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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Veru Inc.    VERU

VERU INC.

(VERU)
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VERU : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/13/2020 | 12:16pm EDT

Overview

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

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

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

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




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

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

The Company is also advancing new drug formulations in its specialty pharmaceutical pipeline addressing unmet medical needs in urology such as TADFIN® for the administration of tadalafil 5mg and finasteride 5mg combination formulation dosed daily to treat urinary tract symptoms caused by BPH. Tadalafil (CIALIS®) is currently approved for treatment of benign prostatic hyperplasia (BPH) and erectile dysfunction and finasteride is currently approved for treatment of BPH (finasteride 5mg PROSCAR®) and male pattern hair loss (finasteride 1mg PROPECIA®). The co-administration of tadalafil and finasteride has been shown to be more effective for the treatment of BPH than by finasteride alone. The Company had a successful pre-NDA meeting with the FDA and the expected submission of the NDA for TADFIN® is the fourth quarter of calendar year 2020 or early 2021. The Company is also developing a Tamsulosin XR formulation which is a formulation of tamsulosin, the active ingredient in FLOMAX®, which the Company has designed to avoid the "food effect" inherent in currently marketed versions of the drug, allowing for potentially safer administration and improved patient compliance.

The Company's commercial products include FC2, an FDA-approved product for the dual protection against unintended pregnancy and sexually transmitted infections, and the PREBOOST® 4% benzocaine medicated individual wipe for the treatment of premature ejaculation. The Company's Female Health Company Division markets and sells FC2 commercially and in the public health sector both in the U.S. and globally. In the U.S., FC2 is available by prescription through the Company's multiple telemedicine and internet pharmacy partners and retail pharmacies, as well as OTC through the Company's website at www.fc2.us.com. In the global public health sector, the Company markets FC2 to entities, including ministries of health, government health agencies, U.N. agencies, nonprofit organizations and commercial partners, that work to support and improve the lives, health and well-being of women around the world. PREBOOST® is marketed online in the U.S. through an exclusive marketing arrangement under the Roman® Swipes brand name by Roman Health Ventures Inc. Roman is a leading telemedicine company that sells men's health products via the internet website www.getroman.com.


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In October 2016, we completed the APP Acquisition. Prior to the completion of the APP Acquisition, the Company had been a single product company, focused on manufacturing, marketing and selling FC2 in the public sector. Most of the Company's net revenues are currently derived from sales of FC2 in the public and commercial sectors.




Recent Developments



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

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

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

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




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

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

Sales of FC2 in the public and commercial sectors

FC2 Public Sector. FC2's primary use is for the prevention of HIV/AIDS and other sexually transmitted diseases and family planning, and the global public health sector has been the Company's main market for FC2. Within the global public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.

FC2 has been distributed in the U.S. and 149 other countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other sexually transmitted infections and 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.

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




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Purchasing patterns for FC2 in the public sector vary significantly from one customer to another and may reflect factors other than simple demand. For example, some governmental agencies purchase FC2 through a formal procurement process in which a tender (request for bid) is issued for either a specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited period of time in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful bidder. The entire tender process, from publication to award, may take many months to complete, including administrative actions or appeals. A tender award indicates acceptance of the bidder's price rather than an order or guarantee of the purchase of any minimum number of units. Many governmental tenders are stated to be "up to" the maximum number of units, which gives the applicable government agency discretion to purchase less than the full maximum tender amount. Orders are placed after the tender is awarded; there are often no set dates for orders in the tender and there are no guarantees as to the timing or amount of actual orders or shipments. Orders received may vary from the amount of the tender award based on a number of factors including vendor supply capacity, quality inspections and changes in demand. Administrative issues, politics, bureaucracy, process errors, changes in leadership, funding priorities and/or other pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may experience significant quarter-to-quarter sales variances in the global public sector due to the timing and shipment of large orders of FC2.

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

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

FC2 Commercial Sector. In April 2017, the Company launched a small-scale marketing and sales program to support the promotion of FC2 in the U.S. market. The commercial team developed a plan to confirm the "proof of concept" that FC2 represented a significant business opportunity. This required changes in the distribution process for FC2 in the U.S. As part of this strategy 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 92% of major retail pharmacies the ability to make FC2 available to their customers. In addition to the distribution system, the Company expanded sales and market access efforts that resulted in FC2 now being available through the following access points: community-based organizations, by prescription, through leading telemedicine providers, through 340B covered entities, colleges 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 U.S. In 2018, we dissolved our small-scale marketing and sales program to focus our efforts in partnering with fast-growing, highly reputable telemedicine firms (telemedicine being the remote diagnosis and treatment of patients by means of telecommunications technology) to bring our much-needed FC2 product to patients in a cost-effective and highly convenient manner.

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




Period                       2020          2019          2018          2017          2016

October 1 - December 31   10,070,700     7,382,524     4,399,932     6,389,320    15,380,240
January 1 - March 31       6,884,472     9,792,584     4,125,032     4,549,020     9,163,855
April 1 - June 30                   -   10,876,704    10,021,188     8,466,004    10,749,860
July 1 - September 30               -    9,842,020     6,755,124     6,854,868     6,690,080
Total                     16,955,172    37,893,832    25,301,276    26,259,212    41,984,035



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

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


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

In 2017, the Company began expanding access to FC2 in the U.S. by making it available by prescription. With a prescription, FC2 is covered by most insurance companies with no copay under the Patient Protection and Affordable Care Act (the "ACA") and the laws of 20+ states prior to enactment of the ACA. The Company supplies FC2 to a leading telemedicine provider, which has become one of our largest customers. The Company has developed and is working to develop additional supply and distributor relationships with telemedicine and other providers.

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

Operating Expenses. The Company manufactures FC2 at its Malaysian facility. The Company's cost of sales consists primarily of direct material costs, direct labor costs and indirect production and distribution costs. Direct material costs include raw materials used to make FC2, principally a nitrile polymer. Indirect production costs include logistics, quality control and maintenance expenses, as well as costs for electricity and other utilities. All the key components for the manufacture of FC2 are essentially available from either multiple sources or multiple locations within a source.

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





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Results of Operations


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

The Company generated net revenues of $9.9 million and net loss of $0.8 million, or $(0.01) per basic and diluted common share, for the three months ended March 31, 2020, compared to net revenues of $7.0 million and net loss of $4.0 million, or $(0.07) per basic and diluted common share, for the three months ended March 31, 2019. Net revenues increased 43% year over year.

FC2 net revenues represented 96% of total net revenues for the three months ended March 31, 2020. FC2 net revenues increased 39% year over year. There was a 30% decrease in total FC2 unit sales and an increase in FC2 average sales price per unit of 98%. The principal factor for the increase in the FC2 average sales price per unit compared to prior year was the increase in net revenues in the U.S. prescription channel. The Company experienced an increase of 168% in FC2 net revenues in the U.S. prescription channel and a decrease of 40% in FC2 net revenues in the global public sector.

Cost of sales increased to $2.5 million in the three months ended March 31, 2020 from $2.4 million in the three months ended March 31, 2019 primarily due to an increase in labor, transportation, and equipment maintenance costs.

Gross profit increased to $7.4 million in the three months ended March 31, 2020 from $4.6 million in the three months ended March 31, 2019. Gross profit margin for the 2020 period was 75% of net revenues, compared to 66% of net revenues for the 2019 period. The increase in the gross profit margin is primarily due to the increase in sales in the U.S. prescription channel, which is at a higher average sales price.

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

Research and development expenses increased to $3.9 million in the three months ended March 31, 2020 from $2.9 million in the same period in fiscal 2019. The increase is primarily due to increased costs associated with the in-process research and development projects and increased personnel costs.

Selling, general and administrative expenses remained consistent at $3.8 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Interest expense, which consists of items related to the Credit Agreement and Residual Royalty Agreement, was $1.2 million in the three months ended March 31, 2020, which is comparable with $1.3 million in the three months ended March 31, 2019.

Income associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $0.5 million in the three months ended March 31, 2020 compared to expense of $0.6 million in the three months ended March 31, 2019. The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the financial statements included in this report for additional information.

The income tax benefit in the second quarter of fiscal 2020 was $133,000, compared to income tax expense of $25,000 in the second quarter of fiscal 2019. The increase in the income tax benefit of $158,000 is primarily due to a decrease in the change in the valuation allowance of $0.9 million, partially offset by a decrease in the income tax benefit of $0.8 million related to the decrease in the loss before income taxes during the current period.


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

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

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

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

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

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

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

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

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

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

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




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Liquidity and Sources of Capital



Liquidity


Our cash on hand at March 31, 2020 was $2.6 million, compared to $6.3 million at September 30, 2019. At March 31, 2020, the Company had working capital of $0.6 million and stockholders' equity of $31.1 million compared to working capital of $2.8 million and stockholders' equity of $32.3 million as of September 30, 2019. The decrease in working capital is primarily due to an increase in the current portion of the Credit Agreement liability and the recognition of a current liability for operating leases as a result of the Company's adoption of the new lease accounting standard, as described in Note 1 to the financial statements included in this report.

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

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



Operating activities


Our operating activities used cash of $4.9 million in the six months ended March 31, 2020. Cash used in operating activities included a net loss of $4.1 million, adjustments for noncash items totaling $4.0 million and changes in operating assets and liabilities of $4.8 million. Adjustments for noncash items primarily consisted of $2.3 million of noncash interest expense, $1.3 million of share-based compensation, and $0.2 million for the write-down of obsolete inventory. The decrease in cash from changes in operating assets and liabilities included an increase in accounts receivable of $1.8 million, an increase in inventories of $2.6 million, an increase in prepaid expenses and other current assets of $1.0 million, and a decrease in accrued expenses and other current liabilities of $0.3 million. These were offset by an increase in accounts payable of $1.1 million.

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



Investing activities


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




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Financing activities


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

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



Sources of Capital



Common Stock Offering


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



SWK Credit Agreement


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

In connection with the Credit Agreement, Veru and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the "Residual Royalty Agreement"), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing after the Lenders would have received their return premium based on the return premium and calculation of revenue-based payments under the Credit Agreement without taking into account the amendments effected by the Second Amendment. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties.

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




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Aspire Capital Purchase Agreement

On December 29, 2017, the Company entered into the Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time and in its sole discretion during the 36-month term of the Purchase Agreement, to direct Aspire Capital purchase up to $15.0 million of the Company's common stock in the aggregate. Other than the 304,457 shares of common stock issued to Aspire Capital in consideration for entering into the Purchase Agreement, the Company has no obligation to sell any shares of common stock pursuant to the Purchase Agreement and the timing and amount of any such sales are in the Company's sole discretion subject to the conditions and terms set forth in the Purchase Agreement.

During the six months ended March 31, 2020, we sold 300,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.2 million. Since inception of the Purchase Agreement through March 31, 2020, we sold 4,017,010 shares of common stock to Aspire Capital resulting in proceeds to the Company of $7.8 million. Subsequent to March 31, 2020, we sold 400,000 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $1.3 million. As of May 11, 2020, the amount remaining under the Purchase Agreement was $5.9 million.

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

In April 2020, the Company was approved for a loan under the U.S. Small Business Administration's (the "SBA") Paycheck Protection Program established by the CARES Act in the amount of $0.5 million (the "PPP Loan"). The PPP Loan proceeds were received on April 20, 2020. The PPP Loan has a maturity of two years and an interest rate of 1%. Payments on the PPP Loan are deferred for six months. Pursuant to the CARES Act, the PPP Loan will be fully forgiven if the funds are used for payroll costs, rent and utilities, subject to certain conditions, including maintaining employees and maintaining salary levels. As of the date of this report, the Company has not terminated any employees in the U.S. due to the COVID-19 pandemic. The Company intends to use the proceeds of the PPP Loan to pay salaries for its U.S.-based employees and to pay rent and utilities. The amount of the PPP Loan that might be forgiven is not known at this time.



Fair Value Measurements


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

The fair values of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company determined the fair value of the embedded derivatives at inception and on subsequent valuation dates using a Monte Carlo simulation model. 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. The assumptions used in calculating the fair value of financial instruments represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company's financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. See Note 3 to the financial statements included in this report for additional information.


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