Overview
Veru Inc. is an oncology biopharmaceutical company with a focus on developing
novel medicines for the management of prostate and breast cancers. Revenues
generated by our growing sexual health division are used to invest and partly
fund the clinical development of our cancer drug pipeline.
The Company's prostate cancer drug pipeline includes VERU-111, VERU-100 and
Zuclomiphene citrate.
VERU-111 for the treatment of men with metastatic castration resistant prostate
cancer who have also become resistant to one androgen receptor targeting agent
VERU111 is an oral, first-in-class, new chemical entity that targets,
crosslinks, and disrupts alpha and beta tubulin subunits of microtubules to
disrupt the cytoskeleton. VERU111 is being evaluated in open label Phase 1b and
Phase 2 clinical studies in men with metastatic castration and androgen receptor
targeting agent resistant prostate cancer in approximately 80 men. In July 2020,
the Company had an FDA meeting and received positive input from FDA on the
pivotal Phase 3 trial design for VERU-111. The Company anticipates starting the
Phase 3 pivotal study evaluating VERU111 for men with metastatic castration
resistant prostate cancer who have also become resistant to one androgen
receptor targeting agent (VERACITY study) in the first quarter of calendar year
2021.
VERU-100 for the palliative treatment of advanced prostate cancer
VERU100 is a novel, proprietary long-acting gonadotropin-releasing hormone
(GnRH) antagonist peptide 3 month subcutaneous depot formulation designed to
address the current limitations of commercially available androgen deprivation
therapies (ADT). There are no GnRH antagonist depot injectable formulations
commercially approved beyond a one-month duration. A Phase 2 study to evaluate
VERU100 dosing is anticipated to begin early in the first quarter of calendar
year 2021 and Phase 3 registration study in 100 men will commence in the second
half of calendar year 2021.
Zuclomiphene citrate for the treatment of men who have hot flashes caused by
androgen deprivation therapy for advanced prostate cancer
Zuclomiphene citrate is an oral nonsteroidal estrogen receptor agonist being
developed to treat hot flashes, a common side effect caused by ADT in men with
advanced prostate cancer. The Company is planning an End of Phase 2 meeting with
the FDA in the last quarter of calendar year 2021.
The Company's breast cancer drug pipeline includes Enobosarm and VERU-111.
Enobosarm, selective androgen receptor targeting agonist, for the treatment of
androgen receptor positive (AR+), estrogen receptor positive (ER+) and human
epidermal growth factor receptor 2 (HER2-) metastatic breast cancer
Enobosarm is an oral, first-in-class, new chemical entity, selective androgen
receptor agonist that targets the androgen receptor (AR) in AR+/ER+/HER2-
metastatic breast cancer without unwanted virilizing side effects. Enobosarm is
the first new class of targeting endocrine therapy in advanced breast cancer in
decades. Enobosarm has extensive nonclinical and clinical experience having been
evaluated in 25 separate clinical studies in over 2,100 subjects, including five
prior Phase 2 clinical studies in advanced breast cancer involving more than 250
patients. In the two Phase 2 clinical studies conducted in women with
AR+/ER+/HER2- breast cancer, enobosarm demonstrated significant antitumor
efficacy in heavily pretreated cohorts and was well tolerated with a favorable
safety profile. In October 2020, the FDA agreed to the Phase 3 registration
clinical trial design to evaluate the efficacy and safety of enobosarm,
selective androgen receptor targeting agonist, versus active control, either
exemestane or tamoxifen (physician's choice), for the treatment of ER+/HER2-
metastatic breast cancer in approximately 240 patients who have failed a
nonsteroidal aromatase inhibitor (anastrozole or letrozole), fulvestrant, and a
CDK 4/6 inhibitor, but prior to IV chemotherapy. The pivotal Phase 3, open
label, randomized, active control study (ARTEST study) is anticipated to
commence in the first half of calendar year 2021.
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VERU-111 for treatment of taxane resistant metastatic triple negative breast
cancer
Preclinical studies in human triple negative breast cancer grown in animal
models demonstrate that VERU111 significantly inhibits cancer proliferation,
migration, metastases, and invasion of triple negative breast cancer cells and
tumors that have become resistant to paclitaxel (taxane). Using the safety
information from the Phase 1b and Phase 2 VERU111 prostate cancer clinical
studies in a total of approximately 80 men, the Company plans to meet with the
FDA in first half of calendar year 2021 and to commence a Phase 2b clinical
study in the fourth quarter of calendar year 2021 to evaluate oral daily dosing
of VERU111 in approximately 100 women with metastatic TNBC that has become
resistant to taxane IV chemotherapy.
Anti-Viral and Anti-Inflammatory Drug Candidate - COVID-19
VERU-111 for the treatment of SARS-CoV-2 in subjects at high risk for acute
respiratory distress syndrome (ARDS)
VERU111 is also being evaluated in a Phase 2 clinical trial to assess the
efficacy of VERU111 in combating COVID-19 to prevent ARDS. If the clinical
results of the Phase 2 clinical trial are positive, the Company intends to apply
for grant funding through third party agencies.
Sexual Health Division
The Company's Sexual Health Division includes a drug candidate, TADFYN®, for the
treatment of BPH and a commercial product, the FC2 Female Condom/ Internal
Condom® (FC2), an FDA-approved product for the dual protection against
unintended pregnancy and sexually transmitted infections.
TADFYN® (tadalafil 5mg and finasteride 5mg combination capsule) is being
developed to treat urinary tract symptoms caused by benign prostatic hyperplasia
(BPH). 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 FDA and expects to submit the NDA for
TADFYN® in early calendar year 2021. The Company's Sexual Health Business
segment will include future revenues for TADFYN®. Costs associated with the
development of TADFYN® are currently included in our Research and Development
segment.
The Company sells FC2 in both commercial sector in U.S. and in the public health
sector in the U.S. and globally. In the U.S., FC2 is available by prescription
through the Company's multiple telemedicine (telemedicine being the remote
diagnosis and treatment of patients by means of telecommunications technology)
and internet pharmacy partners and retail pharmacies. It is also available to
public health sector entities such as state departments of health and 501(c)(3)
organizations. In the global public health sector, the Company markets FC2 to
entities, including ministries of health, government health agencies, U.N.
agencies, nonprofit organizations and commercial partners, that work to support
and improve the lives, health and well-being of women around the world.
Most of the Company's net revenues are currently derived from sales of FC2 in
the commercial and public health sectors.
PREBOOST® Sale
On December 8, 2020, the Company entered into an Asset Purchase Agreement (the
"Purchase Agreement") with Roman Health Ventures Inc. (the "Purchaser").
Pursuant to, and subject to the terms and conditions of, the Purchase Agreement,
the Purchaser purchased substantially all of the assets related to the Company's
PREBOOST® business. PREBOOST® is a 4% benzocaine medicated individual wipes for
the treatment of premature ejaculation and was a commercial product in the
Company's Sexual Health Division during fiscal 2020. The transaction closed on
December 8, 2020. The purchase price for the transaction was $20.0 million,
consisting of $15.0 million paid at closing, $2.5 million payable 12 months
after closing and $2.5 million payable 18 months after closing.
COVID-19 Environment
In December 2019, a novel strain of coronavirus was reported to have emerged in
Wuhan, China. COVID-19, the disease caused by the coronavirus, has since spread
to over 100 countries, including every state in the United States. On March 11,
2020, the World Health Organization declared COVID-19 a pandemic, and on
March 13, 2020, the United States declared a national emergency with respect to
the COVID-19 outbreak.
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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.
The Phase 1b portion of our ongoing VERU-111 clinical trial is fully enrolled.
The Phase 2 clinical study has completed enrollment of approximately 40 men with
metastatic castration resistant prostate cancer who have also become resistant
to androgen receptor targeting agents, such as abiraterone, enzalutamide, or
apalutamide, but prior to proceeding to IV chemotherapy. 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.
COVID-19 has had, and will likely continue to have, an 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. The Company has adopted measures to protect the
employees at its Malaysian facility, to respond in the event an employee at the
facility is determined to have tested positive for COVID-19, and to mitigate the
impact of COVID-19 on the Company's Malaysian manufacturing operations. However,
no such measures can eliminate risks relating to the COVID-19 pandemic, and if
the Company's Malaysian manufacturing facility 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 or through freight or other carriers. The COVID-19 pandemic and related
economic disruption may also adversely affect customer demand for FC2. For
example, sales of FC2 could be impacted in the U.S. prescription market if
insurance coverage is affected by job losses and in the global public health
sector if governments delay future tenders or reduce spending on female condoms
due to financial strains or changed spending priorities caused by the COVID-19
pandemic. The COVID-19 pandemic did not have a material net impact on our
consolidated operating results during the year ended September 30, 2020.
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 largely been
working remotely. Travel between our facilities in the United States, the United
Kingdom and Malaysia has also been restricted. As of the date of this report,
our operations have not been significantly impacted by such remote work
requirements and travel restrictions.
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Significant uncertainty remains as to the potential impact of the COVID-19
pandemic on our operations, and on the global economy. It is currently not
possible to predict how long the pandemic will last or the time that it will
take for economic activity to return to prior levels. We do not yet know the
full extent of any impact on our business or our operations; however, we will
continue to monitor the COVID-19 situation and its impact on our business
closely and expect to reevaluate the timing of our anticipated clinical trials
as the impact of COVID-19 on our industry becomes clearer.
Sales of FC2 in commercial and public health sectors
FC2 Commercial Sector. In 2017, the Company began expanding access to FC2 in
the U.S. by making it available by prescription. With a prescription, FC2 is
covered by most insurance companies with no copay under the ACA and the laws of
20+ states prior to enactment of the ACA. In 2018, we dissolved our small-scale
marketing and sales program to focus our efforts in 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 with a prescription in a
cost-effective and highly convenient manner. As a result of these efforts, the
Company now supplies FC2 to telemedicine providers in the U.S. prescription
channel. The Company is working to develop supply and distributor relationships
with additional telemedicine and other providers.
FC2 Public Health Sector. FC2's 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
unintended pregnancy in these countries represents a remarkable potential for
significant sales of a product that benefits some of the world's most
underprivileged people. However, conditions in these countries can be volatile
and result in unpredictable delays in program development, tender applications
and processing orders.
The Company is working to further develop a global market and distribution
network for FC2 by maintaining relationships with global public health sector
groups and completing strategic arrangements with companies with the necessary
marketing and financial resources and local market expertise.
The Company currently has a limited number of customers for FC2 in the global
public health sector who generally purchase in large quantities. Over the past
few years, significant customers have included large global agencies, such as
UNFPA, USAID, the Brazil Ministry of Health either through UNFPA or Semina
Indústria e Comércio Ltda (Semina), the Company's distributor in Brazil, and the
Republic of South Africa health authorities that purchase through the Company's
various local distributors. Other customers include ministries of health or
other governmental agencies, which either purchase directly or via in-country
distributors, and NGOs.
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Purchasing patterns for FC2 in the public health sector vary significantly from
one customer to another and may reflect factors other than simple demand. For
example, some governmental agencies purchase FC2 through a formal procurement
process in which a tender (request for bid) is issued for either a specific or a
maximum unit quantity. Tenders also define the other elements required for a
qualified bid submission (such as product specifications, regulatory approvals,
clearance by WHO, unit pricing and delivery timetable). Bidders have a limited
period of time in which to submit bids. Bids are subjected to an evaluation
process which is intended to conclude with a tender award to the successful
bidder. The entire tender process, from publication to award, may take many
months to complete, including administrative actions or appeals. A tender award
indicates acceptance of the bidder's price rather than an order or guarantee of
the purchase of any minimum number of units. Many governmental tenders are
stated to be "up to" the maximum number of units, which gives the applicable
government agency discretion to purchase less than the full maximum tender
amount. Orders are placed after the tender is awarded; there are often no set
dates for orders in the tender and there are no guarantees as to the timing or
amount of actual orders or shipments. Orders received may vary from the amount
of the tender award based on a number of factors including vendor supply
capacity, quality inspections and changes in demand. Administrative issues,
politics, bureaucracy, exchange rate risk, process errors, changes in
leadership, funding priorities and/or other pressures may delay or derail the
process and affect the purchasing patterns of public health sector customers. As
a result, the Company may experience significant quarter-to-quarter sales
variances in the global public health sector due to the timing and shipment of
large orders of FC2.
On August 27, 2018, the Company announced that through six of its distributors
in the Republic of South Africa, the Company had received a tender award to
supply 75% of a tender covering up to 120 million female condoms over three
years. The Company began shipping units under this tender award in the third
quarter of fiscal 2019 and we have shipped approximately 10 million units
through September 30, 2020. In October 2020, the Company was awarded 20 million
units through its distributor in Brazil under the new Brazil Female Condom
tender. These units are to be delivered over two years.
The Company classified approximately $0.3 million of trade receivables with its
distributor in Brazil as long-term as of September 30, 2019 because payment was
expected in greater than one year.
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 10,532,048 10,876,704 10,021,188 8,466,004 10,749,860
July 1 - September 30 5,289,908 9,842,020 6,755,124 6,854,868 6,690,080
Total 32,777,128 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
U.S. prescription channel and global public health sector. Other revenues were
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 telemedicine providers in the
U.S. who sell into the prescription channel and global public health sector
agencies who purchase and/or distribute FC2 for use in preventing the
transmission of HIV/AIDS and/or family planning.
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 significant portion of the Company's
future unit sales are likely to be in foreign markets, all sales are denominated
in the U.S. dollar. Effective October 1, 2009, the Company's U.K. and Malaysia
subsidiaries adopted the U.S. dollar as their functional currency, further
reducing the Company's foreign currency risk.
Operating Expenses. The Company manufactures FC2 at its Malaysian facility. The
Company's cost of sales consists primarily of direct material costs, direct
labor costs and indirect production and distribution costs. Direct material
costs include raw materials used to make FC2, principally a nitrile polymer.
Indirect production costs include logistics, quality control and maintenance
expenses, as well as costs for electricity and other utilities. All the key
components for the manufacture of FC2 are essentially available from either
multiple sources or multiple locations within a source.
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Conducting research and development is central to our business model. The
Company's Research and Development segment includes multiple products and
management routinely evaluates each product in its portfolio of products.
Advancement is limited to available working capital and management's
understanding of the prospects for each product. If future prospects do not meet
management's strategic goals, advancement may be discontinued. We have invested
and expect to continue to invest significant time and capital in our research
and development operations. Our research and development expenses were $16.9
million and $13.7 million for fiscal 2020 and 2019, respectively. In fiscal
2021, 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
YEAR ENDED SEPTEMBER 30, 2020 COMPARED TO YEAR ENDED SEPTEMBER 30, 2019
The Company generated net revenues of $42.6 million and net loss of
$19.0 million, which includes a $14.1 million non-cash impairment charge, or
$(0.28) per basic and diluted common share, in fiscal 2020, compared to net
revenues of $31.8 million and net loss of $12.0 million, or $(0.19) per basic
and diluted common share, in fiscal 2019. Net revenues increased 34% year over
year.
FC2 net revenues represented 95% of total net revenues. FC2 net revenues
increased 31% year over year. There was a 14% decrease in total FC2 unit sales,
attributable to the global public health sector, and an increase in FC2 average
sales price per unit of 52%. The principal factor for the increase in the FC2
average sales price per unit compared to prior year was the change in the sales
mix with the U.S. prescription channel representing 64% of total net revenues in
fiscal 2020 compared to 44% of total net revenues in fiscal 2019. The Company
experienced an increase of 93% in FC2 net revenues in the U.S. prescription
channel and a decrease of 20% in FC2 net revenues in the global public health
sector due to timing of orders and tenders.
Cost of sales increased to $11.8 million in fiscal 2020 from $10.1 million in
fiscal 2019 primarily due to an increase in labor, transportation, and equipment
maintenance costs and increased period costs of approximately $0.3 million
resulting from decreased production due to the temporary shutdown of the
Company's manufacturing facility in Malaysia as a result of the COVID-19
pandemic.
Gross profit increased to $30.8 million in fiscal 2020 from $21.7 million in
fiscal 2019. Gross profit margin for fiscal 2020 was 72% of net revenues,
compared to 68% of net revenues for fiscal 2019. In fiscal 2020, the Company
experienced an increase in FC2 sales in the U.S. prescription channel with
higher profit margins, contributing to the increase in overall gross profit
margin, which was partially offset by the increase in labor, transportation, and
equipment maintenance costs and increased period costs of approximately $0.3
million resulting from decreased production due to the temporary shutdown of the
Company's manufacturing facility in Malaysia as a result of the COVID-19
pandemic.
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 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 is also currently seeing pressure on pricing for
FC2 by large global agencies and donor governments in the developed world. As a
result, the Company may continue to experience challenges for revenue from sales
of FC2 in the global public health sector.
Research and development expenses increased to $16.9 million in fiscal 2020 from
$13.7 million 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 $14.5 million in
fiscal 2020 from $14.3 million in fiscal 2019. The increase is primarily due to
increased personnel, personnel costs, and related benefits.
During the fourth quarter of fiscal 2020, we recorded an impairment charge of
$14.1 million related to IPR&D associated with the APP Acquisition. The charge
was primarily a result of deferred development timelines and the decision to
cease development work on Tamsulosin DRS, VERU-722 (male infertility), and
VERU-112 (gout), in response to management's strategic decision to prioritize
the development of other research projects. The Company has several other highly
differentiated, unique, patent-protected drugs under development addressing
larger and potentially more profitable markets. The Company met the criteria for
abandonment under applicable accounting standards. This resulted in writing off
the carrying amounts for these three IPR&D assets during the year ended
September 30, 2020. The remaining book value of other IPR&D assets acquired in
the APP Acquisition is $3.9 million as of September 30, 2020. There was no
impairment charge recorded in fiscal 2019.
Interest expense, which primarily consists of items related to the Credit
Agreement and Residual Royalty Agreement, was $4.6 million in fiscal 2020, which
is comparable with $4.7 million in fiscal 2019.
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Expense associated with the change in fair value of the embedded derivatives
related to the Credit Agreement and Residual Royalty Agreement was $0.6 million
in fiscal 2020 compared to expense of $1.2 million in fiscal 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 9 to the financial statements included in this
report for additional information.
The income tax benefit in fiscal 2020 was $1.1 million, compared to the income
tax benefit of $0.3 million in fiscal 2019. The increase in income tax benefit
of $0.8 million is primarily due to the increase in the federal and state income
tax benefit of $1.7 million related to the increase in the loss before income
taxes for the year and $1.1 million primarily for the increase of 2% in U.K. tax
rates partially offset by an increase in federal tax expense of $2.0 million due
to the increase in the valuation allowance.
Liquidity and Sources of Capital
Liquidity
Our cash and cash equivalents on hand on September 30, 2020 was $13.6 million,
compared to $6.3 million on September 30, 2019. On September 30, 2020, the
Company had working capital of $12.3 million and stockholders' equity of
$30.1 million compared to working capital of $2.8 million and stockholders'
equity of $32.3 million as of September 30, 2019. The increase in working
capital is primarily due to the increase in cash on hand partially offset by an
increase in the current portion of the Credit Agreement and Residual Royalty
Agreement liabilities.
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 I, Item 1A, "Risk Factors - Risks Related to Our Financial
Position and Need for Capital" for a description of certain risks that will
affect our future capital requirements.
The Company believes its current cash position and cash expected to be generated
from sales of the Company's commercial product are adequate to fund planned
operations of the Company for the next 12 months. To the extent the Company may
need additional capital for its operations, it may access financing alternatives
that may include debt financing, common stock offerings, or financing involving
convertible debt or other equity-linked securities and may include financings
under the Company's current effective shelf registration statement on Form S-3
(File No. 333-239493). In August 2020, the Company terminated its 2017 shelf
registration statement on Form S-3 (File No. 333-221120), and as a result no
additional securities will be sold under that registration statement. The
Company intends to be opportunistic when pursuing equity or debt financing which
could include selling common stock under the 2020 Purchase Agreement with Aspire
Capital (see discussion below). See Part I, Item 1A, "Risk Factors - Risks
Related to Our Financial Position and Need for Capital" for a description of
certain risks related to our ability to raise capital on acceptable terms.
As of November 30, 2020, the Company had approximately $15.3 million in cash and
cash equivalents, net trade accounts receivable of $6.6 million and current
trade accounts payable of $2.8 million.
Operating activities
Our operating activities used cash of $1.9 million in fiscal 2020. Cash used in
operating activities included a net loss of $19.0 million, adjustments for
non-cash items totaling $21.4 million and changes in operating assets and
liabilities of $4.3 million. Adjustments for non-cash items primarily consisted
of $14.1 million of impairment of intangible assets, $4.3 million of non-cash
interest expense, and $2.6 million of share-based compensation, partially offset
by deferred income taxes of $1.3 million. The decrease in cash from changes in
operating assets and liabilities included an increase in inventory of
$3.3 million and a decrease in accrued expenses and other current liabilities of
$1.0 million.
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Our operating activities used cash of $5.5 million in fiscal 2019. Cash used in
operating activities included a net loss of $12.0 million, adjustments for
non-cash items totaling $8.1 million and changes in operating assets and
liabilities of $1.6 million. Adjustments for non-cash items primarily consisted
of $4.7 million of non-cash interest expense and $1.9 million of share-based
compensation. The decrease in cash from changes in operating assets and
liabilities included an increase in accounts receivable of $1.4 million and an
increase in inventories of $1.5 million. These were partially offset by an
increase in accrued expenses and other current liabilities of $2.1 million.
Investing activities
Net cash used in investing activities in fiscal 2020 and fiscal 2019 was $0.1
million, associated with capital expenditures.
Financing activities
Net cash provided by financing activities in fiscal 2020 was $9.3 million and
primarily consisted of $13.4 million from the sale of shares under the 2020
Purchase Agreement and 2017 Purchase Agreement with Aspire Capital (see
discussion below), less principal payments on the Credit Agreement (see
discussion below) totaling $4.4 million.
Net cash provided by financing activities in fiscal 2019 was $8.1 million and
primarily consisted of net proceeds from the underwritten public offering of the
Company's common stock of $9.1 million (see discussion below) and $3.6 million
from the sale of shares under the 2017 Purchase Agreement with Aspire Capital
(see discussion below), less payments on the Credit Agreement (see discussion
below) totaling $4.9 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 $9.2 million after deducting
underwriting discounts and commissions and costs paid by the Company. All of the
shares sold in the offering were by the Company. The offering was made pursuant
to the Company's 2017 shelf registration statement on Form S-3 (File No.
333-221120).
Credit Agreement
On March 5, 2018, the Company entered into a Credit Agreement (as amended, the
"Credit Agreement") with the financial institutions party thereto from time to
time (the "Lenders") and SWK Funding LLC, as agent for the Lenders (the
"Agent"), for a synthetic royalty financing transaction. On and subject to the
terms of the Credit Agreement, the Lenders provided the Company with a term loan
of $10.0 million, which was advanced to the Company on the date of the Credit
Agreement. Under the Credit Agreement, the Company is required to make quarterly
payments on the term loan based on the Company's product revenue from net sales
of FC2 until the earlier of receipt by the Lenders of a return premium specified
in the Credit Agreement or a required payment upon termination of the Credit
Agreement on March 5, 2025 or an earlier change of control of the Company or
sale of the FC2 business. The recourse of the Lenders and the Agent for
obligations under the Credit Agreement is limited to assets relating to FC2. On
May 13, 2019, the Company entered into an amendment to the Credit Agreement (the
"Second Amendment") which included a reduction to the percentages to be used to
calculate the quarterly revenue-based payments due on product revenue from net
sales of FC2 during calendar year 2019, a return to the original percentages to
calculate the quarterly revenue-based payments due on product revenue from net
sales of FC2 during calendar year 2020 and an increase to the percentages to be
used to calculate the quarterly revenue-based payments due on product revenue
from net sales of FC2 during calendar year 2021 and thereafter until the loan
has been repaid.
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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 $4.7 million and
$4.9 million during fiscal 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 September 30, 2020 will be approximately $7.3 million under the Credit
Agreement. The Company also estimates that it will begin making payments under
the Residual Royalty Agreement during the 12-month period subsequent to
September 30, 2020 and estimates such payments within that period to be
approximately $1.1 million.
Common Stock Purchase Agreements
On June 26, 2020, the Company entered into a common stock purchase agreement
(the "2020 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 in its sole discretion during the
36-month term of the 2020 Purchase Agreement, to direct Aspire Capital to
purchase up to $23.9 million of the Company's common stock in the aggregate.
Upon execution of the 2020 Purchase Agreement, the Company issued and sold to
Aspire Capital under the 2020 Purchase Agreement 1,644,737 shares of common
stock at a price per share of $3.04, for an aggregate purchase price of
$5,000,000. Other than the 212,130 shares of common stock issued to Aspire
Capital in consideration for entering into the 2020 Purchase Agreement and the
initial sale of 1,644,737 shares of common stock, the Company has no obligation
to sell any shares of common stock pursuant to the 2020 Purchase Agreement and
the timing and amount of any such sales are in the Company's sole discretion
subject to the conditions and terms set forth in the 2020 Purchase Agreement.
Effective June 26, 2020, upon the execution of the 2020 Purchase Agreement, the
Company's prior purchase agreement with Aspire Capital dated December 29, 2017
(the "2017 Purchase Agreement") was terminated. Under the 2017 Purchase
Agreement, the Company had the right, from time to time and in its sole
discretion during the 36-month term of the 2017 Purchase Agreement, to direct
Aspire Capital to purchase up to $15.0 million of the Company's common stock in
the aggregate. As of the date of termination of the 2017 Purchase Agreement, the
Company sold a total of 6,214,343 shares of common stock to Aspire Capital under
the 2017 Purchase Agreement for aggregate proceeds of $15.0 million. During
fiscal 2020, the Company sold 2,497,333 shares of common stock to Aspire Capital
under the 2017 Purchase Agreement resulting in proceeds to the Company of
$8.4 million.
U.S. Small Business Administration's Paycheck Protection Program
In April 2020, the Company was approved for a loan under the Paycheck Protection
Program established by the CARES Act in the amount of $0.5 million. The PPP Loan
proceeds were received on April 20, 2020. The PPP Loan had a maturity of two
years and bore interest at an annual rate of 1%. Payments on the PPP Loan were
deferred for six months. Pursuant to the CARES Act, the PPP Loan would be fully
forgiven if the funds were 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 expended the
funds received under the PPP Loan in full on qualifying expenses, and maintained
the conditions set forth by the CARES Act. The Company submitted its application
for forgiveness in September 2020. The loan and related interest incurred were
forgiven by the SBA on November 10, 2020.
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Critical Accounting Estimates
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States. The Company is required to
adopt various accounting policies and to make estimates and assumptions in
preparing its financial statements that affect the reported amounts of assets,
liabilities, net revenues and expenses. On an ongoing basis, the Company
evaluates its estimates and assumptions. The Company bases its estimates on
historical experience to the extent practicable and on various other assumptions
that it believes are reasonable under the circumstances and at the time they are
made. If the Company's assumptions prove inaccurate or if future results are not
consistent with historical experience, the Company may be required to make
adjustments in its policies that affect reported results. The Company's
significant accounting policies are disclosed in Note 1 to the financial
statements included in this report.
The Company's most critical accounting estimates include: valuation of tax
assets and liabilities, measurement of fair value, and valuation of goodwill and
intangible assets. The Company has other key accounting policies that are less
subjective and, therefore, their application is less subject to variations that
would have a material impact on the Company's reported results of operations.
The following is a discussion of the Company's most critical policies, as well
as the estimates and judgments involved.
Income Taxes
The Company files separate income tax returns for its foreign subsidiaries. ASC
Topic 740 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are also provided for carryforwards for income tax purposes. In
addition, the amount of any future tax benefits is reduced by a valuation
allowance to the extent such benefits are not expected to be realized.
The Company accounts for income taxes using the liability method, which requires
the recognition of deferred tax assets or liabilities for the tax-effected
temporary differences between the financial reporting and tax bases of assets
and liabilities, and for net operating loss and tax credit carryforwards.
The Company completes a detailed analysis of its deferred income tax valuation
allowances on an annual basis or more frequently if information comes to its
attention that would indicate that a revision to its estimates is necessary. In
evaluating the Company's ability to realize its deferred tax assets, management
considers all available positive and negative evidence on a country by country
basis, including past operating results and forecasts of future taxable income,
and the potential Section 382 limitation on the net operating loss carryforwards
due to a change in control. In determining future taxable income, management
makes assumptions to forecast U.S. federal and state, U.K. and Malaysia
operating income, the reversal of temporary differences, and the implementation
of any feasible and prudent tax planning strategies. These assumptions require
significant judgment regarding the forecasts of the future taxable income in
each tax jurisdiction and are consistent with the forecasts used to manage the
Company's business. It should be noted that the Company realized significant
losses through 2005 on a consolidated basis. From fiscal 2006 through fiscal
2015, the Company generated taxable income on a consolidated basis. However, the
Company had a cumulative pretax loss in the U.S. for fiscal 2020 and the three
preceding fiscal years. Forming a conclusion that a valuation allowance is not
needed is difficult when there is significant negative evidence such as
cumulative losses in recent years. Management has projected future pretax losses
in the U.S. driven by the investment in research and development, and based on
their analysis concluded that an additional valuation allowance of $4.1 million
should be recorded against the U.S. deferred tax assets related to federal and
state net operating loss carryforwards as of September 30, 2020. In addition,
the Company's U.K. holding company for the non-U.S. operating companies, The
Female Health Company Limited, continues to have a full valuation allowance of
$2.4 million. The operating U.K. subsidiary, The Female Health Company (UK) plc
does not have a valuation allowance due to projections of future taxable income
for the next 10 years.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
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On December 22, 2017, significant changes were enacted to the U.S. tax law
pursuant to the federal tax legislation commonly referred to as the Tax Cuts and
Jobs Act of 2017 (the "Tax Act"). The Tax Act included a permanent reduction to
the U.S. federal corporate income tax rate from 35% to 21% effective January 1,
2018.
Our effective tax rates have differed from the statutory rate primarily due to
the tax impact of foreign operations, state taxes and addition of the valuation
allowance against the NOL carryforwards. Our future effective tax rates could be
adversely affected by earnings being lower than anticipated in countries where
we have lower statutory rates and higher than anticipated in countries where we
have higher statutory rates, changes in the valuation of our deferred tax assets
or liabilities, or changes in tax laws, regulations, and accounting principles.
In addition, we are subject to the continuous examination of our income tax
returns by the IRS and other tax authorities. We regularly assess the likelihood
of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.
Fair Value Measurements
As of September 30, 2020, the Company's financial liabilities measured at fair
value on a recurring basis, which consisted of embedded derivatives, represent
the fair value of the change of control provisions in the Credit Agreement and
Residual Royalty Agreement. See Note 9 to the financial statements included in
this report.
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.
Goodwill and Intangible Assets
The Company evaluates the carrying value of its goodwill and indefinite-lived
intangible assets, which consists of in-process research and development
(IPR&D), on an annual basis in the fourth quarter of each fiscal year or more
frequently when indicators of impairment exist. An impairment of goodwill could
occur if the carrying amount of a reporting unit exceeded the fair value of that
reporting unit. An impairment of indefinite-lived intangible assets would occur
if the fair value of the intangible asset is less than the carrying value.
Intangible assets with finite lives are tested for impairment when events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If these facts and circumstances exist, the Company assesses
for recovery by comparing the carrying values of the assets with their future
undiscounted net cash flows. Significant management judgment is required in the
forecast of future operating results that are used in the preparation of
expected undiscounted cash flows.
Regarding goodwill, the estimated fair value of a reporting unit is highly
sensitive to changes in projections and assumptions; therefore, in some
instances changes in these assumptions could potentially lead to impairment. We
perform sensitivity analyses around our assumptions in order to assess the
reasonableness of the assumptions and the results of our testing. See further
discussion in Note 1 to the financial statements included in this report.
IPR&D assets are considered to be indefinite-lived until the completion or
abandonment of the associated research and development projects. During the
period the assets are considered indefinite-lived, they are tested for
impairment. If the related project is terminated or abandoned, the Company may
have a full or partial impairment related to the IPR&D assets, calculated as the
excess of their carrying value over fair value. The valuation process is very
complex and requires significant input and judgment using internal and external
sources with respect to the Company's future volume, revenue and expense growth
rates, changes in working capital use, the selection of an appropriate discount
rate, asset groupings, and other assumptions and estimates. The Company recorded
an impairment charge of $14.1 million related to the IPR&D assets during the
year ended September 30, 2020. See further discussion in Note 1 and Note 8 to
the financial statements included in this report.
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Recent Accounting Pronouncements
See Note 1 to the financial statements included in this report for additional
information on recently adopted accounting pronouncements and recently issued
accounting pronouncements not yet adopted.
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses. The
Company has, where possible, increased selling prices to offset such increases
in costs.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Item 303(a)(4)
of Regulation S-K.
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