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 June 30, 2020





 

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

For the transition period from              to             



Commission File Number 1-13602





Veru Inc.

(Exact Name of Registrant as Specified in its Charter)





 

 

 

 

 

Wisconsin

 

39-1144397

(State of Incorporation)

 

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

 

 

48 NW 25th Street, Suite 102, Miami, FL

 

33127

(Address of Principal Executive Offices)

 

(Zip Code)



305-509-6897

(Registrant’s Telephone Number, Including Area Code)



N/A

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

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



 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

VERU

NASDAQ Capital Market



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company



 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      



Indicate by check mark whether the registrant is a shell company (as determined by Rule 12b-2 of the Exchange Act).    Yes       No  



As of August 11, 2020, the registrant had 69,863,681 shares of $0.01 par value common stock outstanding.

 

 


 

Table of Contents

VERU INC.

INDEX





 



 

                      

PAGE



 

Forward Looking Statements

3



 

PART I.          FINANCIAL INFORMATION

 



 

Item 1.  Financial Statements

5



 

     Unaudited Condensed Consolidated Balance Sheets 

5



 

     Unaudited Condensed Consolidated Statements of Operations

6



 

     Unaudited Condensed Consolidated Statements of Stockholders’ Equity

7



 

     Unaudited Condensed Consolidated Statements of Cash Flows

9



 

     Notes to Unaudited Condensed Consolidated Financial Statements

10



 

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

29



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

40



 

Item 4.  Controls and Procedures

40



 

PART II.          OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

41



 

Item 1A.  Risk Factors

42



 

Item 5.  Other Information

46



 

Item 6.  Exhibits

47

 



 

2


 

Table of Contents

 

FORWARD LOOKING STATEMENTS



Certain statements included in this quarterly report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the anticipated or potential impact of COVID-19 and the global response thereto on our financial condition or business, future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, debt repayments, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, clinical trial timing and plans, the achievement of clinical and commercial milestones, the advancement of our technologies and our products and drug candidates, and other statements that are not historical facts. Forward-looking statements can be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect, " "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "should, " "will," "would" or the negative of these terms or other words of similar meaning. These statements are based upon the Company's current plans and strategies and reflect the Company's current assessment of the risks and uncertainties related to its business and are made as of the date of this report. These statements are inherently subject to known and unknown risks and uncertainties. You should read these statements carefully because they discuss our future expectations or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results to differ materially from those currently anticipated include the following:



·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

product demand and market acceptance;

·

some of our products are in development and we may fail to successfully commercialize such products;

·

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

·

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

·

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

·

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

·

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

·

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

·

our reliance on major customers and risks related to delays in payment of accounts receivable by major customers;

3


 

Table of Contents

 

·

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

·

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

·

our ability to successfully integrate acquired businesses, technologies or products.



All forward-looking statements in this report should be considered in the context of the risks and other factors described above and in Part I, Item 1A, "Risk Factors," in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and Part II, Item 1A of this Form 10-Q. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report except as required by applicable law.

4


 

Table of Contents

 



PART I.FINANCIAL INFORMATION



Item 1.  Financial Statements

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS







 

 

 

 

 



June 30,

 

September 30,



2020

 

2019

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

15,394,423 

 

$

6,295,152 

Accounts receivable, net

 

4,144,351 

 

 

5,021,057 

Inventory, net

 

5,194,442 

 

 

3,647,406 

Prepaid expenses and other current assets

 

2,125,730 

 

 

1,843,297 

Total current assets

 

26,858,946 

 

 

16,806,912 

Plant and equipment, net

 

315,456 

 

 

351,895 

Operating lease right-of-use assets

 

1,012,951 

 

 

 —

Deferred income taxes

 

8,628,006 

 

 

8,433,669 

Intangible assets, net

 

19,931,219 

 

 

20,168,495 

Goodwill

 

6,878,932 

 

 

6,878,932 

Other assets

 

1,562,126 

 

 

988,867 

Total assets

$

65,187,636 

 

$

53,628,770 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

3,772,990 

 

$

3,124,751 

Accrued research and development costs

 

2,277,491 

 

 

2,475,490 

Accrued compensation

 

2,196,043 

 

 

1,597,197 

Accrued expenses and other current liabilities

 

1,745,811 

 

 

1,436,888 

Credit agreement, short-term portion

 

6,599,095 

 

 

5,385,649 

Residual royalty agreement liability, short-term portion

 

356,346 

 

 

 —

Operating lease liability, short-term portion

 

425,136 

 

 

 —

Total current liabilities

 

17,372,912 

 

 

14,019,975 

Credit agreement, long-term portion

 

 —

 

 

2,886,382 

Residual royalty agreement liability, long-term portion

 

5,407,007 

 

 

3,845,518 

Operating lease liability, long-term portion

 

808,401 

 

 

 —

Deferred income taxes

 

292,740 

 

 

296,605 

Other liabilities

 

27,469 

 

 

247,154 

Total liabilities

 

23,908,529 

 

 

21,295,634 



 

 

 

 

 

Commitments and contingencies  (Note 12)

 

 

 

 

 



 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

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

 

 —

 

 

 —

Common stock, par value $0.01 per share; 154,000,000 shares authorized, 72,047,385 and 67,221,951 shares issued and 69,863,681 and 65,038,247 shares outstanding at June 30, 2020 and September 30, 2019, respectively

 

720,474 

 

 

672,220 

Additional paid-in-capital

 

126,306,764 

 

 

110,268,057 

Accumulated other comprehensive loss

 

(581,519)

 

 

(581,519)

Accumulated deficit

 

(77,360,007)

 

 

(70,219,017)

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

 

(7,806,605)

 

 

(7,806,605)

Total stockholders' equity

 

41,279,107 

 

 

32,333,136 

Total liabilities and stockholders' equity

$

65,187,636 

 

$

53,628,770 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

5


 

Table of Contents

 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS









 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

10,321,754 

 

$

9,727,060 

 

$

30,842,874 

 

$

23,074,984 

   

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,802,636 

 

 

3,155,902 

 

 

9,618,163 

 

 

7,250,895 

   

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

6,519,118 

 

 

6,571,158 

 

 

21,224,711 

 

 

15,824,089 

   

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

4,436,496 

 

 

4,866,114 

 

 

13,666,730 

 

 

10,138,524 

Selling, general and administrative

 

3,475,474 

 

 

3,547,046 

 

 

11,034,904 

 

 

10,663,884 

Total operating expenses

 

7,911,970 

 

 

8,413,160 

 

 

24,701,634 

 

 

20,802,408 

   

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(1,392,852)

 

 

(1,842,002)

 

 

(3,476,923)

 

 

(4,978,319)

   

 

 

 

 

 

 

 

 

 

 

 

Non-operating (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,169,692)

 

 

(1,091,276)

 

 

(3,476,079)

 

 

(3,627,971)

Change in fair value of derivative liabilities

 

(169,000)

 

 

157,000 

 

 

(94,000)

 

 

(246,000)

Other (expense) income, net

 

(53,334)

 

 

1,744 

 

 

(63,369)

 

 

12,588 

Total non-operating expenses

 

(1,392,026)

 

 

(932,532)

 

 

(3,633,448)

 

 

(3,861,383)

   

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(2,784,878)

 

 

(2,774,534)

 

 

(7,110,371)

 

 

(8,839,702)

   

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

240,502 

 

 

(458)

 

 

30,619 

 

 

117,207 



 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(3,025,380)

 

$

(2,774,076)

 

$

(7,140,990)

 

$

(8,956,909)

   

 

 

 

 

 

 

 

 

 

 

 

Net loss per basic and diluted common share outstanding

$

(0.05)

 

$

(0.04)

 

$

(0.11)

 

$

(0.14)

   

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

66,728,782 

 

 

62,917,362 

 

 

65,709,139 

 

 

62,745,355 

   

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 



 

6


 

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VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

Additional

 

Other

 

 

 

 

Treasury

 

 

 

   

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stock,

 

 

 

   

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

at Cost

 

Total

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2019

67,221,951 

 

$

672,220 

 

$

110,268,057 

 

$

(581,519)

 

$

(70,219,017)

 

$

(7,806,605)

 

$

32,333,136 

Share-based compensation

 —

 

 

 —

 

 

614,498 

 

 

 —

 

 

 —

 

 

 —

 

 

614,498 

Issuance of shares pursuant to share-based awards

867 

 

 

 

 

(8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,305,101)

 

 

 —

 

 

(3,305,101)

Balance at December 31, 2019

67,222,818 

 

 

672,228 

 

 

110,882,547 

 

 

(581,519)

 

 

(73,524,118)

 

 

(7,806,605)

 

 

29,642,533 

Share-based compensation

 —

 

 

 —

 

 

681,680 

 

 

 —

 

 

 —

 

 

 —

 

 

681,680 

Issuance of shares pursuant to share-based awards

356,424 

 

 

3,564 

 

 

405,068 

 

 

 —

 

 

 —

 

 

 —

 

 

408,632 

Sale of shares under common stock purchase agreement

300,000 

 

 

3,000 

 

 

1,224,000 

 

 

 —

 

 

 —

 

 

 —

 

 

1,227,000 

Amortization of deferred costs

 —

 

 

 —

 

 

(34,759)

 

 

 —

 

 

 —

 

 

 —

 

 

(34,759)

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(810,509)

 

 

 —

 

 

(810,509)

Balance at March 31, 2020

67,879,242 

 

 

678,792 

 

 

113,158,536 

 

 

(581,519)

 

 

(74,334,627)

 

 

(7,806,605)

 

 

31,114,577 

Share-based compensation

 —

 

 

 —

 

 

685,314 

 

 

 —

 

 

 —

 

 

 —

 

 

685,314 

Shares issued in connection with common stock purchase agreement

212,130 

 

 

2,121 

 

 

678,816 

 

 

 —

 

 

 —

 

 

 —

 

 

680,937 

Sale of shares under common stock purchase agreement

3,842,070 

 

 

38,421 

 

 

12,134,578 

 

 

 —

 

 

 —

 

 

 —

 

 

12,172,999 

Amortization of deferred costs

 —

 

 

 —

 

 

(356,172)

 

 

 —

 

 

 —

 

 

 —

 

 

(356,172)

Issuance of shares pursuant to common stock purchase warrants

109,143 

 

 

1,092 

 

 

(1,092)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of shares pursuant to share-based awards

4,800 

 

 

48 

 

 

6,784 

 

 

 —

 

 

 —

 

 

 —

 

 

6,832 

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,025,380)

 

 

 —

 

 

(3,025,380)

Balance at June 30, 2020

72,047,385 

 

$

720,474 

 

$

126,306,764 

 

$

(581,519)

 

$

(77,360,007)

 

$

(7,806,605)

 

$

41,279,107 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

Additional

 

Other

 

 

 

 

Treasury

 

 

 

   

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stock,

 

 

 

   

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

at Cost

 

Total

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

57,468,660 

 

$

574,687 

 

$

95,496,506 

 

$

(581,519)

 

$

(58,201,651)

 

$

(7,806,605)

 

$

29,481,418 

Share-based compensation

 —

 

 

 —

 

 

417,256 

 

 

 —

 

 

 —

 

 

 —

 

 

417,256 

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

7,142,857 

 

 

71,428 

 

 

9,060,539 

 

 

 —

 

 

 —

 

 

 —

 

 

9,131,967 

Issuance of shares pursuant to share-based awards

190,000 

 

 

1,900 

 

 

(1,900)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,148,798)

 

 

 —

 

 

(2,148,798)

Balance at December 31, 2018

64,801,517 

 

 

648,015 

 

 

104,972,401 

 

 

(581,519)

 

 

(60,350,449)

 

 

(7,806,605)

 

 

36,881,843 

Share-based compensation

 —

 

 

 —

 

 

496,209 

 

 

 —

 

 

 —

 

 

 —

 

 

496,209 

Issuance of shares pursuant to share-based awards

166,667 

 

 

1,667 

 

 

198,333 

 

 

 —

 

 

 —

 

 

 —

 

 

200,000 

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,034,035)

 

 

 —

 

 

(4,034,035)

Balance at March 31, 2019

64,968,184 

 

 

649,682 

 

 

105,666,943 

 

 

(581,519)

 

 

(64,384,484)

 

 

(7,806,605)

 

 

33,544,017 

Share-based compensation

 —

 

 

 —

 

 

468,207 

 

 

 —

 

 

 —

 

 

 —

 

 

468,207 

Sale of shares under common stock purchase agreement

2,000,000 

 

 

20,000 

 

 

3,580,000 

 

 

 —

 

 

 —

 

 

 —

 

 

3,600,000 

Amortization of deferred costs

 —

 

 

 —

 

 

(101,981)

 

 

 —

 

 

 —

 

 

 —

 

 

(101,981)

Issuance of shares pursuant to share-based awards

34,299 

 

 

343 

 

 

(343)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,774,076)

 

 

 —

 

 

(2,774,076)

Balance at June 30, 2019

67,002,483 

 

$

670,025 

 

$

109,612,826 

 

$

(581,519)

 

$

(67,158,560)

 

$

(7,806,605)

 

$

34,736,167 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.



 



 

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VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS







 

 

 

 

 



Nine Months Ended



June 30,



2020

 

2019

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

$

(7,140,990)

 

$

(8,956,909)

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

 

 

 

 

 

Depreciation and amortization

 

109,883 

 

 

126,084 

Amortization of intangible assets

 

237,276 

 

 

231,926 

Noncash change in right-of-use assets

 

240,282 

 

 

 —

Noncash interest expense

 

3,476,079 

 

 

3,627,971 

Share-based compensation

 

1,981,492 

 

 

1,381,672 

Deferred income taxes

 

(198,202)

 

 

20,413 

Provision for obsolete inventory

 

227,982 

 

 

112,498 

Change in fair value of derivative liabilities

 

94,000 

 

 

246,000 

Other

 

7,500 

 

 

148,674 

Changes in current assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

194,471 

 

 

(791,272)

Increase in inventory

 

(1,775,018)

 

 

(941,188)

Increase in prepaid expenses and other assets

 

(4,794)

 

 

(68,578)

Increase (decrease) in accounts payable

 

648,239 

 

 

(46,894)

Decrease in unearned revenue

 

 —

 

 

(187,159)

Increase in accrued expenses and other current liabilities

 

556,330 

 

 

566,557 

Decrease in operating lease liabilities

 

(243,514)

 

 

 —

Net cash used in operating activities

 

(1,588,984)

 

 

(4,530,205)



 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(73,444)

 

 

(74,948)

Net cash used in investing activities

 

(73,444)

 

 

(74,948)



 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

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

 

 —

 

 

9,400,000 

Payment of costs related to public offering

 

 —

 

 

(268,033)

Proceeds from sale of shares under common stock purchase agreement

 

13,399,999 

 

 

3,600,000 

Installment payments on SWK credit agreement

 

(3,325,180)

 

 

(4,047,207)

Proceeds from stock option exercises

 

415,464 

 

 

200,000 

Proceeds from premium finance agreement

 

836,780 

 

 

 —

Installment payments on premium finance agreement

 

(555,920)

 

 

 —

Cash paid for debt portion of finance lease

 

(9,444)

 

 

 —

Net cash provided by financing activities

 

10,761,699 

 

 

8,884,760 



 

 

 

 

 

Net increase in cash

 

9,099,271 

 

 

4,279,607 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

6,295,152 

 

 

3,759,509 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

15,394,423 

 

$

8,039,116 



 

 

 

 

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

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

$

1,253,233 

 

$

 —

Shares issued in connection with common stock purchase agreement

$

680,937 

 

$

 —

Increase in other assets from accrued expenses

$

50,284 

 

$

 —

Amortization of deferred costs related to common stock purchase agreement

$

390,931 

 

$

101,981 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



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VERU INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 – Basis of Presentation



The accompanying unaudited interim condensed consolidated financial statements for Veru Inc. (“we,” “our,” “us,” “Veru” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting of interim financial information. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The accompanying condensed consolidated balance sheet as of September 30, 2019 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations for the three and nine months ended June 30, 2020 and cash flows for the nine months ended June 30, 2020 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2020.



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



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



Principles of consolidation and nature of operations:  Veru Inc. is referred to in these notes collectively with its subsidiaries as “we,” “our,” “us,” “Veru” or the “Company.” The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Aspen Park Pharmaceuticals, Inc. (APP) and The Female Health Company Limited, and The Female Health Company Limited’s wholly owned subsidiary, The Female Health Company (UK) plc (The Female Health Company Limited and The Female Health Company (UK) plc, collectively, the “U.K. subsidiary”), and The Female Health Company (UK) plc’s wholly owned subsidiary, The Female Health Company (M) SDN.BHD (the “Malaysia subsidiary”). All significant intercompany transactions and accounts have been eliminated in consolidation. Prior to the completion of the October 31, 2016 acquisition (the “APP Acquisition”) of APP through the merger of a wholly owned subsidiary of the Company into APP, the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer healthcare product, the FC2 Female Condom/FC2 Internal Condom® (FC2). The completion of the APP Acquisition transitioned the Company into a biopharmaceutical company focused on oncology and urology with multiple drug products under clinical development. Most of the Company’s net revenues during the three and nine months ended June 30, 2020 and 2019 were derived from sales of FC2.



ReclassificationsCertain prior period amounts on the accompanying unaudited interim condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations or financial position for any period presented.



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

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Operating lease costs are recognized for fixed lease payments on a straight-line basis over the term of the lease. Finance lease costs are a combination of the amortization expense for the ROU asset and interest expense for the outstanding lease liability using the applicable discount rate. Variable lease payments are recognized when incurred based on occurrence or usage. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for short-term leases on a straight-line basis over the lease term.



Government grants:  U.S. GAAP for profit-oriented entities does not define government grants nor is there specific guidance applicable to government grants. Under the Company’s accounting policy for government grants and consistent with non-authoritative guidance, government grants are recognized as a reduction of the related expense. Government grants are recognized when there is reasonable assurance that the Company has met the requirements of the grant and there is reasonable assurance that the grant will be received. Grants that compensate the Company for expenses incurred are recognized as a reduction of the related expenses in the same period in which the expenses are recognized. The Company has elected to treat forgivable loans from a government as a government grant when it is probable that the Company will meet the terms for forgiveness of the loan.



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 unaudited condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss. For the three and nine months ended June 30, 2020 and 2019, comprehensive loss is equivalent to the reported net loss. 



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



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



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



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

 

Note 2 – Liquidity



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



The Company believes its current cash position, cash expected to be generated from sales of the Company’s commercial products, and its ability to secure equity financing or other financing alternatives are adequate to fund planned operations of the Company for the next 12 months. Such financing alternatives may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company's current effective shelf registration statement on Form S-3 (File No. 333-239493). The Company intends to be opportunistic when pursuing equity or debt financing which could include selling common stock under its common stock purchase agreement with Aspire Capital Fund, LLC (see Note 9). 



Note 3 – Fair Value Measurements



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



The three levels of the fair value hierarchy are as follows:



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



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



Level 3 – Instruments with primarily unobservable value drivers.



We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the nine months ended June 30, 2020 and 2019.



As of June 30, 2020 and September 30, 2019, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, were classified within Level 3 of the fair value hierarchy. 



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The Company determines the fair value of hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument. The Company estimates the fair value of hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair value. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating the fair value of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Increases in fair value during a given financial quarter result in the recognition of non-cash derivative expense. Conversely, decreases in fair value during a given financial quarter would result in the recognition of non-cash derivative income. 



The following table provides a reconciliation of the beginning and ending liability balance associated with embedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2020 and 2019:







 

 

 

 

 



Nine Months Ended



June 30,



2020

 

2019



 

 

 

 

 

Beginning balance

$

3,625,000 

 

$

2,426,000 

Change in fair value of derivative liabilities

 

94,000 

 

 

246,000 

Ending balance

$

3,719,000 

 

$

2,672,000 



The expense associated with the change in fair value of the embedded derivatives is included as a separate line item on the accompanying unaudited condensed consolidated statements of operations.



The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 8 for additional information. There is no current observable market for these types of derivatives. The Company determined the fair value of the embedded derivatives using a Monte Carlo simulation model to value the financial liabilities at inception and on subsequent valuation dates. This valuation model incorporates transaction details such as the contractual terms, expected cash outflows, expected repayment dates, probability of a change of control, expected volatility, and risk-free interest rates. A significant acceleration of the estimated repayment date or a significant decrease in the probability of a change of control event prior to repayment of the Credit Agreement, in isolation, would result in a significantly lower fair value measurement of the liabilities associated with the embedded derivatives.



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







 

 

 

 

 

 



 

 

 

Weighted Average (range, if applicable)

Valuation Methodology

 

Significant Unobservable Input

 

June 30, 2020

 

September 30, 2019



 

 

 

 

 

 

Monte Carlo Simulation

 

Estimated change of control dates

 

June 2021 to June 2022

 

September 2020 to December 2021



 

Discount rate

 

13.3% to 14.9%

 

14.4% to 16.8%



 

Probability of change of control

 

10% to 90%

 

10% to 90%

 

Note 4 – Revenue from Contracts with Customers



The Company generates nearly all its revenue from direct product sales. Revenue from direct product sales is generally recognized when the customer obtains control of the product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Sales taxes and other similar taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue.



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The amount of consideration the Company ultimately receives varies depending upon sales discounts, and other incentives that the Company may offer, which are accounted for as variable consideration when estimating the amount of revenue to recognize. The estimate of variable consideration requires significant judgment. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely upon an assessment of current contract sales terms and historical payment experience.



Product returns are typically not significant because returns are generally not allowed unless the product is damaged at time of receipt.



The Company’s revenue is from direct product sales of FC2 in the global public health sector, sales of FC2 in the U.S. prescription channel, and sales of PREBOOST® medicated wipes for prevention of premature ejaculation. The following table presents net revenues from these three categories:







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2020

 

2019

 

2020

 

2019

FC2

 

 

 

 

 

 

 

 

 

 

 

Public health sector

$

4,254,197 

 

$

4,905,874 

 

$

11,197,635 

 

$

13,039,878 

U.S. prescription channel

 

5,391,523 

 

 

4,377,862 

 

 

18,395,280 

 

 

9,412,177 

Total FC2

 

9,645,720 

 

 

9,283,736 

 

 

29,592,915 

 

 

22,452,055 

PREBOOST®

 

676,034 

 

 

443,324 

 

 

1,249,959 

 

 

622,929 

Net revenues

$

10,321,754 

 

$

9,727,060 

 

$

30,842,874 

 

$

23,074,984 



The following table presents net revenue by geographic area:







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



June 30,

 

June 30,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

United States

$

6,396,762 

 

$

5,548,987 

 

$

20,575,515 

 

$

11,234,870 

South Africa

 

1,182,225 

 

 

*

 

 

*

 

 

*

Zimbabwe

 

*

 

 

*

 

 

*

 

 

2,558,308 

Other

 

2,742,767 

 

 

4,178,073 

 

 

10,267,359 

 

 

9,281,806 

Net revenues

$

10,321,754 

 

$

9,727,060 

 

$

30,842,874 

 

$

23,074,984 

*Less than 10% of total net revenues



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



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



The Company recognized revenue of $804,000 and $723,000 during the nine months ended June 30, 2020 and 2019, respectively, after satisfying its contract obligations and transferring control for previously recorded contract liabilities or unearned revenue.

 

Note 5 – Accounts Receivable and Concentration of Credit Risk



The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable is affected by the mix of purchasers within the period. As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion or for certain sales. For sales to the Company’s distributor in Brazil, the Company has agreed to credit terms of up to 180 days subsequent to clearance of the product by the Ministry of Health in Brazil. The Company classified approximately $800,000 and $300,000 of trade receivables with its distributor in Brazil as long-term as of June 30, 2020 and September 30, 2019, respectively, because payment was expected in greater than one year. The long-term portion of trade receivables is included in other assets on the accompanying unaudited condensed consolidated balance sheets.



The components of accounts receivable consist of the following at June 30, 2020 and September 30, 2019:









 

 

 

 

 



June 30,

 

September 30,



2020

 

2019



 

 

 

 

 

Trade receivables, gross

$

5,038,398 

 

$

5,410,165 

Less: allowance for doubtful accounts

 

(25,643)

 

 

(33,143)

Less: allowance for sales and payment term discounts

 

(67,779)

 

 

(49,623)

Less: long-term trade receivables*

 

(800,625)

 

 

(306,342)

Accounts receivable, net

$

4,144,351 

 

$

5,021,057 

*Included in other assets on the accompanying unaudited condensed consolidated balance sheets



At June 30, 2020 and at September 30, 2019, no customers had a current accounts receivable balance that represented greater than 10% of current assets.



At June 30, 2020, three customers had an accounts receivable balance greater than 10% of net accounts receivable and long-term trade receivables, representing 76% of net accounts receivable and long-term trade receivables in the aggregate. At September 30, 2019, two customers had an accounts receivable balance greater than 10% of net accounts receivable and long-term trade receivables, representing 66% of net accounts receivable and long-term trade receivables in the aggregate. 



For the three months ended June 30, 2020, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 72% of the Company’s net revenues in the aggregate. For the three months ended June 30, 2019, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 63% of the Company’s net revenues in the aggregate.



For the nine months ended June 30, 2020, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 74% of the Company’s net revenues in the aggregate. For the nine months ended June 30, 2019, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 64% of the Company’s net revenues in the aggregate.



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



The table below summarizes the change in the allowance for doubtful accounts for the nine months ended June 30, 2020 and 2019:







 

 

 

 

 



Nine Months Ended June 30,



2020

 

2019



 

 

 

 

 

Beginning balance

$

33,143 

 

$

36,201 

Charges to expense

 

 —

 

 

 —

Charge-offs

 

(7,500)

 

 

(3,058)

Ending balance

$

25,643 

 

$

33,143 

 

Recoveries of accounts receivable previously charged off are recorded when received. The Company’s customers are primarily large global agencies, non-government organizations, ministries of health and other governmental agencies,  which purchase and distribute FC2 for use in HIV/AIDS prevention and family planning programs. In the U.S., the Company’s customers include telemedicine providers who sell into the prescription channel.

 

Note 6 – Balance Sheet Information



Inventory



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



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





 

 

 

 

 



June 30,

 

September 30,



2020

 

2019

FC2:

 

 

 

 

 

Raw material

$

750,688 

 

$

426,590 

Work in process

 

127,693 

 

 

187,970 

Finished goods

 

4,268,944 

 

 

3,157,952 

FC2, gross

 

5,147,325 

 

 

3,772,512 

Less: inventory reserves

 

(29,331)

 

 

(125,106)

FC2, net

 

5,117,994 

 

 

3,647,406 

PREBOOST®

 

 

 

 

 

Finished goods

 

76,448 

 

 

 —

Inventory, net

$

5,194,442 

 

$

3,647,406 



Fixed Assets



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



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





 

 

 

 

 

 

 



Estimated

 

June 30,

 

September 30,



Useful Life

 

2020

 

2019

Plant and equipment:

 

 

 

 

 

 

 

Manufacturing equipment

5 - 8 years

 

$

2,766,179 

 

$

2,716,647 

Office equipment, furniture and fixtures

3 - 10 years

 

 

819,140 

 

 

795,228 

Leasehold improvements

3 - 8 years

 

 

298,886 

 

 

298,886 

Total plant and equipment

 

 

 

3,884,205 

 

 

3,810,761 

Less: accumulated depreciation and amortization

 

 

 

(3,568,749)

 

 

(3,458,866)

Plant and equipment, net

 

 

$

315,456 

 

$

351,895 

 

Note 7 – Intangible Assets and Goodwill



Intangible Assets



The gross carrying amounts and net book value of intangible assets are as follows at June 30, 2020:





 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

706,876 

 

$

1,693,124 

Covenants not-to-compete

 

500,000 

 

 

261,905 

 

 

238,095 

Total intangible assets with finite lives

 

2,900,000 

 

 

968,781 

 

 

1,931,219 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

968,781 

 

$

19,931,219 



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





 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

523,172 

 

$

1,876,828 

Covenants not-to-compete

 

500,000 

 

 

208,333 

 

 

291,667 

Total intangible assets with finite lives

 

2,900,000 

 

 

731,505 

 

 

2,168,495 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

731,505 

 

$

20,168,495 



For the three months ended June 30, 2020 and 2019, amortization expense was approximately $79,000 and $77,000,  respectively. For the nine months ended June 30, 2020 and 2019, amortization expense was approximately $237,000 and $232,000, respectively.



Goodwill



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

 

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Note 8 – Debt



SWK Credit Agreement



On March 5, 2018, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with the financial institutions party thereto from time to time (the “Lenders”) and SWK Funding LLC, as agent for the Lenders (the “Agent”), for a synthetic royalty financing transaction. On and subject to the terms of the Credit Agreement, the Lenders provided the Company with a term loan of $10.0 million, which was advanced to the Company on the date of the Credit Agreement. After payment by the Company of certain fees and expenses of the Agent and the Lenders as required in the Credit Agreement, the Company received net proceeds of approximately $9.9 million from the $10.0 million loan under the Credit Agreement.



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



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



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



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



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



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



At June 30, 2020 and September 30, 2019, the Credit Agreement liability consisted of the following:







 

 

 

 

 



June 30,

 

September 30,



2020

 

2019



 

 

 

 

 

Aggregate repayment obligation

$

17,650,000 

 

$

17,650,000 

Less: cumulative payments

 

(8,903,265)

 

 

(5,578,085)

Remaining repayment obligation

 

8,746,735 

 

 

12,071,915 

Less: unamortized discounts

 

(2,102,227)

 

 

(4,590,974)

Less: unamortized deferred issuance costs

 

(49,413)

 

 

(107,910)

Credit agreement, excluding embedded derivative liability, net

 

6,595,095 

 

 

7,373,031 

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

 

4,000 

 

 

899,000 

Credit agreement, net

 

6,599,095 

 

 

8,272,031 

Credit agreement, short-term portion

 

(6,599,095)

 

 

(5,385,649)

Credit agreement, long-term portion

$

 —

 

$

2,886,382 



The Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12month period subsequent to June 30, 2020 will be approximately $8.2 million under the Credit Agreement.



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







 

 

 

 

 



June 30,

 

September 30,



2020

 

2019



 

 

 

 

 

Residual royalty agreement liability, fair value at inception

$

346,000 

 

$

346,000 

Add: accretion of liability using effective interest rate

 

1,702,353 

 

 

773,518 

Residual royalty agreement liability, excluding embedded derivative liability

 

2,048,353 

 

 

1,119,518 

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

 

3,715,000 

 

 

2,726,000 

Total residual royalty agreement liability

 

5,763,353