10-K/A: Veru Inc. Restates Financials Due to R&D Expense Errors, Identifies Material Weakness

Veru Inc. has filed an amended annual report to restate its financial statements for fiscal years 2023 and 2022 due to errors in accounting for research and development expenses, also identifying a material weakness in internal controls.

Summary

• Veru Inc. has restated its financial statements for the fiscal years ended September 30, 2023 and 2022, due to errors in estimating research and development expenses.
• The restatement resulted in a $0.1 million and $0.3 million increase in research and development expenses for 2023 and 2022, respectively.
• Prepaid research and development costs decreased by $0.6 million and $0.8 million as of September 30, 2023 and 2022, respectively.
• Accounts payable decreased by $1.6 million as of September 30, 2023, and accrued research and development costs decreased by $0.8 million and $2.7 million as of September 30, 2023 and 2022, respectively.
• The restatement also included a $2.2 million decrease in the opening balance of accumulated deficit for the year ended September 30, 2022.
• Management identified a material weakness in internal control over financial reporting related to the review of research and development expense estimates.
• The company's net loss for fiscal year 2023 was $93.2 million, compared to a net loss of $84.0 million in fiscal year 2022.
• Net revenues decreased by 59% year-over-year, primarily due to a decline in FC2 sales in the U.S. prescription channel.
• The company's cash and cash equivalents decreased from $80.2 million to $9.6 million year-over-year.

Sentiment

Score: 3

Explanation: The document reveals significant financial and operational challenges, including a restatement, material weakness in internal controls, declining revenues, and a going concern warning. While there are some positive developments, the overall tone is negative from an investment perspective.

Positives

• The company is working to restore ordering and utilization patterns for FC2 in future periods.
• The company is establishing its own dedicated direct to patient telemedicine and pharmacy services portal to drive sales growth for FC2.
• The company is seeing growth in the U.S. public sector for FC2 sales.
• The company is supplying a large multi-year South African tender for female condoms, which is expected to continue until 2025.

Negatives

• The company experienced a significant decline in FC2 sales in the U.S. prescription channel.
• The company's largest telehealth customer, The Pill Club, filed for bankruptcy, eliminating a major revenue source.
• The company has a concentration of accounts receivable with The Pill Club, with $3.9 million unlikely to be collected.
• The company's independent auditor has raised substantial doubt about its ability to continue as a going concern.
• The company's cash and cash equivalents have decreased significantly year-over-year.
• The company has incurred net losses in recent fiscal years and expects to continue to incur losses for the foreseeable future.
• The company may not receive any additional payments from BWV in connection with the sale of its ENTADFI assets and may not receive any value for the shares of BWV Series A Preferred Stock it holds.

Risks

• The company has limited experience in obtaining regulatory approval or emergency use authorization for a drug.
• The company could experience delays in planned clinical trials.
• The company's clinical trials may be suspended or discontinued.
• The company may not be able to gain and retain market acceptance for its drug candidates.
• The company may not be able to successfully implement its strategy to grow sales of FC2 in the U.S. market through its own portal.
• The company may experience competition, especially for enobosarm as a treatment for metabolic diseases, if approved, and FC2.
• The company relies on a single facility to manufacture FC2, which subjects it to the risk of supply disruptions.
• The company may incur costs or experience supply interruptions relating to its need to transition the supply of the nitrile polymer for FC2.
• The company may be subject to claims or investigations relating to The Pill Clubs business practices with respect to sales of FC2.
• The company is subject to potential liability relating to a dispute with a supplier.
• The company has been named a defendant in stockholder class actions.
• The company's business and operations would suffer if it sustains cyber-attacks or other privacy or data security incidents that result in security breaches.
• The company may be unable to protect the proprietary nature of the intellectual property covering its products.
• The company's common stock may be subject to delisting from the Nasdaq Capital Market if its common stock has a closing bid price of less than $1.00 per share.
• The restatement of the company's prior quarterly financial statements may affect stockholder and investor confidence in the company or harm its reputation.
• The company identified material weaknesses in internal control over financial reporting, and determined that they resulted in its internal control over financial reporting and disclosure controls and procedures not being effective, as of September 30, 2023.

Future Outlook

The company plans to prioritize the development of enobosarm for obesity and seek external funding for sabizabulin for ARDS. The company expects revenue from its U.S. FC2 prescription business to demonstrate growth both from its dedicated FC2 telehealth portal and from the addition of new telehealth and other commercial distribution relationships.

Management Comments

• Management has determined that a material weakness existed in the Companys internal control over financial reporting related to its management review control over its estimate of research and development expenses associated with activities conducted by third-party service providers.
• Management believes that the audited consolidated financial statements contained in this Form 10-K/A as of and for the years ended September 30, 2023 and 2022, fairly present, in all material respects, the company's financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Industry Context

The document highlights the challenges faced by companies in the pharmaceutical and medical device industries, including regulatory hurdles, competition, and the need for significant capital investment. The company's focus on telehealth for FC2 sales reflects a broader trend in healthcare towards digital platforms.

Comparison to Industry Standards

• The restatement of financial statements due to R&D expense errors is not uncommon in the pharmaceutical industry, highlighting the complexity of accounting for clinical trials and development costs. However, the identification of a material weakness in internal controls is a significant concern that requires remediation.
• The company's reliance on a single manufacturing facility for FC2 is a risk that is not unique to the company, but is a common challenge for companies with specialized manufacturing processes. The company's efforts to transition to an alternative grade of nitrile polymer is a proactive step to mitigate supply chain risks.
• The company's focus on enobosarm for obesity and breast cancer is aligned with current trends in the pharmaceutical industry, which is seeing increased investment in these areas. However, the company's ability to compete with larger pharmaceutical companies will depend on its ability to secure funding and demonstrate clinical efficacy.
• The company's challenges in the telehealth sector reflect the consolidation and volatility in this market, which is impacting many companies that rely on telehealth for distribution.

Corporate Governance

Legal Proceedings

• The company is a defendant in a putative securities class action lawsuit alleging false statements about sabizabulin.
• The company and certain of its officers and directors are also parties to four derivative actions asserting state law claims primarily in connection with the issues and claims asserted in the securities class action.

Stakeholder Impact

• Shareholders are impacted by the restatement of financial statements, the material weakness in internal controls, and the going concern warning.
• Employees may be impacted by the company's financial challenges and potential restructuring.
• Customers may be impacted by changes in the company's distribution channels and product availability.
• Suppliers may be impacted by the company's financial challenges and potential changes in its supply chain.
• Creditors may be impacted by the company's financial challenges and potential inability to repay debts.

Next Steps

• The company intends to submit an IND for enobosarm as a treatment to augment fat loss and to prevent muscle loss in sarcopenic obese or overweight elderly patients receiving a GLP-1 RA in the fourth quarter of 2023.
• The company plans to conduct a Phase 2b clinical trial for enobosarm in sarcopenic obese or overweight elderly patients receiving a GLP-1 RA, with first data expected in the second half of 2024.
• The company will continue to grow and deepen its investment in its FC2 telehealth portal.
• The company will seek external funding through government grants, pharmaceutical company partnerships, or similar sources to advance the development of sabizabulin as a treatment for viral-induced ARDS.

Key Dates

Keywords

restatement, research and development, internal control, FC2, enobosarm, sabizabulin, clinical trials, telehealth, financial results, going concern