and the global public health sector representing 37% of total FC2 net revenues in the current year period compared to 11% in the prior year period. Sales to the global public health sector are at a lower sales price per unit. The Company experienced a decrease compared to the prior year period of 64% in FC2 net revenues in the U.S. prescription channel and an increase compared to the prior year period of 69% in FC2 net revenues in the global public health sector.
The decrease in FC2 net revenues in the U.S. prescription channel is primarily due to lower volume from telemedicine customers as a result of on-going business challenges, which based on discussion with such customers, we understand to include changes in sales mixstrategy, the impact of rebranding, and unit price increases for customersreductions in marketing spending, which resulted in a slowdown in orders during recent quarters. Specifically, net revenues from The Pill Club were $3.9 million in the U.S.
Cost of sales decreased $318,741current year period compared to $1,272,574$5.4 million in the three months ended December 31, 2017 from $1,591,315prior year period. The Company is uncertain whether sales to The Pill Club will continue in the future, due to The Pill Club’s Chapter 11 bankruptcy filing. We have recorded a provision for credit losses for the samenet revenues during the current year quarter, which were included in the gross accounts receivable balance at March 31, 2023. Net revenues from another prescription channel customer were $5.5 million in the prior year period last year. The reduction isand zero in the current year period, which based on customer discussions, we understand to be due to inventory management after a reduction in orders from its most significant customer, which resulted in it ceasing orders. We are working to increase net revenues in future periods based on growing awareness and demand through increased FC2 marketing efforts, through our telehealth platform, and through discussions with potential new distribution partners in the lower unit sales.telehealth sector. We have also begun to see an increase in U.S. public sector revenues through two new agreements recently executed.
Gross profit decreased $338,245, or 20 percent, to $1,314,039 forThe increase in FC2 net revenues in the three months ended December 31, 2017 from $1,652,284 forglobal public health sector is because the three months ended December 31, 2016. Gross profit margin forCompany began shipping units under the three months ended December 31, 2017 and for2022 South Africa Tender in the same period in 2016 was 51 percent of net revenues.
current year period. Significant quarter-to-quarter variationsvariances in sales in the Company’s resultsglobal public health sector have historically resulted from the timing and shipment of large orders rather than from any fundamental changes in the business or the underlying demand for female condoms.FC2. The Company is also currently seeing pressure on spendingpricing for FC2 by large global agencies and donor governments in the developed world. As a result, the Company may continue to experience challenges for unitrevenue from sales of FC2 in the global public sectorhealth sector.
Cost of sales increased to $2.5 million in the three months ended March 31, 2023 from $1.9 million in the three months ended March 31, 2022 due to an increase in unit sales.
Gross profit decreased to $4.1 million in the three months ended March 31, 2023 from $11.2 million in the three months ended March 31, 2022. Gross profit margin for the remainderfiscal 2023 period was 62% of net revenues, compared to 86% of net revenues for the fiscal 2018.2022 period. The decrease in the gross profit and gross profit margin is primarily due to the decrease in FC2 net revenues in the U.S. prescription channel, which have higher profit margins.
Research and development expenses increased $1,867,686 to $2,038,786 for$22.8 million in the three months ended DecemberMarch 31, 20172023 from $171,100$15.5 million in the prior year period.same period in fiscal 2022. The increase is primarily due to increased research and development costs associated with the multiple in-process research and development projects, acquired pursuantmainly for preparations for the Phase 3 COVID-19 confirmatory study and costs related to the APP Acquisitionongoing and planned enobosarm studies, and increased personnel costs, associated withresulting from increased headcount and an increase in the research and development.fair value of share-based compensation.
Selling, general and administrative expenses increased $418,193, or 17 percent, to $2,947,697 for$12.8 million in the three months ended DecemberMarch 31, 20172023 from $2,529,504$7.4 million in the three months ended March 31, 2022. The increase is due primarily to commercialization costs of $3.7 million related to the Company’s preparations for the potential launch of sabizabulin for COVID-19 incurred in the fiscal 2023 period prior to the FDA’s decision on the Company’s EUA application and an increase in share-based compensation costs to $2.9 million from $1.6 million, resulting from increased headcount and an increase in the fair value of stock options granted, which was $9.10 per share weighted average for options granted in the six months ended March 31, 2023 compared to $5.40 per share weighted average for options granted in the six months ended March 31, 2022.
The Company recorded a provision for credit losses of $3.9 million during the quarter ended March 31, 2023 related to the total amount of receivables due from The Pill Club due to uncertainty related to their financial condition. There was no provision for credit losses recorded in fiscal 2022.
During the quarter ended March 31, 2023, the Company recorded an impairment charge of $3.9 million related to IPR&D assets recorded for sabizabulin for prostate cancer and zuclomiphene, as a result of the Company’s strategic decision to refocus its drug development efforts on those drug candidates that it believes have the best opportunity to lead to long-term success and shareholder value creation. There was no impairment charge recorded in fiscal 2022.
Interest expense, which is related to accretion of the liability for the Residual Royalty Agreement, was $0.7 million in the three months ended March 31, 2023, compared with $1.2 million in the three months ended March 31, 2022. The decrease relates to a decrease in actual and projected FC2 sales.
A gain associated with the change in fair value of the embedded derivative related to the Residual Royalty Agreement was $1.2 million in the three months ended March 31, 2023, compared to a loss of $1.3 million in the three months ended March 31, 2022. The liability associated with embedded derivative represents the fair value of the change of control provisions in the Residual Royalty Agreement. The decrease in the fair value of the embedded derivative in the current year period is due to a decrease in projected FC2 net revenues in future periods and a change in the estimated change of control dates. See Note 3 and Note 8 to the financial statements included in this report for additional information.
Income tax benefit in the second quarter of fiscal 2023 was $67,000, compared to income tax benefit of $27,000 in the second quarter of fiscal 2022. The U.S. continues to have a full valuation allowance on its deferred tax assets; therefore, activity in the U.S. has no effect on income tax expense or benefit.
SIX MONTHS ENDED MARCH 31, 2023 COMPARED TO SIX MONTHS ENDED MARCH 31, 2022
The Company generated net revenues of $9.1 million and net loss of $75.6 million, or $(0.94) per basic and diluted common share, for the six months ended March 31, 2023, compared to net revenues of $27.2 million and net loss of $20.6 million, or $(0.26) per basic and diluted common share, for the six months ended March 31, 2022. Net revenues decreased 67% compared to the prior period.
Most of the Company’s net revenues for the six months ended March 31, 2023 and 2022 were derived from sales of FC2 in the U.S. prescription channel and global public health sector. There was a decrease in the FC2 average sales price per unit of 62%. The principal factor for the decrease in the FC2 average sales price per unit compared to prior period was the change in the sales mix with the U.S. prescription channel representing 47% of total FC2 net revenues in the current year period compared to 85% in the prior year period and the global public health sector representing 53% of total FC2 net revenues in the current year period compared to 15% in the prior year period.
The decrease in FC2 net revenues in the U.S. prescription channel is primarily due to lower volume from telemedicine customers as a result of on-going business challenges, which based on discussions with such customers, we understand included changes in strategy, the impact of rebranding, and reductions in marketing spending and which resulted in a slowdown in orders during recent quarters. Specifically, net revenues from The Pill Club were $3.9 million in the current year period compared to $10.8 million in the prior year period. The increase primarily relatesCompany is uncertain whether sales to salariesThe Pill Club will continue in the future, due to The Pill Club’s Chapter 11 bankruptcy filing. We have recorded a provision for our U.S. Commercial team, part of our Commercial reporting segment.
The Company incurred a loss oncredit losses for the net revenues during the current year period, which were included in the gross accounts receivable of approximately $3.76balance at March 31, 2023. Net revenues from another prescription channel customer were $11.3 million for the three months ended December 31, 2017, as a result of a settlement agreement we entered with Semina, our distributor in Brazil. This amount is presented as a separate line item in the accompanying unaudited condensed consolidated statement of operations.
Business acquisition expenses for the three months ended December 31, 2017 decreased to zero from $826,370 in the prior year period and zero in the current year period, which based on customer discussions, we understand to be due to inventory management after a reduction in orders from its most significant customer, which resulted in it ceasing orders. We are working to increase net revenues in future periods based on growing awareness and demand through increased FC2 marketing efforts, through our telehealth platform, and through discussions with potential new distribution partners in the telehealth sector. We have also begun to see an increase in U.S. public sector revenues through two new agreements recently executed.
The increase in FC2 net revenues in the global public health sector is because the Company began shipping units under the 2022 South Africa Tender in the current year period. Significant quarter-to-quarter variances in sales in the global public health sector 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 expenses representing costs relatedFC2. The Company is also currently seeing pressure on pricing for FC2 by large global agencies and donor governments in the developed world. As a result, the Company may continue to experience challenges for revenue from sales of FC2 in the global public health sector.
Cost of sales increased to $4.3 million in the six months ended March 31, 2023 from $4.1 million in the six months ended March 31, 2022 due to reduced production volume as a result of lower sales volume, which results in a higher cost per unit sold.
Gross profit decreased to $4.8 million in the six months ended March 31, 2023 from $23.1 million in the six months ended March 31, 2022. Gross profit margin for the fiscal 2023 period was 53% of net revenues, compared to 85% of net revenues for the fiscal 2022 period. The decrease in the gross profit and gross profit margin is primarily due to the APP Acquisition.decrease in FC2 net revenues in the U.S. prescription channel, which have higher profit margins, and reduced production as a result of lower sales volume, which results in a higher cost per unit.
InterestResearch and other expense, net, fordevelopment expenses increased to $41.6 million in the threesix months ended DecemberMarch 31, 2017 was $13,169, compared to $9,621 for2023 from $25.6 million in the same period in fiscal year 2017. 2022. The increase is primarily due to increased costs associated with the multiple in-process research and development projects, mainly for preparations for the Phase 3 COVID-19 confirmatory study, pre-launch inventory costs of $12.4 million prior to the FDA’s decision on the Company’s EUA application, and costs related to the ongoing and planned enobosarm studies, and increased personnel costs, resulting from increased headcount and an increase in the fair value of share-based compensation.
Selling, general and administrative expenses increased to $30.4 million in the six months ended March 31, 2023 from $14.1 million in the six months ended March 31, 2022. The increase is due primarily to commercialization costs of $12.1 million related to preparations for the potential launch of sabizabulin for COVID-19 incurred in the fiscal 2023 period prior to the FDA’s decision on the Company’s EUA application, and an increase in share-based compensation costs to $6.5 million from $3.0 million, resulting from increased headcount and an increase in the fair value of stock options granted, which was $9.10 per share weighted average for options granted in the six months ended March 31, 2023 compared to $5.40 per share weighted average for options granted in the six months ended March 31, 2022.
The Company recorded a foreign currency transactionprovision for credit losses of $3.9 million during the quarter ended March 31, 2023 related to the total amount of receivables due from The Pill Club due to uncertainty related to their financial condition. There was no provision for credit losses recorded in fiscal 2022.
During the quarter ended March 31, 2023, the Company recorded an impairment charge of $3.9 million related to IPR&D assets recorded for sabizabulin for prostate cancer and zuclomiphene, as a result of the Company’s strategic decision to refocus its drug development efforts on those drug candidates that it believes have the best opportunity to lead to long-term success and shareholder value creation. There was no impairment charge recorded in fiscal 2022.
Interest expense, which is related to accretion of the liability for the Residual Royalty Agreement, was $1.6 million in the six months ended March 31, 2023, compared with $2.4 million in the six months ended March 31, 2022. The decrease relates to a decrease in actual and projected FC2 sales.
A gain associated with the change in fair value of the embedded derivatives related to the Residual Royalty Agreement was $0.5 million in the six months ended March 31, 2023, compared to a loss of $53,455$1.4 million in the most recent quarter, comparedsix months ended March 31, 2022. The liability associated with embedded derivative represents the fair value of the change of control provisions in the Residual Royalty Agreement. The decrease in the fair value of the embedded derivative in the current year period is due to $11,939a decrease in projected FC2 net revenues in future periods and a change in the estimated change of control dates. See Note 3 and Note 8 to the financial statements included in this report for the same period last year. additional information.
The incomeIncome tax benefit forin the three months ended December 31, 2017first half of fiscal 2023 was $3,246,053,$0.1 million, compared to income tax benefitexpense of $530,069 for the same period in fiscal year 2017. The increase$87,000 in the income tax benefitfirst half of fiscal 2022. The change is due to a tax benefit recorded in the changecurrent period due to a net loss recognized by our U.K. subsidiary and a benefit recorded for the elimination of deferred tax liabilities upon the impairment of the IPR&D assets, compared to a tax expense in the prior year period due to net income recognized by our U.K. and Malaysia subsidiaries. The U.S. continues to have a full valuation allowance on its deferred tax assets; therefore, activity in the U.S. federal corporatehas no effect on income tax rate from 35% to 21% under the Tax Act and the increase in the loss before income taxes.expense or benefit.
29
Liquidity and Sources of Capital
Liquidity
Our operating activities generated cash of $296,662 in the first quarter of fiscal 2018. Accounts receivable and long-term other receivables decreased from $11.4cash equivalents on hand at March 31, 2023 was $23.5 million, compared to $80.2 million at September 30, 2017 to $3.0 million at December2022. At March 31, 2017.
On December 27, 2017, we entered into a settlement agreement with Semina pursuant to which Semina has made a payment of $2.25 million and is obligated to make a second payment of $1.5 million by February 28, 2018, to settle net amounts due to us totaling $7.5 million relating to the 2014 Brazil Tender. The settlement was not related to our belief in the ultimate collectability of the receivables or in the creditworthiness of Semina. We elected to settle these amounts due to the uncertainty regarding the timing of payment by the Brazilian Government and, ultimately to us, on the remaining amounts due. The result of the settlement was a net loss of approximately $3.76 million, which is included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2017.
At December 31, 2017,2023, the Company had working capital of $4.0 million and stockholders’ equity of $44.8$16.7 million compared to working capital of $4.8$63.3 million and stockholders’ equity of $48.5$80.8 million as of DecemberSeptember 30, 2022. The decrease in working capital is primarily due to the decrease in cash on hand, related to our increased spend on research and development and drug commercialization costs, and a decrease in prepaid research and development costs.
We anticipate that we will continue to consume cash as we develop and commercialize 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 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, 2022 for a description of certain risks that will affect our future capital requirements.
The Company believes its current cash position, cash expected to be generated from sales of FC2, cash to be received from the sale of ENTADFI (see note 15 to the financial statements included in this report) and its ability to secure equity financing or other financing alternatives will be adequate to fund planned operations of the Company for the next 12 months. To the extent the Company may need additional capital for its operations or the conditions for raising capital are favorable, the Company may access financing alternatives that may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company’s current effective shelf registration statements on Form S-3 (File No. 333-239493 and File No. 333-270606) or under a new registration statement.
Operating activities
Operating activities used cash of $60.1 million in the six months ended March 31, 2016.2023. Cash used in operating activities included net loss of $75.6 million, adjustments to reconcile net loss to net cash used in operating activities totaling an increase of $17.8 million and changes in operating assets and liabilities resulting in a decrease of $2.2 million. Adjustments to net loss primarily consisted of $8.7 million of share-based compensation, $3.9 million for impairment of intangible assets, $3.9 million provision for credit losses, and interest expense in excess of interest paid of $1.3 million. The decrease in cash from changes in operating assets and liabilities included an increase in accounts payable of $3.9 million and a decrease in accounts payable of $4.8 million, partially offset by a decrease in prepaid expenses and other current assets of $4.5 million and an increase in accrued expenses and other current liabilities of $1.4 million.
Operating activities used cash of $12.6 million in the six months ended March 31, 2022. Cash used in operating activities included net loss of $20.6 million, adjustments to reconcile net loss to net cash used in operating activities totaling an increase of $6.7 million and changes in operating assets and liabilities resulting in an increase of $1.3 million. Adjustments to net loss primarily consisted of $4.0 million of share-based compensation, interest expense in excess of interest paid of $0.9 million, and $1.4 million for the change in fair value of derivative liabilities. The increase in cash from changes in operating assets and liabilities included an increase in accounts payable of $4.1 million and an increase in accrued expenses and other current liabilities of $0.4 million, partially offset by an increase in accounts receivable of $0.8 million, an increase in inventory of $0.9 million, and an increase in prepaid expenses and other current assets of $1.4 million.
Investing activities
Net cash used in investing activities was $0.4 million in the six months ended March 31, 2023, and consisted of capital expenditures primarily at our Malaysia location.
Net cash provided by investing activities was $2.0 million in the six months ended March 31, 2022, and consisted of $2.5 million collected on notes receivable from the sale of the Company’s PREBOOST® business, partially offset by $0.5 million associated with capital expenditures primarily at our U.S. location.
Financing activities
Net cash provided by financing activities in the six months ended March 31, 2023 was $3.8 million, and primarily consisted of proceeds from the Premium Finance Agreement of $1.4 million, which were used to finance the Company’s directors and officers liability insurance premium, offset by payments on such agreement of $0.5 million, proceeds from sale of shares under the common stock purchase agreement with Aspire Capital (see discussion below) and proceeds from stock option exercises of $0.3 million.
Net cash provided by financing activities in the six months ended March 31, 2022 was $0.2 million and primarily consisted of proceeds from stock option exercises of $0.3 million.
Sources of Capital
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. The Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement. The Agent has released its security interest in Company collateral previously pledged to secure its obligations under the Credit Agreement.
In connection with the Company's acquisition of intellectual property rights associated with Solifenacin DRG and Tadalafil/ Finasteride combination capsules, the Company will be obligated to make upfront payments totaling $500,000 by March 2018, as well as future installment payments and milestone payments.
The Company's Credit Agreement, with BMO Harris Bank N.A. expired on December 29, 2017. No amounts were outstandingVeru and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2, which continues after the repayment of the loan and return premium under the Credit Agreement. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Residual Royalty Agreement, or (ii) mutual agreement of the parties.
The Company made total payments under the Residual Royalty Agreement of $0.3 million and $1.5 million during the threesix months ended DecemberMarch 31, 2017 or 2016.2023 and 2022, respectively. The Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12-month period subsequent to March 31, 2023 will be approximately $1.4 million under the Residual Royalty Agreement.
Aspire Capital Purchase Agreement
On December 29, 2017,June 26, 2020, the Company entered into thea common stock purchase agreement (the “2020 Purchase AgreementAgreement”) with Aspire Capital Fund, LLC (Aspire Capital) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time and in its sole discretion during the 36-month term of the 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $15.0$23.9 million of the Company'sCompany’s common stock in the aggregate. Upon execution of the 2020 Purchase Agreement, the Company issued and sold to Aspire Capital under the 2020 Purchase Agreement 1,644,737 shares of common stock at a price per share of $3.04, for an aggregate purchase price of $5,000,000. Other than the 304,457212,130 shares of common stock issued to Aspire Capital in consideration for entering into the 2020 Purchase Agreement and the initial sale of 1,644,737 shares of common stock, the Company has no obligation to sell any shares of common stock pursuant to the 2020 Purchase Agreement and the timing and amount of any such sales are in the Company's sole discretion subject to the conditions and terms set forth in the 2020 Purchase Agreement. As of
During the date of filing this Quarterly Report with the SEC, nosix months ended March 31, 2023, we sold 1,920,013 shares of the Company’s common stock have been sold to Aspire Capital under the 2020 Purchase Agreement.
TheAgreement, resulting in proceeds to the Company believes its current cash position and its ability to secure equity financing or other financing alternatives are adequate to fund operationsof $2.6 million. Since inception of the 2020 Purchase Agreement through March 31, 2023, we sold 3,564,750 shares of common stock to Aspire Capital resulting in proceeds to the Company for the next 12 months. Such financing alternatives may include debt financing, convertible debt or other equity-linked securities and may include financingsof $7.6 million. Subsequent to March 31, 2023, we sold 859,700 shares of common stock to Aspire Capital under the Company's current2020 Purchase Agreement, resulting in proceeds to the Company of $0.8 million. As of May 9, 2023, the amount remaining under the 2020 Purchase Agreement was $15.5 million, which is registered under the Company’s shelf registration statement on Form S-3 (File No. 333-221120)333-239493).
Stock Purchase Agreement
On April 12, 2023, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Frost Gamma Investments Trust (FGI), pursuant to which, on the date thereof, the Company issued and sold 5,000,000 shares of the Company’s common stock to FGI at a price of $1.00 per share, for a total investment of $5,000,000. The Company's intentionshares of common stock issued to FGI pursuant to the Stock Purchase Agreement were not registered under the Securities Act. The Company is obligated to be opportunistic when pursuing equity financingfile a registration statement under the Securities Act within 45 days after the date of the Stock Purchase Agreement to register the resale of the shares of common stock issued to FGI.
Lincoln Park Capital Fund, LLC Purchase Agreement
On May 2, 2023, the Company entered into a common stock purchase agreement (the “Lincoln Park Purchase Agreement”) with Lincoln Park Capital Fund, LLC (Lincoln Park) which could include sellingprovides that the Company has the right, but not the obligation, to sell to Lincoln Park up to $100.0 million of shares of the Company’s common stock over the 36-month term of the Lincoln Park Purchase Agreement. On the date the Company executed the Lincoln Park Purchase Agreement, we also issued 800,000 shares of the Company’s common stock to Lincoln Park as an initial fee for Lincoln Park’s commitment to purchase shares of the Company’s common stock under the Lincoln Park Purchase Agreement, with Aspire Capital and/orand we are obligated to issue $1.0 million of shares of the Company’s common stock at the time Lincoln Park’s purchases cumulatively reach an aggregate amount of $50.0 million. The capacity and commitment shares under the Lincoln Park Purchase Agreement have been registered pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-270606).
Fair Value Measurements
As of March 31, 2023 and September 30, 2022, the Company’s financial liabilities measured at fair value on a marketed deal with an investment bank. See Part I, Item 1A, "Risk Factors - Risks Related to Our Financial Position and Need for Capital"recurring basis, which consisted of embedded derivatives, represent the fair value of the change of control provision in the Company's Form 10-KResidual Royalty Agreement. See Note 8 to the financial statements included in this report for the year ended September 30, 2017, for a description of certain risks related to our ability to raise capital on acceptable terms.additional information.
The fair values of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company estimates the fair value of the embedded derivative within the Residual Royalty Agreement using a scenario-based method, whereby different scenarios are valued and probability weighted. The scenario-based valuation model incorporates transaction details such as the contractual terms of the instrument and assumptions including projected FC2 revenues, expected cash outflows, probability and estimated dates of a change of control, risk-free interest rates and applicable credit risk. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company’s financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. See Note 3 to the financial statements included in this report for additional information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is limited to fluctuations in raw material commodity prices, particularly the nitrile polymer used to manufacture FC2, and foreign currency exchange rate risk associated with the Company's foreign operations. The Company does not utilize financial instruments for trading purposes or to hedge risk and holds no derivative financial instruments which would expose it to significant market risk. Effective October 1, 2009, the Company's U.K. subsidiary and Malaysia subsidiary each adopted the U.S. dollar as its functional currency. The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. The Company’s distributors are subject to exchange rate risk as their orders are denominated in U.S. dollars and they generally sell to their customerswas discussed in the local country currency. If currency fluctuations“Quantitative and Qualitative Disclosures About Market Risk” section contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There have abeen no material impact on a distributor it may ask the Company for pricing concessions or other financial accommodations. The Company currently has no significant exposurechanges to interest rate risk. The Company had a linesuch exposures since September 30, 2022.
Item 4. 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company'sCompany’s management, including the Company's PrincipalCompany’s Chief Executive Officer and the Company's PrincipalCompany’s Chief Financial Officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company's PrincipalCompany’s Chief Executive Officer and PrincipalChief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures were effective. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, the Company's PrincipalChief Executive Officer and PrincipalChief Financial Officer concluded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance.
Changes in Internal Control over Financial Reporting
There waswere no changechanges in the Company'sCompany’s internal control over financial reporting (as(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company's most recently completed fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
In connection with the APP Acquisition, two purported derivative and class action lawsuits were filed against the Company in the Circuit Court of Cook County, Illinois, which were captioned Glotzer v. The Female Health Company, et al., Case No. 2016-CH-13815, and Schartz v. Parrish, et al., Case No. 2016-CH-14488. On January 9, 2017 these two lawsuits were consolidated. On March 31, 2017, the plaintiffs filedFor a consolidated complaint. The consolidated complaint named as defendants Veru, the membersdescription of our board of directors priormaterial pending legal proceedings, see Legal Proceedings in Note 12, Contingent Liabilities, to the closingunaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and incorporated herein by reference.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties relating to the Company's business disclosed in Part I, Item 1A, "Risk Factors," ofin the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2022. 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, 2022, except for the following additional risk factors relating to the Company’s refocused research and development strategy and other business matters. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations.
If we fail to obtain additional capital, we may need to reduce the scope of our development programs or we could be forced to share our rights to technologies with third parties on terms that may not be favorable to us.
We will need large amounts of capital to support our development and commercialization efforts for our drug candidates, including the Phase 3 COVID-19 confirmatory study for certain COVID-19 patients. If we are unable to secure sufficient capital to fund our operations, we will not be able to continue these efforts and we might have to enter into strategic collaborations that could require us to share commercial rights to one or more of our drug candidates with third parties in ways that we currently do not intend or on terms that may not be favorable to us. Our ability to raise capital through equity financing may be limited by the number of authorized shares of our common stock, which is currently 154 million shares, and as of May 9, 2023, we had 39.6 million authorized but unissued shares of common stock (after deducting the number of shares issuable upon exercise, conversion or exchange of our outstanding securities or otherwise reserved for future issuance). In order to raise significant additional amounts from equity financing, we may need to seek stockholder approval to amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock, and any such amendment would require the approval of the Company'sholders of at least two-thirds of the outstanding shares of our common stock. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms and not enter into strategic collaborations, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
Our ability to obtain an EUA from the FDA to market sabizabulin as a potential treatment for certain COVID-19 patients will depend on the federal government continuing to issue EUAs for treatments relating to COVID-19 in the United States.
We may submit a new EUA application sabizabulin as a potential treatment for certain COVID-19 patients based on the results of the Phase 3 COVID-19 confirmatory study for certain COVID-19 patients we plan to conduct. In addition to the risks relating to the EUA process disclosed in the risk factors in our annual report on Form 10-K for the year ended September 30, 2017, except2022, we are subject to risks relating to whether COVID-19 continues to be treated as a public health emergency supporting the issuance of EUAs for COVID-19 treatments in the following additional risk factor:
The recently passed Tax CutsUnited States. On January 30, 2023, the White House Office of Management and Jobs Act may have a significant impactBudget announced that the Biden administration plans to terminate the COVID-19 national and public health emergencies on our financial condition and results of operations.
On December 22, 2017, significant changes were enacted to the U.S. tax law pursuant to H.R.1. “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”May 11, 2023 (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”“May 11 Termination”). The Tax Act makes broad and complex changes to the U.S. tax code that could materially affect us. The Tax Act includes a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition taxFDA announced on the previously untaxed earnings of certain foreign subsidiaries, generally eliminates the corporate alternative minimum tax, adds an anti-base erosion tax and makes other changes to deductions, credits and business-related exclusions.
While we have reflected the impact of the Tax Act on the accounting treatment of certain discrete items, we are still evaluating the full potential impact of the Tax Act on our tax provision and deferred tax assets. It is possibleJanuary 31, 2023, that the changes containedMay 11 Termination would not impact the FDA’s ability to authorize new treatments for emergency use, that existing EUAs would remain in effect and that it may continue to issue new EUAs when criteria for issuance are met. However, if the Tax Act could result in a write down of deferred tax assets or otherwise have an adverse impact on our effective tax rate, tax payments, financial condition or results of operations. The Tax Act is complex and additional interpretative guidance may be issued that could affect interpretations and assumptions we have made, as well as actions we may takeFDA were to determine to cease issuing EUAs for COVID-19 treatments, whether as a result of the Tax Act.May 11 Termination or otherwise, we may not be able to obtain an EUA for sabizabulin as a potential treatment for certain COVID-19 patients and in that case we would not be able to market sabizabulin as a potential treatment for certain COVID-19 patients in the United Statues unless it was approved by the FDA following the submission of a new drug application.
Our net revenues from sales of FC2 may not return to past levels.
Net revenues from sales of FC2 have declined significantly in recent periods, particularly in the U.S. prescription channel. Although we are working to restore ordering and utilization patterns in future periods, net revenues from sales of FC2 may not return to past levels. Ordering patterns may not rebound or may continue to decline if our distribution partners in the telehealth sector encounter issues, we or our distribution partners are not able or willing to spend sufficient amounts to market and promote FC2, or underlying demand for FC2 decreases. In particular, sales to our largest telehealth customer, The Pill Club, may not return to past levels due to risks that include potential operational challenges of The Pill Club stemming from its settlement with the California Attorney General, potential issues with The Pill Club’s business and financial condition as a result of the effects of such settlement, The Pill Club’s recent Chapter 11 bankruptcy filing, or other reasons, and the termination of our contract with The Pill Club due to recent payment and shipment acceptance breaches by The Pill Club. In addition, we may lack resources to increase FC2 marketing efforts by an amount sufficient to grow revenues and drive awareness of our dedicated direct to patient telemedicine and pharmacy services portal/platform. Any failure to attain or sustain sales growth for FC2 in the U.S. market may have a material adverse effect on our results of operations.
We are subject to risks relating to the concentration of accounts receivable with The Pill Club.
The Pill Club is one of our largest customers, accounting for 44% of our net revenues in fiscal 2022 and 43% of our net revenues in fiscal 2021. We have a concentration of accounts receivable at The Pill Club, with $3.9 million of accounts receivable as of March 31, 2023, including $1.3 million of accounts receivable that are past due. Veru had been making significant efforts to obtain clarity from The Pill Club on when this payment would be made. On March 29, 2023, The Pill Club refused delivery of a shipment of FC2 for which it had previously submitted a binding purchase order and which it was contractually bound to accept. On March 30, 2023, Veru provided written notice to The Pill Club that Veru believed The Pill Club was in default for the past due payment and the refused shipment. These breaches remained uncured 10 calendar days after the default notice and accordingly, Veru’s contract with The Pill Club for the sale of FC2 automatically terminated by its terms. On April 18, 2023, The Pill Club filed for Chapter 11 bankruptcy.
These adverse changes in our relationship with The Pill Club, including a termination of our contract with The Pill Club, and in The Pill Club’s business and financial condition following its settlement with the California Attorney General and its Chapter 11 bankruptcy filing, could result in a delay in payment of, or an inability to pay, its outstanding accounts receivable balance or an inability or unwillingness to place new orders for FC2, any of which could have a material adverse effect on our cash flows and liquidity.
We may incur costs or experience supply interruptions relating to our need to transition the supply of the nitrile polymer for FC2.
We have relied on a sole supplier for the principal raw material for FC2. The supplier has recently indicated that it intends to close the facility where our specialty grade of nitrile is currently manufactured at the end of our current fiscal year. We intend to move to an alternative grade of nitrile, which will require us to incur costs to formulate and test the alternative grade and seek FDA approval of the alternative grade. We are not certain of the amount of time or costs involved in this transition. In addition, while the supplier has stated that it will assist in providing continuity of supply while we transfer to the alternative grade of nitrile and we have sufficient inventory in the U.S. to cover all the expected demand from the U.S. prescription channel while this transfer occurs, if this transfer or change in raw material grade results in an interruption of supply of FC2, we may not have sufficient supply to fulfill orders in the global public health sector.
Exhibit Number | Description |
2.1 | |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
3.8 | |
3.9 | |
4.1 | Amended and Restated Articles of Incorporation, as amended (same as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,3.7and |
4.2 | Articles II, VII and XI of the Amended and Restated By-Laws (included in Exhibit |
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33
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31.2 |
32.1 | |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended |
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104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101). |
* | Filed herewith |
** | This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VERU INC.
DATE: February 14, 2018May 11, 2023
/s/ Mitchell S. Steiner
Mitchell S. Steiner President and
Chairman, Chief Executive Officer and President
DATE: February 14, 2018May 11, 2023
/s/ Michele Greco
Michele Greco Executive Vice President of Finance
Chief Financial Officer and
Chief Administrative Officer