Company Quick10K Filing
Quick10K
Veru
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.33 63 $83
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
8-K 2019-02-13 Earnings, Exhibits
8-K 2018-12-18 Other Events
8-K 2018-12-13 Earnings, Exhibits
8-K 2018-09-27 Enter Agreement, Other Events, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-05-25 Officers
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-05-02 Amend Bylaw, Exhibits
8-K 2018-04-16 Officers, Exhibits
8-K 2018-03-20 Officers, Shareholder Vote, Exhibits
8-K 2018-03-05 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-01-04 Officers, Exhibits
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KDMN Kadmon Holdings
ATXI Avenue Therapeutics
AKAO Achaogen
AZRX Azurrx Biopharma
ATOS Atossa Genetics
RELV Reliv
RETA Reata Pharmaceuticals
VERU 2018-12-31
Part I.Financial Information
Item 1. Financial Statements
Note 1 – Basis of Presentation
Note 2 – Liquidity
Note 3 – Fair Value Measurements
Note 4 – Accounts Receivable and Concentration of Credit Risk
Note 5 – Balance Sheet Information
Note 6 – Intangible Assets and Goodwill
Note 7 – Debt
Note 8 – Stockholders’ Equity
Note 9 – Share-Based Compensation
Note 10 – Contingent Liabilities
Note 11 – Income Taxes
Note 12 – Net Loss per Share
Note 13 – Industry Segments and Financial Information About Foreign and Domestic Operations
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 veru-20181231xex10_1.htm
EX-31.1 veru-20181231xex31_1.htm
EX-31.2 veru-20181231xex31_2.htm
EX-32.1 veru-20181231xex32_1.htm

Veru Earnings 2018-12-31

VERU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 veru-20181231x10q.htm 10-Q 20181231 10Q Q1



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



 

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



For the quarterly period ended December 31, 2018





 

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



For the transition period from              to             



Commission file number 1-13602





Veru Inc.

(Name of registrant as specified in its charter)





 

 

 

 

 

Wisconsin

 

39-1144397

(State of Incorporation)

 

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

 

 

4400 Biscayne Boulevard, Suite 888

Miami, FL

 

33137

(Address of principal executive offices)

 

(Zip Code)



305-509-6897

(Registrant’s telephone number, including area code)



N/A

(Former Name or Former Address, if Changed Since Last Report)





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



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



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





 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company



 

Emerging growth company



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



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



As of February 11, 2019, the registrant had 62,784,480 shares of $0.01 par value common stock outstanding.

 

 


 

VERU INC.

INDEX





 



 

                      

PAGE



 

Forward Looking Statements



 

PART I.          FINANCIAL INFORMATION

 



 

Item 1.  Financial Statements



 

Unaudited Condensed Consolidated Balance Sheets -

 

     December 31, 2018 and September 30, 2018 



 

Unaudited Condensed Consolidated Statements of Operations -

 

     Three months ended December 31, 2018 and 2017



 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity -

 

     Three months ended December 31, 2018 and 2017



 

Unaudited Condensed Consolidated Statements of Cash Flows -

 

     Three months ended December 31, 2018 and 2017



 

Notes to Unaudited Condensed Consolidated Financial Statements



 

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

29 



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

36 



 

Item 4.  Controls and Procedures

36 



 

PART II.          OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

37 



 

Item 1A.  Risk Factors

37 



 

Item 6.  Exhibits

38 



 



 

2


 

FORWARD LOOKING STATEMENTS



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





·

potential delays in the timing of and results from clinical trials and studies and the risk that such results will not support marketing approval and commercialization;



·

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



·

risks related to our ability to obtain sufficient financing on acceptable terms when needed to fund product development and our operations;



·

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



·

product demand and market acceptance;



·

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



·

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



·

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



·

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



·

risks inherent in doing business on an international level;



·

the disruption of production at our manufacturing facilities due to raw material shortages, labor shortages and/or physical damage to our facilities;



·

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



·

risks related to our growth strategy;



·

our continued ability to attract and retain highly skilled and qualified personnel;

3


 



·

the costs and other effects of litigation, governmental investigations, legal and administrative cases and proceedings, settlements and investigations;



·

government contracting risks;



·

a governmental tender award, including our recent South Africa tender award, indicates acceptance of the bidder’s price rather than an order or guarantee of the purchase of any minimum number of units, and as a result government ministries or other public sector customers may order and purchase fewer units than the full maximum tender amount;



·

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



·

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



·

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



All forward-looking statements in this report should be considered in the context of the risks and other factors described above and in Part I, Item 1A, "Risk Factors," in the Company’s Form 10-K for the year ended September 30, 2018 and Part II, Item 1A of this Form 10-Q.  The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report except as required by applicable law.

4


 



PART I.FINANCIAL INFORMATION



Item 1.  Financial Statements

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS







 

 

 

 

 



 

 

 

 

 



December 31,
2018

 

September 30,
2018

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

$

8,979,183 

 

$

3,759,509 

Accounts receivable, net

 

2,487,096 

 

 

3,972,632 

Inventory, net

 

2,698,306 

 

 

2,302,030 

Prepaid expenses and other current assets

 

1,208,446 

 

 

1,148,345 

Total current assets

 

15,373,031 

 

 

11,182,516 

Plant and equipment, net

 

361,998 

 

 

404,552 

Deferred income taxes

 

8,546,718 

 

 

8,543,758 

Intangible assets, net

 

20,400,420 

 

 

20,477,729 

Goodwill

 

6,878,932 

 

 

6,878,932 

Other assets

 

773,861 

 

 

965,152 

Total assets

$

52,334,960 

 

$

48,452,639 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

2,103,711 

 

$

3,226,036 

Accrued research and development costs

 

569,873 

 

 

981,357 

Accrued expenses and other current liabilities

 

2,076,009 

 

 

2,450,364 

Credit agreement, short-term portion  (Note 7)

 

4,943,543 

 

 

6,692,718 

Unearned revenue

 

49,095 

 

 

202,452 

Total current liabilities

 

9,742,231 

 

 

13,552,927 

Credit agreement, long-term portion  (Note 7)

 

2,996,120 

 

 

2,701,570 

Residual royalty agreement  (Note 7)

 

1,702,576 

 

 

1,753,805 

Other liabilities

 

30,000 

 

 

30,000 

Deferred rent

 

86,328 

 

 

88,161 

Deferred income taxes

 

895,862 

 

 

844,758 

Total liabilities

 

15,453,117 

 

 

18,971,221 



 

 

 

 

 

Commitments and contingencies  (Note 11)

 

 

 

 

 



 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock; no shares issued and outstanding at December 31, 2018 and

 

 

 

 

 

September 30, 2018

 

 —

 

 

 —

Common stock, par value $0.01 per share; 77,000,000 shares authorized, 64,801,517

 

 

 

 

 

and 57,468,660 shares issued and 62,617,813 and 55,284,956 shares outstanding at

 

 

 

 

 

December 31, 2018 and September 30, 2018, respectively

 

648,015 

 

 

574,687 

Additional paid-in-capital

 

104,972,401 

 

 

95,496,506 

Accumulated other comprehensive loss

 

(581,519)

 

 

(581,519)

Accumulated deficit

 

(60,350,449)

 

 

(58,201,651)

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

 

(7,806,605)

 

 

(7,806,605)

Total stockholders' equity

 

36,881,843 

 

 

29,481,418 

Total liabilities and stockholders' equity

$

52,334,960 

 

$

48,452,639 



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



 

5


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS









 

 

 

 

 



Three Months Ended



December 31,



2018

 

2017



 

 

 

 

 

Net revenues

$

6,371,809 

 

$

2,586,613 

   

 

 

 

 

 

Cost of sales

 

1,727,729 

 

 

1,272,992 

   

 

 

 

 

 

Gross profit

 

4,644,080 

 

 

1,313,621 

   

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

2,361,823 

 

 

1,958,367 

Selling, general and administrative

 

3,293,984 

 

 

3,027,698 

Loss on settlement of accounts receivable

 

 —

 

 

3,764,137 

Total operating expenses

 

5,655,807 

 

 

8,750,202 

   

 

 

 

 

 

Operating loss

 

(1,011,727)

 

 

(7,436,581)

   

 

 

 

 

 

Non-operating (expenses) income:

 

 

 

 

 

Interest expense

 

(1,278,423)

 

 

 —

Other income (expense), net

 

26,394 

 

 

(13,169)

Change in fair value of derivative liabilities

 

225,000 

 

 

 —

Foreign currency transaction loss

 

(17,544)

 

 

(53,455)

Total non-operating expenses

 

(1,044,573)

 

 

(66,624)

   

 

 

 

 

 

Loss before income taxes

 

(2,056,300)

 

 

(7,503,205)

   

 

 

 

 

 

Income tax expense (benefit)

 

92,498 

 

 

(3,246,053)



 

 

 

 

 

Net loss

$

(2,148,798)

 

$

(4,257,152)

   

 

 

 

 

 

Net loss per basic and diluted common share outstanding

$

(0.03)

 

$

(0.08)

   

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

62,553,791 

 

 

53,154,076 

   

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.



 

 

 

 

 



 



 

6


 



VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Treasury

 

 

 

   

Preferred

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stock,

 

 

 

   

Stock

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

at Cost

 

Total

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

$

 —

 

57,468,660 

 

$

574,687 

 

$

95,496,506 

 

$

(581,519)

 

$

(58,201,651)

 

$

(7,806,605)

 

$

29,481,418 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 —

 

 —

 

 

 —

 

 

417,256 

 

 

 —

 

 

 —

 

 

 —

 

 

417,256 

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

 

 —

 

7,142,857 

 

 

71,428 

 

 

9,060,539 

 

 

 —

 

 

 —

 

 

 —

 

 

9,131,967 

Issuance of shares pursuant to share-based awards

 

 —

 

190,000 

 

 

1,900 

 

 

(1,900)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,148,798)

 

 

 —

 

 

(2,148,798)

Balance at December 31, 2018

$

 —

 

64,801,517 

 

$

648,015 

 

$

104,972,401 

 

$

(581,519)

 

$

(60,350,449)

 

$

(7,806,605)

 

$

36,881,843 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017

$

 —

 

55,392,193 

 

$

553,922 

 

$

90,550,669 

 

$

(581,519)

 

$

(34,263,262)

 

$

(7,806,605)

 

$

48,453,205 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 —

 

 —

 

 

 —

 

 

207,454 

 

 

 —

 

 

 —

 

 

 —

 

 

207,454 

Shares issued in connection with common stock purchase agreement

 

 —

 

304,457 

 

 

3,045 

 

 

344,036 

 

 

 —

 

 

 —

 

 

 —

 

 

347,081 

Net loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,257,152)

 

 

 —

 

 

(4,257,152)

Balance at December 31, 2017

$

 —

 

55,696,650 

 

$

556,967 

 

$

91,102,159 

 

$

(581,519)

 

$

(38,520,414)

 

$

(7,806,605)

 

$

44,750,588 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

7


 

VERU INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS







 

 

 

 

 



Three Months Ended



December 31,



2018

 

2017

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

$

(2,148,798)

 

$

(4,257,152)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

42,554 

 

 

44,229 

Amortization of intangible assets

 

77,309 

 

 

68,816 

Noncash interest expense

 

1,278,423 

 

 

 —

Share-based compensation

 

417,256 

 

 

207,454 

Deferred income taxes

 

48,144 

 

 

(3,297,000)

Loss on settlement of accounts receivable

 

 —

 

 

3,764,137 

Change in fair value of derivative liabilities

 

(225,000)

 

 

 —

Other

 

20,413 

 

 

(5,000)

Changes in current assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

1,485,536 

 

 

3,248,628 

Increase in inventory

 

(418,522)

 

 

(299,112)

(Increase) decrease in prepaid expenses and other assets

 

(58,810)

 

 

46,671 

Decrease in accounts payable

 

(1,231,443)

 

 

(168,347)

Decrease in unearned revenue

 

(153,357)

 

 

(24,501)

(Decrease) increase in accrued expenses and other current liabilities

 

(640,186)

 

 

967,839 

Net cash (used in) provided by operating activities

 

(1,506,481)

 

 

296,662 



 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

 —

 

 

(1,914)

Net cash used in investing activities

 

 —

 

 

(1,914)



 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

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

 

9,285,432 

 

 

 —

Installment payments on SWK credit agreement

 

(2,559,277)

 

 

 —

Net cash provided by financing activities

 

6,726,155 

 

 

 —



 

 

 

 

 

Net increase in cash

 

5,219,674 

 

 

294,748 

CASH AT BEGINNING OF PERIOD

 

3,759,509 

 

 

3,277,602 

CASH AT END OF PERIOD

$

8,979,183 

 

$

3,572,350 



 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

Shares issued in connection with common stock purchase agreement

$

 —

 

$

347,081 

Increase in deferred assets from accrued expenses

$

 —

 

$

75,920 

Costs related to common stock offering in accounts payable

$

153,465 

 

$

 —



 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 



8


 

VERU INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 – Basis of Presentation



The accompanying unaudited interim condensed consolidated financial statements for Veru Inc. (“we,” “our,” “us,” “Veru” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting of interim financial information. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. The accompanying condensed consolidated balance sheet as of September 30, 2018 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations and cash flows for the three months ended December 31, 2018 are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending September 30, 2019.  



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



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



Principles of consolidation and nature of operations: Veru Inc. is referred to in these notes collectively with its subsidiaries as “we,” “our,” “us,” “Veru” or the “Company.” The consolidated financial statements include the accounts of Veru and its wholly owned subsidiaries, Aspen Park Pharmaceuticals, Inc. (“APP”) and The Female Health Company Limited, and The Female Health Company Limited’s wholly owned subsidiary, The Female Health Company (UK) plc (The Female Health Company Limited and The Female Health Company (UK) plc, collectively, the “U.K. subsidiary”), and The Female Health Company (UK) plc’s wholly owned subsidiary, The Female Health Company (M) SDN.BHD (the “Malaysia subsidiary”). All significant intercompany transactions and accounts have been eliminated in consolidation. Prior to the completion of the October 31, 2016 acquisition (the “APP Acquisition”) of APP through the merger of a wholly owned subsidiary of the Company into APP, the Company had been a single product company engaged in marketing, manufacturing and distributing a consumer health care product, the FC2 Female Condom/FC2 Internal Condom® (“FC2”).  The completion of the APP Acquisition transitioned the Company into a biopharmaceutical company focused on oncology and urology with multiple drug products under clinical development.  Nearly all of the Company’s net revenues during the three months ended December 31, 2018 and 2017 were derived from sales of FC2. 



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



Cash concentration: The Company’s cash is maintained primarily in three financial institutions, located in Chicago, Illinois, London, England and Kuala Lumpur, Malaysia.



Restricted cash:  Restricted cash relates to security provided to one of the Company’s U.K. banks for performance bonds issued in favor of customers. The Company has a facility of $250,000 for such performance bonds.  Such security has been extended infrequently and only on occasions where it has been a contract term expressly stipulated as an absolute requirement by the customer or its provider of funds. The expiration of the bond is defined by the completion of the event such as, but not limited to, a period of time after the product has been distributed or expiration of the product shelf life.  Restricted cash was approximately $132,000 and $135,000 at December 31, 2018 and September 30, 2018, respectively, and is included in cash on the accompanying unaudited condensed consolidated balance sheets.  

9


 



Patents and trademarks:   The costs for patents and trademarks are expensed when incurred.    



Deferred financing costs: Costs incurred in connection with the common stock purchase agreement discussed in Note 8 have been included in other assets on the accompanying unaudited condensed consolidated balance sheets at December 31, 2018 and September 30, 2018. When shares of the Company’s common stock are sold under the common stock purchase agreement, a pro-rata portion of the deferred costs is recorded to additional paid-in-capital.



As discussed in Note 8, in connection with the common stock offering that closed on October 1, 2018, we incurred costs of approximately $190,000 through September 30, 2018. This amount was included in other assets on the accompanying unaudited condensed consolidated balance sheet at September 30, 2018. These costs were charged to additional paid-in capital in the three months ended December 31, 2018 after the common stock offering was closed.



Costs incurred in connection with the issuance of debt discussed in Note 7 are presented as a reduction of the debt on the accompanying unaudited condensed consolidated balance sheets at December 31, 2018 and September 30, 2018. These issuance costs are being amortized using the effective interest method over the expected repayment period of the debt, which is currently estimated to occur in the fourth quarter of fiscal 2021. The amount of amortization was approximately $28,000 for the three months ended December 31, 2018 and is included in interest expense on the accompanying unaudited condensed consolidated statements of operations.



Fair value measurements: Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us as of the reporting dates. Accordingly, the estimates presented in the accompanying unaudited condensed consolidated financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. See Note 3 for a discussion of fair value measurements.



The carrying amounts reported in the accompanying unaudited condensed consolidated balance sheets for cash, accounts receivable, accounts payable and other accrued liabilities approximate their fair value based on the short-term nature of these instruments. The carrying value of long-term debt, taking into consideration debt discounts and related derivative instruments, is estimated to approximate fair value.



Unearned revenueThe Company records an unearned revenue liability if a customer pays consideration before the Company transfers the product to the customer under the terms of a contract. Unearned revenue is recognized as revenue after control of the product is transferred to the customer and all revenue recognition criteria have been met.  Unearned revenue as of December 31, 2018 and September 30, 2018 was approximately $49,000 and $202,000, respectively, and was comprised mainly of sales made to a large distributor who has the right to return product under certain conditions.



Derivative instruments: The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company reviews the terms of debt instruments it enters into to determine whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as derivative financial instruments. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. Liabilities incurred in connection with an embedded derivative are discussed in Note 7.



Revenue recognition:  Revenue is recognized when control of the promised goods is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products.



The Company generates nearly all of its revenue from direct product sales. Revenue from direct product sales is generally recognized when the customer obtains control of the product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Sales taxes and other similar taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company does not typically have significant unusual payment terms beyond 120 days in its contracts with customers. See Note 4 for additional information regarding credit terms.

10


 



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



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



Research and development costs:  Research and development costs are expensed as they are incurred and include salaries and benefits, clinical trials costs and contract services. Nonrefundable advance payments made for goods or services to be used in research and development activities are deferred and capitalized until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, the Company would be required to expense the related capitalized advance payments. The Company did not have any capitalized nonrefundable advance payments as of December 31, 2018 and September 30, 2018.



The Company records estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled and the rate of patient enrollments may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.



Share-based compensation: The Company recognizes share-based compensation expense in connection with its share-based awards based on the estimated fair value of the awards on the date of grant, on a straight-line basis over the vesting period. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of the expected life of the share-based award, stock price volatility and risk-free interest rates.



Advertising:  The Company's policy is to expense advertising costs as incurred. Advertising costs were immaterial to the Company’s results of operations for the three months ended December 31, 2018 and 2017.

 

Income taxes:  The Company files separate income tax returns for its foreign subsidiaries. FASB ASC Topic 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also provided for carryforwards for income tax purposes. In addition, the amount of any future tax benefits is reduced by a valuation allowance to the extent such benefits are not expected to be realized.

 

Foreign currency translation and operations: Effective October 1, 2009, the Company determined that there were significant changes in facts and circumstances, triggering an evaluation of its subsidiaries’ functional currency.  The evaluation indicated that the U.S. dollar is the currency with the most significant influence upon the subsidiaries.  Because all of the U.K. subsidiary's future sales and cash flows would be denominated in U.S. dollars following the October 2009 cessation of production of the Company’s first-generation product, FC1, the U.K. subsidiary adopted the U.S. dollar as its functional currency effective October 1, 2009. As the Malaysia subsidiary is a direct and integral component of the U.K. parent’s operations, it, too, adopted the U.S. dollar as its functional currency as of October 1, 2009. The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. The cumulative foreign currency translation loss included in

11


 

accumulated other comprehensive loss was $0.6 million as of December 31, 2018 and September 30, 2018. Assets located outside of the U.S. totaled approximately $4.6 million and $5.2 million at December 31, 2018 and September 30, 2018, respectively.

   

Other comprehensive loss:  Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net loss.  Although certain changes in assets and liabilities, such as foreign currency translation adjustments, are reported as a separate component of the equity section of the accompanying unaudited condensed consolidated balance sheets, these items, along with net loss, are components of other comprehensive loss.



The U.S. parent company and its U.K. subsidiary routinely purchase inventory produced by its Malaysia subsidiary for sale to their respective customers. These intercompany trade accounts are eliminated in consolidation. The Company’s policy and intent is to settle the intercompany trade account on a current basis.  Since the U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currencies effective October 1, 2009, no foreign currency gains or losses from intercompany trade are recognized.  For the three months ended December 31, 2018 and 2017, comprehensive loss is equivalent to the reported net loss.    



Recently Issued Accounting Pronouncements



In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606).  This new accounting guidance on revenue recognition provides for a single five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts.  The Company adopted the new guidance on October 1, 2018 using the modified retrospective method and elected to apply the guidance only to contracts that were not completed as of the date of adoption. The adoption of this guidance did not have a material effect on our consolidated financial statements and related disclosures. See discussion above for disclosures relating to the Company's revenue recognition.



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required upon adoption.  Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases to clarify the implementation guidance and ASU No. 2018-11, Leases (Topic 842) Targeted Improvements. This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors to address certain implementation issues facing lessors when adopting ASU 2016-02. The Company will adopt the new accounting standard on October 1, 2019 and intends to elect certain practical expedients, including the optional transition method that allows for the application of the new standard at its adoption date with no restatement of prior period amounts.  We have begun to identify our significant lease contracts and are in the process of evaluating the effect of the new guidance on our consolidated financial statements and related disclosures.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The purpose of ASU 2016-18 is to clarify guidance and presentation related to restricted cash in the statements of cash flows as well as increased disclosure requirements. It requires beginning-of-period and end-of-period total amounts shown on the statements of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. We adopted ASU 2016-18 effective October 1, 2018. The adoption of ASU 2016-18 did not have a material effect on the presentation of our consolidated statements of cash flows or related disclosures. 



In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of ASU 2017-04 is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the impaired fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by

12


 

which the carrying value exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position or results of operations.



In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The purpose of ASU 2017-09 is to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. We adopted ASU 2017-09 effective October 1, 2018. The adoption of ASU 2017-09 did not have a material effect on our financial position or results of operations. 



In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The purpose of ASU 2018-07 is to expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 will be effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company has issued share-based payments to nonemployees in the past but is not able to predict the amount of future share-based payments to nonemployees, if any. The adoption of ASU 2018-07 is not expected to have a material effect on our financial position or results of operations but should simplify the process by which the Company measures compensation expense for share-based payments to nonemployees.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for fair value measurements for assets and liabilities disclosed within the fair value hierarchy. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. The adoption of ASU 2018-13 is not expected to have a material effect on our financial position or results of operations as it modifies disclosure requirements only.

 

Note 2 – Liquidity



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



The Company believes its current cash position and its ability to secure equity financing or other financing alternatives are adequate to fund planned operations of the Company for the next 12 months. Such financing alternatives may include debt financing, common stock offerings or financing involving convertible debt or other equity-linked securities and may include financings under the Company's effective shelf registration statement on Form S-3 (File No. 333-221120) (the “Shelf Registration Statement”).  The Company intends to be opportunistic when pursuing equity financing which could include selling common stock under its common stock purchase agreement with Aspire Capital Fund, LLC (see Note 7) and/or a marketed deal with an investment bank. The Company's ability to raise capital through equity financing may be limited by the number of authorized shares of the Company's common stock, which is currently 77 million shares.  In order to raise significant additional amounts from equity financing, the Company will need to seek stockholder approval to amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock, and any such amendment would require the approval of the holders of at least two-thirds of the outstanding shares of the Company's common stock. 

13


 

Note 3 – Fair Value Measurements



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



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



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



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



Level 3 – Instruments with primarily unobservable value drivers.



We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the three months ended December 31, 2018 and 2017.



As of December 31, 2018 and September 30, 2018, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, were classified within Level 3 of the fair value hierarchy. 



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



The following table provides a reconciliation of the beginning and ending liability balance associated with embedded derivatives measured at fair value using significant unobservable inputs (Level 3) for the three months ended December 31, 2018:







 

 

Beginning balance at October 1, 2018

$

2,426,000 

Additions

 

 —

Change in fair value of derivative liabilities

 

(225,000)

Ending balance at December 31, 2018

$

2,201,000 



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



The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the SWK Credit Agreement and Residual Royalty Agreement. See Note 7 for additional information. There is no current observable market for these types of derivatives. The Company determined the fair value of the embedded derivatives using a Monte Carlo simulation model to value the financial liabilities at inception and on subsequent valuation dates. This valuation model incorporates transaction details such as the contractual terms, expected cash outflows, expected repayment dates, probability of a change of control, expected volatility, and risk-free interest rates. A significant acceleration of the estimated repayment date or a significant decrease in the probability of a change of control event prior to repayment of the SWK Credit Agreement, in isolation, would result in a significantly lower fair value measurement of the liabilities associated with the embedded derivatives.



14


 

The following table presents quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 of the fair value hierarchy as of December 31, 2018:





 

 

 

 



 

 

 

 

Valuation Methodology

 

Significant Unobservable Input

 

Weighted Average
(range, if applicable)



 

 

 

 

Monte Carlo Simulation

 

Estimated change of control dates

 

September 2019 to December 2021



 

Discount rate

 

16.1% to 18.5%



 

Probability of change of control

 

10% to 90%

 

Note 4 – Accounts Receivable and Concentration of Credit Risk



The Company's standard credit terms vary from 30 to 120 days, depending on the class of trade and customary terms within a territory, so accounts receivable is affected by the mix of purchasers within the period.  As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion or for certain sales.  The Company has agreed to credit terms of up to 150 days with our distributor in the Republic of South Africa.  For the order of 15 million units under the Brazil tender in 2014, the Company agreed to up to 360 days credit terms with our distributor in Brazil subject to earlier payment upon receipt of payment by the distributor from the Brazilian Government.  For the 12-month period ended December 31, 2018, the Company's average days’ sales outstanding was approximately 61 days. 



The components of accounts receivable consist of the following at December 31, 2018 and September 30, 2018:









 

 

 

 

 

 



 

December 31,
2018

 

September 30,
2018



 

 

 

 

 

 

Accounts receivable

 

$

2,558,328 

 

$

4,046,733 

Less: allowance for doubtful accounts

 

 

(36,201)

 

 

(36,201)

Less: allowance for sales and payment term discounts

 

 

(35,031)

 

 

(37,900)

Accounts receivable, net

 

$

2,487,096 

 

$

3,972,632 



On December 27, 2017, we entered into a settlement agreement with Semina, our distributor in Brazil, pursuant to which Semina made a payment of $2.2 million and was obligated to make a second payment of $1.5 million by February 28, 2018, to settle net amounts due to us totaling $7.5 million relating to the Brazil tender in 2014. The settlement was not related to our belief in the ultimate collectability of the receivables or in the creditworthiness of Semina. We elected to settle these amounts due to the uncertainty regarding the timing of payment by the Brazilian Government and, ultimately to us, on the remaining amounts due. The result of the settlement was a net loss of $3.8 million in the three months ended December 31, 2017, which is presented as a separate line item in the accompanying unaudited condensed consolidated statements of operations. Semina did not make its second payment of $1.5 million by February 28, 2018.  In July 2018, the Company agreed to accept $1.3 million as settlement of the $1.5 million that was owed, which resulted in an additional loss of $0.2 million in the third quarter of fiscal 2018



At December 31, 2018, no single customer’s accounts receivable balance accounted for more than 10% of current assets.  At September 30, 2018, one customer had an accounts receivable balance that represented 15% of current assets.



At December 31, 2018, two customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 65% of net accounts receivable in the aggregate. At September 30, 2018, three customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 74% of net accounts receivable in the aggregate. 



For the three months ended December 31, 2018, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 77% of the Company’s net revenues in the aggregate. For the three months ended December 31, 2017, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 59% of the Company’s net revenues in the aggregate.



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The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments on accounts receivable.  Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts.  Management also periodically evaluates individual customer receivables and considers a customer’s financial condition, credit history, and the current economic conditions.  Accounts receivable are charged-off when deemed uncollectible.  The table below summarizes the change in the allowance for doubtful accounts for the three months ended December 31, 2018 and 2017.





 

 

 

 

 



Three Months Ended December 31,



 

2018

 

 

2017



 

 

 

 

 

Beginning balance

$

36,201 

 

$

38,103 

Charges to expense

 

 —

 

 

 —

Charge-offs

 

 —

 

 

(5,000)

Ending balance

$

36,201 

 

$

33,103 



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

 

Note 5 – Balance Sheet Information



Inventory



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



Inventory consisted of the following at December 31, 2018 and September 30, 2018:







 

 

 

 

 



December 31,

 

September 30,



2018

 

2018

FC2

 

 

 

 

 

Raw material

$

491,617 

 

$

366,220 

Work in process

 

51,944 

 

 

77,669 

Finished goods

 

2,550,032 

 

 

2,232,864 

Inventory, gross

 

3,093,593 

 

 

2,676,753 

Less: inventory reserves

 

(397,635)

 

 

(391,861)

FC2, net

 

2,695,958 

 

 

2,284,892 

PREBOOST®

 

 

 

 

 

Finished goods

 

2,348 

 

 

17,138 

Inventory, net

$

2,698,306 

 

$

2,302,030 



Fixed Assets



We record equipment, furniture and fixtures, and leasehold improvements at historical cost.  Expenditures for maintenance and repairs are recorded to expense. Depreciation and amortization are primarily computed using the straight-line method.  Depreciation and amortization are computed over the estimated useful lives of the respective assets which range as follows:







 



 

Manufacturing equipment

5 – 10 years

Office equipment

3 – 5 years

Furniture and fixtures

7 – 10 years



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Leasehold improvements are depreciated on a straight-line basis over the lesser of the remaining lease term or the estimated useful lives of the improvements.



Plant and equipment consisted of the following at December 31, 2018 and September 30, 2018:





 

 

 

 

 

 



 

December 31,
2018

 

September 30,
2018



 

 

 

 

 

 

Equipment, furniture and fixtures

 

$

4,018,284 

 

$

4,018,284 

Leasehold improvements

 

 

287,686 

 

 

287,686 



 

 

4,305,970 

 

 

4,305,970 

Less: accumulated depreciation and amortization

 

 

(3,943,972)

 

 

(3,901,418)

Plant and equipment, net

 

$

361,998 

 

$

404,552 













Note 6 – Intangible Assets and Goodwill



Intangible Assets



Intangible assets acquired in the APP Acquisition included in-process research and development (“IPR&D”), developed technology consisting of PREBOOST® medicated wipes for prevention of premature ejaculation, and covenants not-to-compete. IPR&D represents incomplete research and development projects at APP as of the date of the APP Acquisition. These intangible assets are carried at cost less accumulated amortization. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. IPR&D is tested for impairment at least annually in the fourth quarter of each fiscal year until the underlying projects are completed or abandoned.  



The gross carrying amounts and net book value of intangible assets are as follows at December 31, 2018:

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

344,818 

 

$

2,055,182 

Covenants not-to-compete

 

500,000 

 

 

154,762 

 

 

345,238 

Total intangible assets with finite lives

 

2,900,000 

 

 

499,580 

 

 

2,400,420 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

499,580 

 

$

20,400,420 



The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2018:





 

 

 

 

 

 

 

 



Gross Carrying

 

Accumulated

 

Net Book



Amount

 

Amortization

 

Value

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

Developed technology - PREBOOST®

$

2,400,000 

 

$

285,366 

 

$

2,114,634 

Covenants not-to-compete

 

500,000 

 

 

136,905 

 

 

363,095 

Total intangible assets with finite lives

 

2,900,000 

 

 

422,271 

 

 

2,477,729 

Acquired in-process research and development assets

 

18,000,000 

 

 

 —

 

 

18,000,000 

Total intangible assets

$

20,900,000 

 

$

422,271 

 

$

20,477,729 



Amortization is recorded over the projected related revenue stream for the PREBOOST® developed technology over 10 years and on a straight-line basis over seven years for the covenants not-to-compete. The amortization expense is recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The IPR&D assets will not be amortized until the underlying development projects are completed. If and when development is complete, which generally occurs when regulatory approval to market the product is obtained, the associated IPR&D assets would be accounted for as finite-lived intangible assets and amortized over the estimated period of economic benefit. If a development project is abandoned, the associated IPR&D assets would be charged to expense.



17


 

Amortization expense was approximately $77,000 and $69,000, for the three months ended December 31, 2018 and 2017, respectively. Based on finite-lived intangible assets recorded as of December 31, 2018, the estimated future amortization expense is as follows:





 

 



Estimated

Fiscal Year Ending September 30,

Amortization Expense

2019

$

231,925 

2020

 

316,368 

2021

 

323,706 

2022

 

331,316 

2023

 

339,062 

Thereafter

 

858,043 

Total

$

2,400,420 



Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval, additional development costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation. Considering the high-risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. 



Goodwill



The carrying amount of goodwill at December 31, 2018 and September 30, 2018 was $6.9 million. There was no change in the balance during the three months ended December 31, 2018 and 2017. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired in the APP Acquisition.  Goodwill from the APP Acquisition principally relates to intangible assets that do not qualify for separate recognition, our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction.  Goodwill is not tax deductible for income tax purposes and was assigned to the Company’s Research and Development reporting unit, which consists of multiple drug products under clinical development for oncology and urology.



Goodwill is tested for impairment at least annually in the fourth quarter of each fiscal year or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors include our share price, our financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test previously performed.



The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value; however, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material.



18


 

Note 7 – Debt



SWK Credit Agreement



On March 5, 2018, the Company entered into a Credit Agreement (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 agreed to provide the Company with a multi-draw term loan of up to $12.0 million, with $10.0 million advanced to the Company on the date of the Credit Agreement. The Company may draw up to an additional $1.0 million if the Company enters into an agreement to distribute at least 47.5 million units of FC2 in Brazil upon the terms described in the Credit Agreement and up to an additional $1.0 million if the Company enters into an agreement to distribute at least 30 million units of FC2 in South Africa upon the terms described in the Credit Agreement.

The Lenders will be entitled to receive quarterly payments on the term loan based on the Company’s product revenue from net sales of FC2 as provided in the Credit Agreement until the Company has paid 175% of the aggregate amount advanced to the Company under the Credit Agreement. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is less than $10.0 million, the quarterly payments will be 32.5% of product revenue from net sales of FC2 during the quarterly period. If product revenue from net sales of FC2 for the 12-month period ended as of the last day of the respective quarterly payment period is equal to or greater than $10.0 million, the quarterly payments are calculated as the sum of 25% of product revenue from net sales of FC2 up to and including $12.5 million in the Elapsed Period (as defined in the Credit Agreement), plus 10% of product revenue from net sales of FC2 greater than $12.5 million in the Elapsed Period.  Upon the Credit Agreement’s termination date of March 5, 2025, the Company must pay 175% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue.

The first quarterly revenue-based payment due May 15, 2018 was approximately $642,000 and was paid on that date. On August 10, 2018, the Company entered into an amendment (the “Credit Agreement Amendment”) to the Credit Agreement.  The Credit Agreement Amendment deferred until November 15, 2018 the due date for the quarterly revenue-based payment that would have otherwise been due on August 15, 2018. The Company made a payment of approximately $2.6 million on November 15, 2018, consisting of approximately $1.4 million for the quarterly revenue-based payment originally due on August 15, 2018 and approximately $1.2 million for the quarterly revenue-based payment due on November 15, 2018.

Upon a change of control of the Company or sale of the FC2 business, the Company must pay off the loan by making a payment to the Lenders equal to (i) 175% of the aggregate amount advanced to the Company under the Credit Agreement less the amounts previously paid by the Company from product revenue, plus (ii) the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five. A “change of control” under the Credit Agreement includes (i) an acquisition by any person of direct or indirect ownership of more than 50% of the Company’s issued and outstanding voting equity, (ii) a change of control or similar event in the Company’s articles of incorporation or bylaws, (iii) certain Key Persons as defined in the Credit Agreement cease to serve in their current executive capacities unless replaced within 90 days by a person reasonably acceptable to the Agent, which acceptance not to be unreasonably withheld, or (iv) the sale of all or substantially all of the Company’s assets.

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

In connection with the Credit Agreement, the Company and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2 commencing upon the payment in full by the Company of the required amount pursuant to the Credit Agreement. The Residual Royalty Agreement will terminate upon (i) a change of control or sale of the FC2 business and the payment by the Company of the amount due in connection therewith pursuant to the Credit Agreement, or (ii) mutual agreement of the parties. If a change of control occurs prior to payment in full of the Credit Agreement, there will be no payment due with respect to the Residual Royalty

19


 

Agreement.  If a change of control occurs after the payment in full of the Credit Agreement, the Agent will receive a payment that is the greater of (A) $2.0 million or (B) the product of (x) 5% of the product revenue from net sales of FC2 for the most recently completed 12-month period multiplied by (y) five.

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



After payment by the Company of certain fees and expenses of the Agent and the Lenders as required in the Credit Agreement, the Company received net proceeds of approximately $9.9 million from the initial $10.0 million advance under the Credit Agreement.



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



At December 31, 2018 and September 30, 2018, the Credit Agreement consisted of the following:







 

 

 

 

 



December 31,
2018

 

September 30,
2018



 

 

 

 

 

Aggregate repayment obligation

$

17,500,000 

 

$

17,500,000 

Less: Payments

 

(3,201,762)

 

 

(642,485)

Less: Unamortized discounts

 

(7,320,088)

 

 

(8,475,874)

Less: Unamortized deferred issuance costs

 

(176,487)

 

 

(204,353)

Credit agreement, net

 

6,801,663 

 

 

8,177,288 

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

 

1,138,000 

 

 

1,217,000 



 

7,939,663 

 

 

9,394,288 

Credit agreement, short-term portion

 

(4,943,543)

 

 

(6,692,718)

Credit agreement, long-term portion

$

2,996,120 

 

$

2,701,570 



 

 

 

 

 



The short-term portion of the Credit Agreement represents the aggregate of the estimated quarterly revenue-based payments payable during the 12-month periods subsequent to December 31, 2018 and September 30, 2018, respectively.

20


 

At December 31, 2018 and September 30, 2018, the Residual Royalty Agreement liability consisted of the following:





 

 

 

 

 



December 31,
2018

 

September 30,
2018



 

 

 

 

 

Residual Royalty Agreement liability, fair value at inception

$

346,000 

 

$

346,000 

Less: Unamortized discounts

 

 —

 

 

(2,420)

Add: Accretion of liability using effective interest rate

 

293,576 

 

 

201,225 

Residual Royalty Agreement liability, net

 

639,576 

 

 

544,805 

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

 

1,063,000 

 

 

1,209,000 

Residual Royalty Agreement liability

$

1,702,576 

 

$

1,753,805 



 

 

 

 

 



Interest expense related to the Credit Agreement and the Residual Royalty Agreement consisted of amortization of the discounts, accretion of the liability for the Residual Royalty Agreement and amortization of the deferred issuance costs.  For the three months ended December 31, 2018, interest expense related to the Credit Agreement and Residual Royalty Agreement was as follows:







 

 



Three Months Ended
December 31, 2018



 

 

Amortization of Credit Agreement and Residual Royalty Agreement discounts

$

1,158,206 

Accretion of Residual Royalty Agreement liability

 

92,351 

Amortization of deferred issuance costs

 

27,866 



$

1,278,423 

 

Note 8 – Stockholders’ Equity



Preferred Stock



The Company has 5,000,000 shares designated as Class A Preferred Stock with a par value of $0.01 per share. There are 1,040,000 shares of Class A Preferred Stock – Series 1 authorized; 1,500,000 shares of Class A Preferred Stock – Series 2 authorized; 700,000 shares of Class A Preferred Stock – Series 3 authorized; and 548,000 shares of Class A Preferred Stock – Series 4 (the “Series 4 Preferred Stock”) authorized.  There were no shares of Class A Preferred Stock of any series issued and outstanding at December 31, 2018 and September 30, 2018.  The Company has 15,000 shares designated as Class B Preferred Stock with a par value of $0.50 per share. There were no shares of Class B Preferred Stock issued and outstanding at December 31, 2018 and September 30, 2018.



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 $9.3 million after deducting underwriting discounts and commissions and costs paid by the Company through December 31, 2018. An additional $153,000 of costs is included in accounts payable at December 31, 2018. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Shelf Registration Statement.



Common Stock Purchase Warrants



In connection with the closing of the APP Acquisition, the Company issued a warrant to purchase up to 2,585,379 shares of the Company's common stock to Torreya Capital, the Company's financial advisor (the “Financial Advisor Warrant”).  The Financial Advisor Warrant has a five-year term, a cashless exercise feature and a strike price equal to $1.93 per share. The Financial Advisor Warrant vested upon issuance and remains outstanding at December 31, 2018.



In May 2018, the Company issued two warrants to purchase a total of up to 750,000 shares of the Company's common stock in connection with a consulting services agreement. The first warrant allows the consultant to purchase up to 300,000 shares of the Company’s common stock at $2.31 per share subject to achievement of specified performance goals that will be measured at March 31, 2019. The second warrant allows the consultant to

21


 

purchase up to 450,000 shares of the Company’s common stock at $2.31 per share subject to achievement of specified performance goals that will be measured at March 31, 2020. The warrants provide for early exercisability if certain events occur related to the Company’s FC2 business. If the warrants become exercisable, they will expire to the extent not exercised on or before April 2, 2023.  The warrants have a cashless exercise feature. If the performance goals defined in the warrant agreements are not achieved, the warrants will be forfeited. For measurement and recognition purposes, the Company utilized the lowest aggregate amount within the range of potential values, which was zero. Therefore, at December 31, 2018, the Company has determined the fair value of these warrants to be zero and has not recognized any compensation expense related to these warrants for the three months ended December 31, 2018.



Aspire Capital Purchase Agreement    



On December 29, 2017, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time in its sole discretion during the 36-month term of the Purchase Agreement, to direct Aspire Capital to purchase up to $15.0 million of the Company’s common stock in the aggregate.  Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), in which the Company agreed to prepare and file under the Securities Act of 1933 and under the Shelf Registration Statement, a prospectus supplement for the sale or potential sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the Purchase Agreement.



Under the Purchase Agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 200,000 shares of the Company’s common stock per business day, up to $15.0 million of the Company’s common stock in the aggregate at a per share price (the "Purchase Price") equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date or the average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date.



In addition, on any date on which the Company submits a Purchase Notice to Aspire Capital in an amount equal to 200,000 shares and the closing sale price of our common stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of common stock equal to up to 30% of the aggregate shares of the common stock traded on its principal market on the +next trading day (the VWAP Purchase Date), subject to a maximum number of shares the Company may determine.  The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the VWAP Purchase Date.



In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 304,457 shares of the Company’s common stock. The shares of common stock issued as consideration were valued at approximately $347,000. This amount and related expenses of approximately $78,000, which total approximately $425,000, were recorded as deferred costs.



During fiscal 2018, we sold an aggregate of 1,717,010 shares of common stock to Aspire Capital under the Purchase Agreement resulting in proceeds to the Company of $3.0 million. As a result of these sales, we recorded approximately $85,000 of the deferred costs noted above to additional paid-in capital. The unamortized amount of deferred costs of approximately $340,000 is included in other assets on the accompanying unaudited condensed consolidated balance sheets at December 31, 2018 and September 30, 2018. As of December 31, 2018, the amount remaining under the Purchase Agreement was $12.0 million. However, based on the current market price of the Company’s common stock and the number of shares of the Company’s common stock that are unreserved and available for issuance, the Company will need to seek stockholder approval to amend its Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock to use the full remaining availability under the Purchase Agreement.



22


 

Note 9 – Share-based Compensation



We allocate share-based compensation expense to cost of sales, selling, general and administrative expense and research and development expense based on the award holder’s employment function. For the three months ended December 31, 2018 and 2017, we recorded share-based compensation expenses as follows:





 

 

 

 

 

 



 

Three Months Ended



 

December 31,



 

2018

 

2017



 

 

 

 

 

 

Cost of sales

 

$

7,952 

 

$

3,265 

Selling, general and administrative

 

 

327,009 

 

 

175,337 

Research and development

 

 

82,295 

 

 

28,852 



 

$

417,256 

 

$

207,454 



Equity Plans



In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (the “2018 Plan”).  A total of 2.0 million shares are authorized for issuance under the 2018 Plan.  As of December 31, 2018, 409,498 shares remain available for issuance under the 2018 Plan. 



In July 2017, the Company’s stockholders approved the Company's 2017 Equity Incentive Plan (the “2017 Plan”).  A total of 4.7 million shares are authorized for issuance under the 2017 Plan. As of December 31, 2018, 12,534 shares remain available for issuance under the 2017 Plan. The 2017 Plan replaced the Company's 2008 Stock Incentive Plan (the “2008 Plan”), and no further awards will be made under the 2008 Plan.



Stock Options



Each option grants the holder the right to purchase from us one share of our common stock at a specified price, which is generally the quoted market price of our common stock on the date the option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance date within three years of the date the option is issued. Options may be exercised after they have vested and prior to the specified expiry date provided applicable exercise conditions are met, if any. The expiry date can be for periods of up to ten years from the date the option is issued. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions established at that time. The Company accounts for forfeitures as they occur and does not estimate forfeitures as of the option grant date.



The following table outlines the weighted average assumptions for options granted during the three months ended December 31, 2018 and 2017:





 

 

 

 

 

 



 

Three Months Ended



 

December 31,

Weighted Average Assumptions:

 

 

2018

 

 

2017



 

 

 

 

 

 

Expected volatility

 

 

67.61% 

 

 

60.60% 

Expected dividend yield

 

 

0.00% 

 

 

0.00% 

Risk-free interest rate

 

 

2.75% 

 

 

2.24% 

Expected term (in years)

 

 

5.5 

 

 

5.7 

Fair value of options granted

 

$

0.83 

 

$

0.65 



During the three months ended December 31, 2018 and 2017, the Company used historical volatility of our common stock over a period equal to the expected life of the options to estimate their fair value.  The dividend yield assumption is based on the Company’s recent history and expectation of future dividend payouts on the common stock.  The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.



23


 

The following table summarizes the stock options outstanding and exercisable at December 31, 2018: 





 

 

 

 

 

 

 

 

 



 

 

Weighted Average

 

 

 



 

 

 

 

 

Remaining

 

Aggregate



Number of

 

Exercise Price

 

Contractual Term

 

Intrinsic



Shares

 

Per Share

 

(years)

 

Value



 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

5,645,312 

 

$

1.59 

 

 

 

$

 

Granted

583,656 

 

 

1.38 

 

 

 

 

 

Exercised

 —

 

 

 —

 

 

 

 

 

Forfeited

(118,500)

 

 

1.25 

 

 

 

 

 

Outstanding at December 31, 2018

6,110,468 

 

$

1.57 

 

8.51 

 

$

646,633 

Exercisable at December 31, 2018

1,777,286 

 

$

1.29 

 

6.76 

 

$

381,186 



The aggregate intrinsic values in the table above are before income taxes and represent the number of in-the-money options outstanding or exercisable multiplied by the closing price per share of the Company’s common stock on December 31, 2018 of $1.40, less the respective weighted average exercise price per share at period end



No stock options were exercised during the three months ended December 31, 2018 and 2017.



As of December 31, 2018, the Company had unrecognized compensation expense of approximately $3.3 million related to unvested stock options. This expense is expected to be recognized over approximately three years.



Restricted Stock



The Company has issued restricted stock to employees, directors and consultants. Such issuances had vesting periods that ranged from one to three years. All such shares of restricted stock vest provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting date. There were no shares of restricted stock outstanding at December 31, 2018 and September 30, 2018.



Restricted Stock Units



In connection with the closing of the APP Acquisition, the Company issued 50,000 and 140,000 restricted stock units to an employee and an outside director, respectively, that vested on October 31, 2018. The restricted stock units were settled in common stock issued under the 2017 Plan. As of December 31, 2018, there are no outstanding restricted stock units.



Stock Appreciation Rights



In connection with the closing of the APP Acquisition, the Company issued stock appreciation rights based on 50,000 and 140,000 shares of the Company’s common stock to an employee and an outside director, respectively, that vested on October 31, 2018. The stock appreciation rights have a ten-year term and an exercise price per share of $0.95, which was the closing price per share of the Company’s common stock as quoted on NASDAQ on the trading day immediately preceding the date of the completion of the APP Acquisition. The stock appreciation rights will be settled in common stock issued under the 2017 Plan.  As of December 31, 2018, these vested stock appreciation rights remain outstanding.

 

Note 10 – Contingent Liabilities



The testing, manufacturing and marketing of consumer products by the Company entail an inherent risk that product liability claims will be asserted against the Company.  The Company maintains product liability insurance coverage for claims arising from the use of its products.  The coverage amount is currently $10.0 million.



Litigation



In response to the APP Acquisition, two purported derivative and class action lawsuits were filed against the Company and certain of its officers and directors in the Circuit Court of Cook County, Illinois, captioned Glotzer v. The Female Health Company, et al., Case No. 2016-CH-13815, and Schartz v. Parrish, et al., Case No. 2016-CH-14488.  These lawsuits were originally filed on or about October 21, 2016 and November 7, 2016, respectively. On

24


 

January 9, 2017, these two lawsuits were consolidated. On March 31, 2017, the plaintiffs filed a consolidated complaint.  The consolidated complaint named as defendants Veru, the members of our board of directors prior to the closing of the APP Acquisition and the members of our board of directors after the closing of the APP Acquisition. The consolidated complaint alleged, among other things, that the directors breached their fiduciary duties, or aided and abetted such breaches, by consummating the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements and by causing us to issue the shares of our common stock and Series 4 Preferred Stock to the former stockholders of APP pursuant to the APP Acquisition in order to evade the voting requirements of the Wisconsin Business Corporation Law. The consolidated complaint also alleged that Dr. Steiner, a director and the Chairman, President and Chief Executive Officer of Veru and a co-founder of APP, and Dr. Fisch, a director and Vice Chairman of Veru and a co-founder of APP, were unjustly enriched in receiving shares of our common stock and Series 4 Preferred Stock in the APP Acquisition.



On May 5, 2017, the defendants filed a motion to dismiss the consolidated complaint. On August 15, 2017, the court entered an order dismissing without prejudice the claims that the post-acquisition directors aided and abetted the alleged breaches of fiduciary duties by the pre-acquisition directors and that Dr. Steiner and Dr. Fisch were unjustly enriched.  The court did not dismiss the claims that our directors prior to the closing of the APP Acquisition breached their fiduciary duties and the claims that Veru consummated the APP Acquisition in violation of the Wisconsin Business Corporation Law and NASDAQ voting requirements.  On November 30, 2018, plaintiffs filed an Amended Consolidated Complaint.  The Amended Consolidated Complaint makes allegations similar to those in the original consolidated complaint as to the claims that were not dismissed and names as defendants Veru and the members of our board of directors prior to the closing of the APP Acquisition. The Amended Consolidated Complaint also makes claims against Dr. Steiner for allegedly aiding and abetting the pre-acquisition directors’ breach of fiduciary duty and for unjust enrichment.  Like the original consolidated complaint, the Amended Consolidated Complaint seeks equitable relief, including rescission of the APP Acquisition, money damages, disgorgement of the shares of our common stock and Series 4 Preferred Stock issued to Dr. Steiner, and costs and expenses of the litigation, including attorneys' fees.  On December 14, 2018, the defendants filed their answer to the Amended Consolidated Complaint wherein they denied any and all liability and asserted additional defenses.  On January 14, 2019, the plaintiffs filed a motion for class certification.  The defendants’ response to plaintiffs’ motion for class certification is due on February 15, 2019.  Veru believes that this action is without merit and is vigorously defending itself. No amount has been accrued for possible losses relating to this litigation as any such losses are not both probable and reasonably estimable.



License and Purchase Agreements



From time to time, we license or purchase rights to technology or intellectual property from third parties. These licenses and purchase agreements require us to pay upfront payments as well as development or other payments upon successful completion of preclinical, clinical, regulatory or revenue milestones. In addition, these agreements may require us to pay royalties on sales of products arising from the licensed or acquired technology or intellectual property. Because the achievement of future milestones is not reasonably estimable, we have not recorded a liability in the accompanying unaudited condensed consolidated financial statements for any of these contingencies.



Note 11 – Income Taxes



The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of its assets and liabilities, and for net operating loss and tax credit carryforwards.



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 includes a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income, and changes to deductions, credits and business-related exclusions.



The Tax Act also repealed the alternative minimum tax (“AMT”) for corporations.  The new law provides that AMT carryovers can be utilized to reduce or eliminate the tax liability in subsequent years or to obtain a tax refund.  For tax years beginning in 2018, 2019 and 2020, to the extent the AMT credit carryovers exceed regular tax liability, 50% of the excess AMT credit carryovers will be refundable.  Any remaining credits will be fully refundable in 2021.  At September 30, 2018, the Company reclassified $0.5 million of its AMT credit carryovers from its deferred tax assets to other assets due to the expectation that the AMT credits will be refundable over the next several years.



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Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretations, and rule-making from the Internal Revenue Service, the SEC, the FASB and/or various other taxing jurisdictions.  For example, the Company anticipates that state jurisdictions will continue to determine and announce their conformity to the Tax Act which would have an impact on the annual effective tax rate. The Company’s calculations are based on the information available, prepared or analyzed (including computations) in reasonable detail.



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, 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 year 2006 through fiscal year 2015, the Company generated taxable income on a consolidated basis.  However, the Company had a cumulative pretax loss in the U.S. for fiscal 2018 and the two 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 taxable losses in the U.S. driven by the investment in research and development, and based on their analysis concluded that a valuation allowance should continue to be recorded against the U.S. deferred tax assets related to federal and state net operating loss carryforwards as of December 31, 2018. An additional valuation allowance has been recorded against the U.S. deferred tax assets and net operating loss carryforwards as of December 31, 2018 of $0.6 million.  In addition, the Company’s holding company for the non-U.S. operating companies, The Female Health Company Limited, continues to have a full valuation allowance.  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.



As of September 30, 2018, the Company had U.S. federal and state net operating loss carryforwards of approximately $33.2 million and $36.2 million, respectively, for income tax purposes with $14.4 million and $19.6 million, respectively, expiring in years 2022 to 2037 and $18.8 million and $16.6 million, respectively, which can be carried forward indefinitely.  The Company’s U.K. subsidiary has U.K. net operating loss carryforwards of approximately $62.3 million as of September 30, 2018, which can be carried forward indefinitely to be used to offset future U.K. taxable income.



ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 developed a two-step process to evaluate a tax position and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. 



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A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:













 

 

 

 

 



 

 

 

 

 



Three Months Ended



December 31,



2018

 

2017



 

 

 

 

 

Income tax benefit at statutory rates

$

(431,823)

 

$

(2,551,000)

State income tax benefit, net of federal benefits

 

(102,342)

 

 

(563,000)

Effect of change in U.S. tax rate

 

 —

 

 

(187,000)

Non-deductible expenses – other

 

2,420 

 

 

4,000 

Effect of lower foreign income tax rates

 

(8,357)

 

 

29,405 

Effect of deemed dividend

 

31,309 

 

 

 —

Other

 

(21,839)

 

 

21,542 

Change in valuation allowance

 

623,130 

 

 

 —

Income tax expense (benefit)

$

92,498 

 

$

(3,246,053)



Significant components of the Company’s deferred tax assets and liabilities are as follows:







 

 

 

 

 



 

 

 

 

 



December 31,

 

September 30,

Deferred tax assets:

2018

 

2018



 

 

 

 

 

Federal net operating loss carryforwards

$

7,357,498 

 

$

6,973,047 

State net operating loss carryforwards

 

2,294,400 

 

 

2,195,865 

Foreign net operating loss carryforwards – U.K.

 

10,598,452 

 

 

10,595,518 

Foreign capital allowance – U.K.

 

102,098 

 

 

102,098 

U.K. bad debts

 

1,700 

 

 

1,700 

Restricted stock – U.K.

 

17,586 

 

 

17,586 

U.S. deferred rent

 

22,425 

 

 

22,902 

Share-based compensation

 

670,536 

 

 

622,442 

Other, net – U.S.

 

113,237 

 

 

91,419 

Other, net – Malaysia

 

33,868 

 

 

33,843 

Gross deferred tax assets

 

21,211,800 

 

 

20,656,420 

Valuation allowance for deferred tax assets

 

(8,254,208)

 

 

(7,631,078)

Net deferred tax assets

 

12,957,592 

 

 

13,025,342 

Deferred tax liabilities:

 

 

 

 

 

In process research and development

 

(4,675,860)

 

 

(4,675,860)

Developed technology

 

(533,875)

 

 

(549,318)

Covenant not-to-compete

 

(89,683)

 

 

(94,321)

Other

 

(7,318)

 

 

(6,843)

Net deferred tax liabilities

 

(5,306,736)

 

 

(5,326,342)

Net deferred tax asset

$

7,650,856 

 

$

7,699,000 



The deferred tax amounts have been classified in the accompanying unaudited condensed consolidated balance sheets as follows:





 

 

 

 

 



 

 

 

 

 



December 31,
2018

 

September 30,
2018



 

 

 

 

 

Long-term deferred tax asset – U.K.

 

8,512,850 

 

 

8,509,915 

Long-term deferred tax asset – Malaysia

 

33,868 

 

 

33,843 

Total long-term deferred tax asset

$

8,546,718 

 

$

8,543,758 



 

 

 

 

 

Long-term deferred tax liability – U.S.

 

(895,862)

 

 

(844,758)

Total long-term deferred tax liability

$

(895,862)

 

$

(844,758)