Veru(VERU) - 2023 Q3 - Quarterly Report

FORM 10-Q Registrant Information This report is a quarterly filing by VERU INC. for the period ended June 30, 2023, registered in Wisconsin and listed on Nasdaq Capital Market - The company has filed all required reports and has been subject to such reporting requirements for the past 90 days[3] - The company is classified as a non-accelerated filer and a smaller reporting company[4] Common Stock Outstanding | Date | Common Stock Outstanding (Shares) | | :--------- | :-------------------------------- | | August 8, 2023 | 90,280,439 | Table of Contents FORWARD LOOKING STATEMENTS Forward-Looking Statements Overview This report contains forward-looking statements on financial condition, product development, and business outlook, subject to various risks and uncertainties - Forward-looking statements cover the company's financial condition, product development (including sabizabulin and enobosarm), FC2 business growth, future financial performance, and clinical trial timing and results[10] - These statements are based on the company's current plans and strategies, reflecting its assessment of business risks and uncertainties[10] Risk Factors for Forward-Looking Statements Forward-looking statements face multiple risks, including clinical trial delays, regulatory uncertainties, financing difficulties, and market competition - Clinical trials and research may experience delays, and results may not support market approval or commercialization[11] - The company may not obtain sufficient financing in a timely manner to support product development and operations[11] - FC2 sales have significantly declined recently and may not recover to past levels, especially after telehealth industry consolidation and a major customer's bankruptcy[13] - The company relies on a single supplier for key FC2 raw materials, and the supplier's planned closure of production facilities may lead to supply disruptions and additional costs[13] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements as of June 30, 2023, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with related notes Unaudited Condensed Consolidated Balance Sheets As of June 30, 2023, total assets, cash, liabilities, and stockholders' equity significantly decreased compared to September 30, 2022 Balance Sheet Key Data | Metric | June 30, 2023 (USD) | September 30, 2022 (USD) | | :------------------- | :------------------ | :----------------------- | | Cash and cash equivalents | 16,213,136 | 80,190,675 | | Total current assets | 43,221,164 | 104,769,474 | | Total assets | 75,195,414 | 136,126,017 | | Total current liabilities | 27,686,180 | 41,437,629 | | Total liabilities | 40,808,163 | 55,287,381 | | Total stockholders' equity | 34,387,251 | 80,838,636 | Unaudited Condensed Consolidated Statements of Operations For the three months ended June 30, 2023, the company reported net revenue of $3.34 million and net income of $6.31 million, with basic and diluted earnings per share of $0.07, while the nine-month period saw an expanded net loss Operations Statement Key Data (Three Months) | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :--------------- | :------------------ | :------------------ | | Net revenue | 3,341,185 | 9,602,195 | | Cost of sales | 2,110,567 | 2,533,572 | | Gross profit | 1,230,618 | 7,068,623 | | Research and development expenses | 2,925,171 | 18,133,412 | | Selling, general and administrative expenses | 10,902,916 | 10,761,486 | | Gain on disposal of ENTADFI assets | 17,456,814 | — | | Operating income (loss) | 4,859,345 | (21,823,775) | | Net income (loss) | 6,314,204 | (22,195,576) | | Basic earnings (loss) per share | 0.07 | (0.28) | Operations Statement Key Data (Nine Months) | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :--------------- | :------------------ | :------------------ | | Net revenue | 12,434,946 | 36,765,721 | | Cost of sales | 6,410,198 | 6,679,738 | | Gross profit | 6,024,748 | 30,085,983 | | Research and development expenses | 44,534,153 | 43,755,677 | | Selling, general and administrative expenses | 41,283,275 | 24,887,830 | | Gain on disposal of ENTADFI assets | 17,456,814 | — | | Operating income (loss) | (70,147,580) | (38,551,024) | | Net income (loss) | (69,320,881) | (42,753,412) | | Basic earnings (loss) per share | (0.83) | (0.53) | Unaudited Condensed Consolidated Statements of Stockholders' Equity As of June 30, 2023, total stockholders' equity significantly decreased to $34.39 million from $80.84 million as of September 30, 2022, primarily due to an increased accumulated deficit Summary of Stockholders' Equity Changes | Metric | June 30, 2023 (USD) | September 30, 2022 (USD) | | :------------------- | :------------------ | :----------------------- | | Common stock shares | 91,420,436 | 82,692,598 | | Common stock amount | 914,204 | 826,926 | | Additional paid-in capital | 276,756,250 | 253,974,032 | | Accumulated other comprehensive loss | (581,519) | (581,519) | | Accumulated deficit | (234,895,079) | (165,574,198) | | Treasury stock | (7,806,605) | (7,806,605) | | Total stockholders' equity | 34,387,251 | 80,838,636 | - During the nine months ended 2023, the company increased additional paid-in capital through share-based compensation, stock issuance, and private equity investment, but net losses significantly increased the accumulated deficit[20][22] Unaudited Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2023, operating activities resulted in a net cash outflow of $78.52 million, investing activities provided $5.55 million, and financing activities provided $9.00 million, leading to a net decrease in cash of $63.98 million Cash Flow Statement Key Data (Nine Months) | Cash Flow Type | June 30, 2023 (USD) | June 30, 2022 (USD) | | :----------------- | :------------------ | :------------------ | | Net cash outflow from operating activities | (78,521,354) | (26,626,506) | | Net cash inflow from investing activities | 5,547,174 | 4,415,755 | | Net cash inflow from financing activities | 8,996,641 | 401,826 | | Net decrease in cash | (63,977,539) | (21,808,925) | | Cash and cash equivalents at period end | 16,213,136 | 100,550,610 | - Operating cash outflow significantly increased, primarily due to net loss, share-based compensation, impairment of intangible assets, and credit loss provisions, partially offset by the gain on sale of ENTADFI assets[24] - Investing cash inflow primarily resulted from $6 million in cash proceeds from the sale of ENTADFI assets[24] - Financing cash inflow mainly came from a $5 million private equity investment and $3.4 million from common stock sales under a purchase agreement[24] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed information on the company's accounting policies, estimates, liquidity, fair value measurements, revenue recognition, and significant events Note 1 – Basis of Presentation This note explains the basis of presentation for the unaudited condensed consolidated financial statements, highlighting the company's focus on oncology and viral ARDS drug development, FC2 commercialization, and the recent sale of ENTADFI assets - The company's primary businesses include developing enobosarm for breast cancer and sabizabulin for viral ARDS, as well as selling the FC2 female condom[28] - The company sold substantially all ENTADFI® (benign prostatic hyperplasia treatment) assets on April 19, 2023[28] - FC2 sales were the primary source of the company's net revenue for the three and nine months ended June 30, 2023 and 2022[28] Note 2 – Liquidity The company anticipates continued cash consumption and losses during drug development and commercialization, but expects current cash, FC2 sales, ENTADFI proceeds, and financing capabilities to support operations for the next 12 months - The company expects to continue consuming cash and incurring losses as it develops and commercializes drug candidates[32] - The company believes its existing cash, FC2 sales revenue, ENTADFI sale proceeds, and financing capabilities are sufficient to support operations for the next 12 months[33] - The company may seek additional capital through debt financing, common stock offerings, or equity-linked securities[33] Note 3 – Fair Value Measurements The company classifies embedded derivatives related to a change of control clause in a residual royalty agreement as Level 3 fair value measurements, with the balance decreasing to $1.98 million as of June 30, 2023 - The company classifies embedded derivatives (related to the change of control clause in the residual royalty agreement) as Level 3 fair value measurements[36][38] Embedded Derivative Fair Value Changes | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :------------------- | :------------------ | :------------------ | | Beginning balance | 4,294,000 | 7,851,000 | | Change in fair value of derivative | (2,319,000) | 557,000 | | Ending balance | 1,975,000 | 8,408,000 | - Fair value estimates use a scenario analysis approach, considering assumptions such as FC2 revenue forecasts, cash outflows, probability and estimated date of change of control, risk-free rates, and credit risk[38] Note 4 – Revenue from Contracts with Customers The company's revenue primarily derives from direct sales of FC2 products, with significant declines in US prescription channel revenue for both three and nine-month periods ended June 30, 2023 - The company's revenue primarily comes from FC2 sales in the US prescription channel and global public health sector, as well as past ENTADFI sales[42] Net Revenue by Product and Channel (Three Months) | Category | June 30, 2023 (USD) | June 30, 2022 (USD) | | :------------------- | :------------------ | :------------------ | | FC2 US prescription channel | 863,379 | 6,736,158 | | FC2 global public health sector | 2,478,031 | 2,866,037 | | Total FC2 | 3,341,410 | 9,602,195 | | ENTADFI | (225) | — | | Total net revenue | 3,341,185 | 9,602,195 | Net Revenue by Product and Channel (Nine Months) | Category | June 30, 2023 (USD) | June 30, 2022 (USD) | | :------------------- | :------------------ | :------------------ | | FC2 US prescription channel | 5,172,543 | 29,900,890 | | FC2 global public health sector | 7,249,315 | 6,864,831 | | Total FC2 | 12,421,858 | 36,765,721 | | ENTADFI | 13,088 | — | | Total net revenue | 12,434,946 | 36,765,721 | Note 5 – Accounts Receivable and Concentration of Credit Risk As of June 30, 2023, net accounts receivable totaled $5.08 million, with a significant concentration of credit risk due to The Pill Club's bankruptcy, leading to a $3.9 million credit loss provision Accounts Receivable Composition | Metric | June 30, 2023 (USD) | September 30, 2022 (USD) | | :----------------------- | :------------------ | :----------------------- | | Trade accounts receivable, gross | 9,028,298 | 4,289,892 | | Less: Allowance for credit losses | (3,923,857) | (12,143) | | Less: Allowance for sales returns and payment discounts | (21,563) | (12,854) | | Less: Long-term trade accounts receivable | — | (714,000) | | Accounts receivable, net | 5,082,878 | 3,550,895 | - The company recorded a $3.9 million credit loss provision for accounts receivable from The Pill Club in the quarter ended March 31, 2023, due to its uncertain financial condition and subsequent bankruptcy filing on April 18, 2023[50] - As of June 30, 2023, the combined accounts receivable balances from two customers accounted for 58% of net accounts receivable[46] Note 6 – Balance Sheet Information This note details inventory and property, plant, and equipment, with net inventory decreasing to $6.49 million and net property, plant, and equipment increasing to $1.49 million as of June 30, 2023 Inventory Composition | Category | June 30, 2023 (USD) | September 30, 2022 (USD) | | :----------- | :------------------ | :----------------------- | | Raw materials | 1,245,019 | 1,662,712 | | Work-in-process | 75,848 | 872,596 | | Finished goods | 5,376,970 | 6,099,343 | | Total inventory | 6,697,837 | 8,634,651 | | Less: Inventory reserve | (207,869) | (15,707) | | Net inventory | 6,489,968 | 8,618,944 | Net Property, Plant, and Equipment | Category | June 30, 2023 (USD) | September 30, 2022 (USD) | | :--------------- | :------------------ | :----------------------- | | Property and equipment, net | 1,492,183 | 1,185,766 | - The September 30, 2022, inventory balance included $1.1 million of ENTADFI inventory, which was sold with the ENTADFI assets[53] Note 7 – Intangible Assets and Goodwill As of June 30, 2023, net intangible assets were $23,810, primarily non-compete clauses, following a $3.9 million impairment charge in Q2 FY2023 due to strategic shifts, while goodwill remained unchanged at $6.9 million Net Book Value of Intangible Assets | Category | June 30, 2023 (USD) | September 30, 2022 (USD) | | :------------------- | :------------------ | :----------------------- | | Non-compete clauses | 23,810 | 77,381 | | Acquired in-process research and development | — | 3,900,000 | | Total intangible assets | 23,810 | 3,977,381 | - The company recorded a $3.9 million intangible asset impairment charge in the second quarter of fiscal year 2023 due to discontinuing the development of sabizabulin for prostate cancer and zuclomiphene[60] - Goodwill remained unchanged at $6.9 million during the reporting period and is allocated to the research and development reporting unit[61] Note 8 – Debt The residual royalty agreement with SWK Funding LLC requires a 5% royalty on FC2 net sales, with total liability at $10.34 million as of June 30, 2023, and the company also entered a $1.4 million premium financing agreement for D&O insurance - The residual royalty agreement requires the company to pay a 5% royalty on FC2 product net sales, terminating upon a change of control or sale of the FC2 business[63] Residual Royalty Agreement Liability | Metric | June 30, 2023 (USD) | September 30, 2022 (USD) | | :------------------------- | :------------------ | :----------------------- | | Total residual royalty agreement liability | 10,338,628 | 10,825,536 | | Residual royalty agreement liability, current portion | (1,061,893) | (1,169,095) | | Residual royalty agreement liability, long-term portion | 9,276,735 | 9,656,441 | - The company entered into a premium financing agreement on November 1, 2022, to finance $1.4 million of directors and officers liability insurance premiums at an annual interest rate of 6.3%[68] Note 9 – Stockholders' Equity The company has authorized but unissued preferred stock, and has engaged in various equity financing activities, including a $200 million shelf registration, a private placement, and common stock purchase agreements with Lincoln Park Capital Fund and Jefferies LLC - The company has authorized 5 million shares of Class A preferred stock and 15,000 shares of Class B preferred stock, none of which were issued as of June 30, 2023[69] - The company's $200 million S-3 shelf registration statement, effective April 14, 2023, had $23 million remaining available as of June 30, 2023[70] - The 2020 common stock purchase agreement with Aspire Capital expired on June 26, 2023, during which the company sold 4,424,450 shares of common stock for $8.4 million in proceeds[73] - The company sold 5 million shares of common stock to Frost Gamma Investments Trust for $5 million through a private equity investment on April 12, 2023[75] - On May 2, 2023, the company entered into a common stock purchase agreement with Lincoln Park Capital Fund to sell up to $100 million of common stock over 36 months, issuing 800,000 shares as an initial fee[76][81] - The company entered into an at-the-market sales agreement with Jefferies LLC on May 12, 2023, to sell up to $75 million of common stock[83] Note 10 – Share-based Compensation Share-based compensation expenses significantly increased for both the three and nine months ended June 30, 2023, totaling $4.55 million and $13.23 million respectively, allocated across cost of sales, SG&A, and R&D Share-based Compensation Expense | Category | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Nine Months Ended June 30, 2023 (USD) | Nine Months Ended June 30, 2022 (USD) | | :------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Cost of sales | 112,515 | 25,275 | 263,879 | 70,923 | | Selling, general and administrative expenses | 3,667,599 | 2,052,755 | 10,183,510 | 5,036,356 | | Research and development expenses | 770,718 | 832,946 | 2,786,310 | 1,809,066 | | Total share-based compensation | 4,550,832 | 2,910,976 | 13,233,699 | 6,916,345 | - As of June 30, 2023, the company had 17,964,858 unexercised stock options with a weighted-average exercise price of $5.19[92] - Unrecognized compensation expense related to unvested stock options was approximately $34.8 million as of June 30, 2023, expected to be recognized over a weighted-average period of 2.1 years[94] Note 11 – Leases The company holds operating leases for office, manufacturing, and storage spaces, with a weighted-average remaining lease term of 6.1 years and a discount rate of 7.7% as of June 30, 2023 Lease Costs (Nine Months) | Category | June 30, 2023 (USD) | June 30, 2022 (USD) | | :--------------- | :------------------ | :------------------ | | Operating lease costs | 838,112 | 598,965 | | Short-term lease costs | 32,003 | 36,817 | | Variable lease costs | 136,569 | 162,287 | | Sublease income | (134,533) | (134,533) | | Total lease costs | 872,151 | 667,570 | Operating Lease Information | Metric | June 30, 2023 | September 30, 2022 | | :------------------- | :------------ | :----------------- | | Weighted-average remaining lease term (years) | 6.1 | 6.8 | | Weighted-average discount rate | 7.7% | 7.6% | - The company's decision not to cancel its London office lease option resulted in a $265,000 adjustment to lease liabilities and right-of-use assets[98] Note 12 – Contingent Liabilities The company faces inherent product liability risks, maintaining $10 million in insurance, and is involved in two lawsuits related to sabizabulin COVID-19 treatment claims, which it intends to vigorously defend - The company faces product liability claims risk and holds $10 million in product liability insurance[102] - The company is a defendant in two lawsuits, including a class action regarding sabizabulin COVID-19 treatment and a shareholder derivative suit, both alleging claims against company officers and directors[103][104] - The company has a clinical trial collaboration and supply agreement with Eli Lilly and Company for a combination study of enobosarm and abemaciclib, with Eli Lilly providing the compound free of charge[106] Note 13 – Income Taxes The company uses the liability method for income tax accounting, recognizing deferred tax assets and liabilities, and while the 2017 Tax Cuts and Jobs Act increased deferred tax assets by $8.7 million, a full valuation allowance resulted in no net impact on US income tax expense - The company uses the liability method for income tax accounting, recognizing deferred tax assets and liabilities[109] - As of September 30, 2022, the company had $112.7 million in US federal NOL carryforwards, $51.3 million in state NOL carryforwards, and $5.9 million in US federal R&D tax credits[110] - The 2017 Tax Cuts and Jobs Act, requiring capitalization and amortization of R&D expenditures, increased deferred tax assets by approximately $8.7 million as of June 30, 2023, but with a full valuation allowance against US deferred tax assets, there was no net impact on US income tax expense[111] Reconciliation of Income Tax Expense (Benefit) to Statutory Rate (Nine Months) | Item | June 30, 2023 (USD) | June 30, 2022 (USD) | | :----------------------- | :------------------ | :------------------ | | Income tax expense (benefit) at U.S. federal statutory rate | (14,573,616) | (8,931,007) | | State income tax expense (benefit), net of federal benefit | (1,128,414) | (691,515) | | Change in valuation allowance | 14,705,293 | 13,637,539 | | Total income tax expense (benefit) | (77,286) | 224,808 | Note 14 – Net Income (Loss) Per Share For the three months ended June 30, 2023, basic and diluted net earnings per share were $0.07, while all potentially dilutive instruments were excluded from diluted EPS calculations for periods with net losses due to their anti-dilutive effect Net Income (Loss) Per Share Reconciliation (Three Months) | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :----------------------- | :------------------ | :------------------ | | Net income (loss) | 6,314,204 | (22,195,576) | | Basic weighted-average common shares | 88,266,152 | 80,088,431 | | Basic earnings (loss) per share | 0.07 | (0.28) | | Diluted weighted-average common shares | 88,301,516 | 80,088,431 | | Diluted earnings (loss) per share | 0.07 | (0.28) | Net Income (Loss) Per Share Reconciliation (Nine Months) | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :----------------------- | :------------------ | :------------------ | | Net income (loss) | (69,320,881) | (42,753,412) | | Basic weighted-average common shares | 83,218,748 | 80,054,594 | | Basic earnings (loss) per share | (0.83) | (0.53) | | Diluted weighted-average common shares | 83,218,748 | 80,054,594 | | Diluted earnings (loss) per share | (0.83) | (0.53) | - All potentially dilutive instruments were excluded from diluted earnings per share calculations for the three months ended June 30, 2022, and the nine months ended June 30, 2023 and 2022, due to their anti-dilutive effect resulting from net losses[115] Note 15 – Sale of ENTADFI Assets On April 19, 2023, the company sold substantially all ENTADFI® assets to Blue Water Vaccines Inc. for $20 million, including cash, an interest-free note, and up to $80 million in milestone payments, recognizing a gain of approximately $17.5 million - The company sold substantially all ENTADFI® assets to Blue Water Vaccines Inc. (BWV) on April 19, 2023[116] - The transaction price was $20 million, comprising $6 million in cash, a $14 million interest-free note (with $8.5 million short-term and $4.4 million long-term portions), and up to $80 million in milestone payments[116] - The company recognized a gain of approximately $17.5 million from this transaction[116] Note 16 – Subsequent Events On July 24, 2023, company shareholders approved an increase in authorized common stock from 154,000,000 to 308,000,000 shares - On July 24, 2023, company shareholders approved increasing the authorized number of common stock shares from 154,000,000 to 308,000,000[117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results for the period ended June 30, 2023, highlighting progress in oncology, infectious disease, and sexual health programs, alongside challenges in FC2 sales, high R&D, and financing needs Overview Veru is a late-clinical stage biopharmaceutical company focused on developing novel drugs for advanced breast cancer and viral ARDS, commercializing the FC2 female condom, and recently selling ENTADFI assets - The company focuses on developing enobosarm (for advanced breast cancer) and sabizabulin (for viral ARDS) as drug candidates[119] - The Phase III ENABLAR-2 clinical study for enobosarm has been redesigned per FDA recommendations to optimize dosage and evaluate monotherapy efficacy, with Phase I clinical results expected in late 2024 or early 2025[122][125] - Sabizabulin showed mortality benefits in Phase II and III COVID-19 clinical studies, and the company plans to meet with the FDA to expand the Phase III confirmatory COVID-19 study into a Phase III study for all types of viral ARDS[127][137] - The FC2 business faces challenges from telehealth industry consolidation and the bankruptcy of a major customer (The Pill Club), with the company seeking growth through its own telehealth platform and public health sector partnerships[144][145][147] - The company sold ENTADFI assets on April 19, 2023, for $20 million, with potential for up to $80 million in milestone payments[149] Oncology Program The oncology program focuses on enobosarm, an oral selective androgen receptor agonist for metastatic breast cancer, currently in a Phase III ENABLAR-2 study with initial positive results and expected Phase I clinical results in late 2024 or early 2025 - Enobosarm is a novel endocrine therapy for AR+ ER+ HER2- metastatic breast cancer, evaluated in approximately 1,450 subjects across 25 clinical studies[120] - The Phase III ENABLAR-2 study has been redesigned into two stages based on FDA recommendations, with the first stage aiming to optimize enobosarm dosage in combination with abemaciclib and evaluate enobosarm monotherapy efficacy[122] - Preliminary clinical results from the first stage show 2 partial responses and 1 stable disease among the first 3 patients, all of whom have been studied for over 9 months[123] - The company plans to obtain Phase III Stage 1 clinical results in late 2024 or early 2025 and may seek accelerated approval based on this data[125] Infectious Disease Program The company is developing sabizabulin 9mg for viral ARDS, demonstrating host-targeted antiviral and broad anti-inflammatory properties, with plans to expand its Phase III confirmatory study to treat all types of viral ARDS - Sabizabulin 9mg possesses host-targeted antiviral and broad anti-inflammatory properties, showing promise for treating viral ARDS[127] - In Phase III clinical studies for COVID-19, sabizabulin demonstrated a 55.2% relative reduction in mortality compared to placebo[128] - The FDA denied Emergency Use Authorization for sabizabulin in COVID-19, but an agreement has been reached on the Phase III confirmatory study design, which will evaluate sabizabulin's efficacy and safety in hospitalized moderate-to-severe COVID-19 patients[131][132] - The company plans to meet with the FDA to expand sabizabulin's Phase III confirmatory study to treat hospitalized patients with all types of viral ARDS[137] - Sabizabulin demonstrated potent anti-inflammatory activity in an H1N1 influenza-induced ARDS mouse model and potential efficacy against poxviruses (e.g., smallpox virus)[133][140] Sexual Health Program The sexual health program centers on the FC2 female condom, the only FDA-approved female-initiated, hormone-free contraceptive, with the company focusing on its own telehealth platform and public health partnerships to drive sales amidst industry challenges - FC2 is the only FDA-approved female-initiated, hormone-free condom for preventing unintended pregnancy and sexually transmitted infections[143] - The company has launched its own FC2-dedicated telehealth and pharmacy services platform to address challenges from telehealth industry consolidation and the bankruptcy of a major customer[145] - The company anticipates strong growth in its FC2 US prescription business and continued large orders in the global public health sector through partnerships with US public health departments[147] - The company is fulfilling a large multi-year South African female condom tender contract and expects Brazil to initiate a formal tender process[148] Sale of ENTADFI On April 19, 2023, the company sold substantially all ENTADFI® assets to Blue Water Vaccines Inc. for $20 million, including cash, an interest-free note, and up to $80 million in milestone payments - The company sold substantially all ENTADFI® assets to Blue Water Vaccines Inc. (BWV) on April 19, 2023[149] - The transaction price was $20 million, comprising $6 million in cash, a $14 million interest-free note, and up to $80 million in milestone payments[149] Consolidated Operations The company's revenue primarily stems from FC2 sales, with US prescription channel revenue significantly declining due to customer challenges and bankruptcy, while operating expenses remain high due to R&D and commercialization efforts Revenues Company revenue primarily comes from FC2 sales in the US prescription channel and global public health sector, with US prescription channel revenue significantly declining due to major telehealth customer challenges and bankruptcy, while global public health sales fluctuate and face pricing pressure - The company has shifted its FC2 business focus to developing its prescription business through internal telehealth solutions to offset lost revenue from major telehealth providers[152] - The Pill Club, formerly the company's largest telehealth customer, filed for bankruptcy in April 2023, eliminating future revenue from this client[153][157] - The company has recorded a $3.9 million credit loss provision for accounts receivable from The Pill Club, with recovery uncertain[156] - The company's primary FC2 raw material relies on a single supplier, which plans to close relevant production facilities, potentially leading to supply disruptions and additional costs as the company seeks alternative materials[160] Operating Expenses The company's cost of sales for FC2 includes direct materials, labor, and overhead, with recent increases in raw material and shipping costs, while R&D expenses remain high for drug development and SG&A is expected to rise due to user acquisition costs - FC2 cost of sales primarily includes direct materials (mainly nitrile polymer), direct labor, and indirect manufacturing and distribution costs[161] - Nitrile polymer costs and shipping costs have recently increased, and user acquisition costs for the company's own telehealth solutions are also expected to rise[162] Research and Development Expenses | Period | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Nine Months Ended June 30, 2023 (USD) | Nine Months Ended June 30, 2022 (USD) | | :------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Research and development expenses | 2,925,171 | 18,133,412 | 44,534,153 | 43,755,677 | - The company expects to continue investing significant resources in the research and development of drug candidates such as enobosarm and sabizabulin[163] Results of Operations This section compares operating results for the three and nine months ended June 30, 2023, to the prior year, showing a 65% revenue decline but net income for the three-month period due to ENTADFI asset sale, while the nine-month period saw an expanded net loss THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THREE MONTHS ENDED JUNE 30, 2022 For the three months ended June 30, 2023, net revenue decreased by 65% to $3.3 million, but the company achieved a net income of $6.3 million due to a $17.5 million gain from the ENTADFI asset sale, despite an 87% drop in FC2 US prescription channel revenue Three-Month Operating Results Comparison | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | Change (%) | | :--------------- | :------------------ | :------------------ | :--------- | | Net revenue | 3,341,185 | 9,602,195 | -65% | | Net income (loss) | 6,314,204 | (22,195,576) | N/A | | Basic earnings (loss) per share | 0.07 | (0.28) | N/A | | Research and development expenses | 2,925,171 | 18,133,412 | -84% | | Gain on disposal of ENTADFI assets | 17,456,814 | — | N/A | - FC2 US prescription channel net revenue decreased by 87%, primarily due to the bankruptcy of The Pill Club, resulting in zero revenue from this customer[166][167] - Gross profit margin decreased from 74% to 37%, mainly due to lower high-margin US prescription channel sales and increased unit costs from reduced production volume[170] - Research and development expenses significantly decreased due to the company's strategic shift to focus on the most promising drug candidates[171] NINE MONTHS ENDED JUNE 30, 2023 COMPARED TO NINE MONTHS ENDED JUNE 30, 2022 For the nine months ended June 30, 2023, net revenue decreased by 66% to $12.4 million, and net loss expanded to $69.3 million, driven by a significant decline in FC2 US prescription channel revenue, high R&D and SG&A expenses, and credit loss provisions Nine-Month Operating Results Comparison | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | Change (%) | | :--------------- | :------------------ | :------------------ | :--------- | | Net revenue | 12,434,946 | 36,765,721 | -66% | | Net income (loss) | (69,320,881) | (42,753,412) | N/A | | Basic earnings (loss) per share | (0.83) | (0.53) | N/A | | Selling, general and administrative expenses | 41,283,275 | 24,887,830 | +66% | | Provision for credit losses | 3,911,714 | (6,500) | N/A | | Impairment of intangible assets | 3,900,000 | — | N/A | - FC2 US prescription channel net revenue significantly decreased, primarily due to telehealth customer business challenges and The Pill Club's bankruptcy, with revenue from The Pill Club dropping from $17.4 million to $3.9 million[179] - Global public health sector net revenue increased, driven by shipments for the 2022 South Africa tender project and growth in the US public sector[180] - Selling, general and administrative expenses increased, mainly due to $12.9 million in sabizabulin commercialization preparation costs and an increase in share-based compensation costs from $5 million to $10.2 million[184] Liquidity and Sources of Capital As of June 30, 2023, cash and cash equivalents significantly decreased to $16.2 million from $80.2 million, with operating activities using $78.5 million cash, while investing and financing activities provided $5.5 million and $9.0 million, respectively, as the company seeks additional capital through various equity agreements Liquidity As of June 30, 2023, cash and cash equivalents significantly decreased to $16.2 million from $80.2 million, with working capital and stockholders' equity also declining, though the company expects to meet future operating needs through existing cash, FC2 sales, ENTADFI proceeds, and equity financing Liquidity Key Data | Metric | June 30, 2023 (USD) | September 30, 2022 (USD) | | :------------------- | :------------------ | :----------------------- | | Cash and cash equivalents | 16,213,136 | 80,190,675 | | Working capital | 15,534,984 | 63,331,845 | | Stockholders' equity | 34,387,251 | 80,838,636 | - The decrease in working capital and stockholders' equity is primarily due to reduced cash, linked to increased R&D and drug commercialization costs, partially offset by decreased accounts payable and accrued expenses[191] - The company expects to continue consuming cash and plans to meet its operating capital needs for the next 12 months through existing cash, FC2 sales revenue, ENTADFI sale proceeds, and equity financing[193][194] Operating activities For the nine months ended June 30, 2023, operating activities used $78.5 million in cash, primarily due to a $69.3 million net loss, non-cash adjustments for share-based compensation, intangible asset impairment, and credit loss provisions, partially offset by the ENTADFI asset sale gain - For the nine months ended June 30, 2023, operating activities used $78.5 million in cash[195] - Cash usage primarily included a $69.3 million net loss, along with $13.2 million in share-based compensation, $3.9 million in intangible asset impairment, and $3.9 million in credit loss provisions as non-cash adjustments[195] - A $17.5 million gain on the sale of ENTADFI assets and a $2.3 million change in the fair value of derivative liabilities partially offset the cash outflow[195] Investing activities For the nine months ended June 30, 2023, investing activities provided $5.5 million in cash, mainly from the $6 million cash proceeds from the ENTADFI asset sale, partially offset by capital expenditures - For the nine months ended June 30, 2023, investing activities provided $5.5 million in cash, primarily from $6 million in cash proceeds from the sale of ENTADFI assets[197] - In the prior year period, investing activities provided $4.4 million in cash, mainly from the $5 million sale of the PREBOOST® business[198] Financing activities For the nine months ended June 30, 2023, financing activities provided $9.0 million in cash, primarily from a $5 million private equity investment, $3.4 million from common stock sales under the Aspire Capital agreement, and $0.3 million from stock option exercises - For the nine months ended June 30, 2023, financing activities provided $9.0 million in cash[199] - Primary sources included a $5 million private equity investment, $3.4 million from common stock sales under the Aspire Capital purchase agreement, and $0.3 million from stock option exercises[199] - In the prior year period, financing activities provided $0.4 million in cash, mainly from stock option exercises[200] Sources of Capital The company secures capital through various means, including the SWK residual royalty agreement, a private equity investment, and common stock purchase agreements with Lincoln Park Capital Fund and Jefferies LLC - The SWK residual royalty agreement requires the company to pay a 5% royalty on FC2 product net sales, with approximately $1.1 million expected to be paid in the next 12 months[202][203] - The common stock purchase agreement with Aspire Capital expired on June 26, 2023, during which the company sold 4,424,450 shares of common stock for $8.4 million in proceeds[205] - The company sold 5 million shares of common stock to Frost Gamma Investments Trust through a private equity investment, generating $5 million[206] - The company entered into an agreement with Lincoln Park Capital Fund to sell up to $100 million of common stock over 36 months, having already issued 800,000 shares as an initial fee[208] - The company entered into an at-the-market sales agreement with Jefferies LLC to sell up to $75 million of common stock[209] Fair Value Measurements The company classifies embedded derivatives related to a change of control clause in a residual royalty agreement as Level 3 fair value measurements, with estimates based on unobservable inputs and subjective assumptions that could significantly impact operating results - The company classifies embedded derivatives (related to the change of control clause in the residual royalty agreement) as Level 3 fair value measurements[212] - Fair value estimates use a scenario analysis approach, considering assumptions such as FC2 revenue forecasts, cash outflows, probability and estimated date of change of control, risk-free rates, and credit risk[213] - Any significant changes in these assumptions could lead to significantly higher or lower fair value measurements in future reporting periods, materially impacting operating results[213] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure has not significantly changed since its annual report on Form 10-K for the year ended September 30, 2022 - The company's market risk exposure was discussed in its annual report on Form 10-K for the year ended September 30, 2022[215] - There have been no significant changes in the company's market risk exposure since September 30, 2022[215] Item 4. Controls and Procedures As of the end of this reporting period, the company's management, including the CEO and CFO, assessed the effectiveness of disclosure controls and procedures, concluding they are effective, with no significant changes to internal control over financial reporting this quarter - Company management assessed the effectiveness of disclosure controls and procedures, concluding they are effectively designed and operated[216] - There were no significant changes in the company's internal control over financial reporting during this quarter[217] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company's current material legal proceedings are disclosed in Note 12, "Contingent Liabilities," to the financial statements, which is incorporated by reference herein - The company's current material legal proceedings are disclosed in Note 12, "Contingent Liabilities," to the financial statements[219] Item 1A. Risk Factors This section supplements the risk factors disclosed in the company's annual report on Form 10-K, focusing on risks related to its refocused R&D strategy, financing, sabizabulin EUA, FC2 sales, customer concentration, and supply chain - Failure to obtain additional capital may require the company to scale back development programs or share technology rights with third parties on unfavorable terms[221] - Sabizabulin's eligibility for FDA Emergency Use Authorization depends on the federal government continuing to issue EUAs for COVID-19 treatments; otherwise, New Drug Application (NDA) approval may be required for market entry[222] - FC2 sales revenue has significantly declined recently and may not recover to past levels, especially after the bankruptcy of a major telehealth customer (The Pill Club)[223] - The company faces concentrated credit risk with $3.9 million in accounts receivable from The Pill Club, which may not be fully or partially recoverable due to its bankruptcy[225] - The company relies on a single supplier for key FC2 raw materials, and the supplier's planned closure of production facilities may lead to supply disruptions and additional costs[226] Item 6. Exhibits This section lists the exhibits filed with this quarterly report, including asset purchase agreements, certificate of amendment to the articles of incorporation, stock purchase agreements, registration rights agreements, at-the-market sales agreements, and CEO and CFO certifications - Exhibits include asset purchase agreements, certificate of amendment to the articles of incorporation, stock purchase agreements, registration rights agreements, at-the-market sales agreements, and CEO and CFO certifications[228][229] SIGNATURES