Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Veru is principally an oncology biopharmaceutical company with a focus on developing novel medicines for the management of breast and prostate cancers. One of our anticancer drugs, sabizabulin, also has dual antiviral and anti-inflammatory effects and is also being developed for the treatment of hospitalized COVID-19 patients at high risk for acute respiratory distress syndrome (ARDS). The Company has a commercial Sexual Health Division which includes a drug candidate, ENTADFITM, for the treatment of benign prostatic hyperplasia (BPH) and a commercial product, the FC2 Female Condom® (Internal Condom) (FC2), an FDA-approved product for the dual protection against unplanned pregnancy and the transmission of sexually transmitted infections.

The Biopharmaceutical Business:

The Company’s breast cancer drug pipeline has four clinical development programs for two drugs: enobosarm, oral selective androgen receptor agonist, and sabizabulin, oral cytoskeleton disruptor.

Hormone receptor positive HER2- metastatic breast cancer:

Phase 3 clinical study – Enobosarm as a 3rd line treatment of AR+ER+HER2- metastatic breast cancer (AR nuclei staining ≥40%). We are enrolling the Phase 3 multicenter, international, open label, and randomized (1:1) ARTEST registration clinical trial design to evaluate the efficacy and safety of enobosarm monotherapy versus physician’s choice of either exemestane  everolimus or a SERM as the active comparator for the treatment of AR+ ER+ HER2- metastatic breast cancer in approximately 210 patients with AR nuclei staining ≥40% in their breast cancer tissue who had tumor progression on a nonsteroidal aromatase inhibitor, fulvestrant, and a CDK4/6 inhibitor. We have identified that patients who have greater than 40% androgen receptor nuclei staining in their breast cancer tissue are most likely to respond to enobosarm. Based on the recommendation of the FDA to have a companion diagnostic test to determine the patient’s AR status, we are partnering with Roche/Ventana Diagnostics, a global oncology diagnostics company, who will develop and commercialize a companion diagnostic AR test.

Phase 2b clinical study – Sabizabulin as a 3rd line treatment of AR+ER+HER2- metastatic breast cancer (AR nuclei staining <40%). We also intend to conduct a Phase 2b clinical study of sabizabulin, a novel oral cytoskeleton disruptor, for the treatment of AR+ ER+ HER2- metastatic breast cancer in patients with an AR nuclei staining <40%. The Phase 2b clinical trial will be an open label, multicenter, and randomized (1:1) study evaluating the efficacy and safety of sabizabulin 32mg monotherapy versus physician’s choice of either exemestane  everolimus or a SERM as the active comparator for the treatment of ER+ HER2- metastatic breast cancer in approximately 200 patients with AR nuclei staining <40% in their breast cancer tissue who had tumor progression on a nonsteroidal aromatase inhibitor, fulvestrant, and a CDK4/6 inhibitor. The Phase 2b study is expected to commence during the first quarter of calendar year 2022.

Phase 3 clinical study – Enobosarm + abemaciclib combination as a 2nd line treatment of AR+ER+HER2- metastatic breast cancer (AR nuclei staining ≥40%). We intend to conduct a Phase 3 multicenter, open label, randomized (1:1), active control clinical study, named ENABLAR-2 to evaluate the efficacy and safety of enobosarm plus abemaciclib combination therapy versus an alternative estrogen blocking agent (fulvestrant or an aromatase inhibitor) in subjects with AR+ ER+ HER2- metastatic breast cancer who have failed first line palbociclib (a CDK4/6 inhibitor) plus an estrogen blocking agent (non-steroidal aromatase inhibitor or fulvestrant) and have an AR nuclei staining ≥ 40% in their breast cancer tissue. We plan to enroll approximately 186 subjects in this Phase 3 clinical study which is expected to commence during the first quarter of calendar year 2022.

Metastatic triple negative breast cancer:

Phase 2b clinical study - Sabizabulin + enobosarm combination therapy for the treatment of patients who have AR+ metastatic triple negative breast cancer and who have tumor progression after receiving at least 2 systemic chemotherapies. The Company plans to commence a single arm, sabizabulin plus enobosarm combination therapy Phase 2b clinical study in the first quarter of calendar year 2022 in approximately 111 women.

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The Company’s prostate cancer drug pipeline includes sabizabulin, VERU-100 and zuclomiphene citrate.

Sabizabulin 32mg for the treatment of metastatic castration resistant and androgen receptor targeting agent resistant prostate cancer-

Phase 1b/2 clinical studies to determine maximum tolerated dose and recommended dosing of sabizabulin. We are completing the Phase 1b open label clinical trial of sabizabulin in 39 men with metastatic castration resistant and androgen receptor targeting agent resistant prostate cancer ± taxane chemotherapy and the Phase 2 clinical study in 41 men with metastatic castration resistant prostate cancer who have also become resistant to at least one androgen receptor targeting agent, but prior to proceeding to IV chemotherapy. In the Phase 1b/2 studies, sabizabulin was both well tolerated and demonstrated promising preliminary efficacy data.

Phase 3 VERACITY clinical study. We are currently enrolling the Phase 3 VERACITY registration study evaluating sabizabulin 32mg in men approximately 245 men who have metastatic castration resistant prostate cancer and who had tumor progression while receiving at least one androgen receptor targeting agent, but prior to IV chemotherapy.

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VERU-100, long acting GnRH antagonist subcutaneous depot, for the treatment of advanced hormone sensitive prostate cancer-

Phase 2 dose finding clinical study. Currently enrolling study to determine optimal dose of VERU-100 in men with advance hormone sensitive prostate cancer. Phase 2 clinical results are expected in early 2022.

Phase 3 registration clinical study. If the Phase 2 trial is successful, and as discussed with and agreed upon by the FDA, the Phase 3 clinical trial will be a single arm, multicenter, open-label study in approximately 100 men with hormone sensitive advanced prostate cancer using the achievement and maintenance of castration levels of testosterone as the primary endpoint. The Phase 3 registration study is planned to initiate in the first half of calendar year 2022.

‎Zuclomiphene citrate, estrogen receptor agonist, for the treatment of hot flashes caused by prostate cancer hormonal therapies in men with advanced prostate cancer-

Phase 2b zuclomiphene clinical study. The Company reported positive dose finding Phase 2 study in January 2020. The Company plans to further optimize the dosing schedule of zuclomiphene citrate in a Phase 2b study.

The Company is opportunistically developing sabizabulin 9mg, which has both broad anti-inflammatory and anti-viral properties as a two-pronged approach to the treatment of COVID-19 virus infection.

Phase 3 COVID-19 registration trial: Sabizabulin 9mg for the treatment of hospitalized moderate to severe COVID-19 patients at high risk for acute respiratory distress syndrome- We are enrolling a global Phase 3 COVID-19 clinical registration trial which is a double-blind randomized (2:1) placebo-controlled trial evaluating daily oral doses of 9 mg sabizabulin for 21 days versus placebo in approximately 300 moderate to severe COVID-19 hospitalized subjects who are at high risk for developing ARDS, which remains an unmet medical need. The Company anticipates having results for Phase 3 clinical trial in the first half of calendar year 2022.

Sexual Health Division

The Company's Sexual Health Division includes a drug candidate, ENTADFITM, for the treatment of benign prostatic hyperplasia (BPH) and a commercial product, the FC2 Female Condom® (internal condom) (FC2), an FDA-approved product for the dual protection against unplanned pregnancy and the transmission of sexually transmitted infections.

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ENTADFITM (tadalafil 5mg and finasteride 5mg capsule) is being developed to treat urinary tract symptoms caused by BPH. The co-administration of tadalafil and finasteride has been shown to be more effective for the treatment of BPH than finasteride alone with no adverse effects on sexual function. The NDA was submitted in February 2021, filed by the FDA in April 2021 with a PDUFA date in December 2021. If approved, ENTADFITM is expected to be marketed and distributed by telemedicine (telemedicine being the remote diagnosis and treatment of patients by means of telecommunications technology) and telepharmacy channels. The Company’s Sexual Health Business segment will include future revenues for ENTADFI, if approved. Costs associated with the development of ENTADFITM are currently included in our Research and Development segment.

The Company sells FC2 in both the commercial sector and in the public health sector both in the U.S. and globally. In the U.S., FC2 is available by prescription through multiple telemedicine and internet pharmacy channels as well as retail pharmacies. The Company is establishing its own dedicated direct to patient telemedicine and pharmacy services portal/platform to continue to drive sales growth. FC2 is also available to public health sector entities such as state departments of health and 501(c)(3) organizations. In the global public health sector, the Company markets FC2 to entities, including ministries of health, government health agencies, U.N. agencies, nonprofit organizations and commercial partners, that work to support and improve the lives, health and well-being of women around the world.

All of the Company’s net revenues are currently derived from sales of FC2 in the commercial and public health sectors.

PREBOOST® Sale

On December 8, 2020, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Roman Health Ventures Inc. (the “Purchaser”). Pursuant to, and subject to the terms and conditions of, the Purchase Agreement, the Purchaser purchased substantially all of the assets related to the Company's PREBOOST® business. PREBOOST® is a 4% benzocaine medicated individual wipes for the treatment of premature ejaculation and was a commercial product in the Company’s Sexual Health Division during fiscal 2020 and in fiscal 2021 through the date the transaction closed. The transaction closed on December 8, 2020. The purchase price for the transaction was $20.0 million, consisting of $15.0 million paid at closing, $2.5 million payable 12 months after closing and $2.5 million payable 18 months after closing.

COVID-19 Environment

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

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

The COVID-19 pandemic has substantially impacted the global healthcare system, including the conduct of clinical trials. Many healthcare systems have restructured operations to prioritize caring for those suffering from COVID-19 and to limit or cease other activities. The severe burden on healthcare systems caused by this pandemic has also impaired the ability of many research sites to start new clinical trials or to enroll new patients in clinical trials. The imposed mandatory sheltering in place and social distancing restrictions may delay the recruitment of patients and impede their ability to effectively participate in such trials. Significant fees may also be owed to contract research organizations associated with starting and stopping clinical trials, typically more so than delaying the start of a clinical trial.

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To date, COVID-19 has not impacted the Company’s ability to supply product demand for FC2. We have experienced, and continue to experience, some temporary disruptions to our manufacturing facility due to the implementation of government policies. On March 16, 2020, the Malaysian government issued an order closing non-essential businesses in that country due to the COVID-19 pandemic. As a result, the sole facility where the Company manufactures FC2 was unable to manufacture or ship product starting March 16, 2020. Because FC2 is a health product, the Company received an exemption to reopen the facility with limited staff to ship existing inventory on March 27, 2020, to reopen for manufacturing with 50% of the regular number of workers and social distancing requirements on April 20, 2020 and to return to 100% of the regular number of workers but with continued social distancing requirements on May 4, 2020. On June 1, 2021, the Malaysian government issued a nationwide lockdown order placing limitations on social and economic activity in the country. The Company was able to secure the required approvals, as a health product, to continue to partially operate by reducing the number of employees physically allowed in the facilities to 60% of the total workforce. On July 3, 2021, the lockdown was strengthened in the region in which the Company operates and the Company entered into a two-week period ceasing all operations, in common with similar manufacturing businesses. On July 19, 2021, after allowing some time for staff testing, operations resumed at the required levels of 60% of the total workforce. The Company has partially mitigated the disruption to production by changing staffing patterns. From time to time, we have temporarily paused operations as part of our contact tracing protocols and to allow for cleaning and disinfection of our production facility.

The Company has enrolled manufacturing staff in a vaccination program. More than 95% of the staff have received two doses of vaccination. This has allowed shift patterns to return to normal and the facility is allowed to operate at 100% capacity under the current Malaysia control orders.

The Company has had and believes it continues to have a sufficient quantity of FC2 inventory both inside and outside of Malaysia to satisfy expected customer demand. The recent closure and reduced operating capacity did not have a material impact to the Company’s consolidated operating results in fiscal 2021 and we do not expect them to have a material impact on the Company’s consolidated operating results in foreseeable future periods. The Company continues to operate enhanced health and safety protocols to protect the employees at its Malaysian facility, to respond in the event an employee at the facility is determined to have tested positive for COVID-19, and to mitigate the impact of COVID-19 on the Company’s Malaysian manufacturing operations. However, no such measures can eliminate risks relating to the COVID-19 pandemic, and if the Company’s Malaysian manufacturing facility is subject to future government mandates to counter COVID-19 or encounters labor or raw material shortages, transportation delays or other issues, our ability to supply product to our customers could be disrupted.

The sole supplier of the nitrile polymer sheath for FC2 also produces surgical gloves and has at times prioritized their production during the COVID-19 pandemic and may continue to do so, which could disrupt the Company’s supply of a critical raw material. Malaysian ports are currently open for shipment but at reduced capacity, and the Company may also encounter issues shipping product into key markets or through freight or other carriers. To mitigate these factors, the Company continues to build strategic stock to ensure supply is available during a period of potential disruption. The COVID-19 pandemic and related economic disruption may also adversely affect customer demand for FC2. For example, sales of FC2 could be impacted in the U.S. prescription channel if insurance coverage is affected by job losses and in the global public health sector if governments delay future tenders or reduce spending on female condoms due to financial strains or changed spending priorities caused by the COVID-19 pandemic. The COVID-19 pandemic did not have a material net impact on our consolidated operating results during fiscal 2021.

To protect the health and safety of our workforce, we closed our offices in the United States and the United Kingdom temporarily. Offices have reopened but non-essential staff and our personnel have largely continued to work remotely. Travel between our facilities in the United States, the United Kingdom and Malaysia has also been restricted. As of the date of this report, our operations have not been significantly impacted by such remote work requirements and travel restrictions.

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Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels as a result of uncertainties, including the extent and rate of the spread of the virus that continue to fluctuate, the potential for additional peaks in infection rates, and the timing and availability of vaccines, treatments or cures to slow and eventually stop the spread. We do not yet know the full extent of any impact on our business or our operations; however, we will continue to monitor the COVID-19 situation and its impact on our business closely and expect to reevaluate the timing of our anticipated clinical trials as the impact of COVID-19 on our industry becomes clearer.

Sales of FC2 in commercial and global public health sectors

FC2 Commercial Sector. In 2017, the Company began expanding access to FC2 in the U.S. by making it available by prescription. With a prescription, FC2 is covered by most insurance companies with no copay under the ACA and the laws of 20+ states prior to enactment of the ACA. In 2018, we dissolved our small-scale marketing and sales program to focus our efforts in accessing fast-growing, highly reputable telemedicine firms to bring our much-needed FC2 product to patients with a prescription in a cost-effective and highly convenient manner. As a result of these efforts, the Company now supplies FC2 to telemedicine providers in the U.S. prescription channel. The Company is working to develop supply and distributor relationships with additional telemedicine and other providers. The Company is establishing its own dedicated direct to patient telemedicine and pharmacy services portal to continue to drive sales growth.

FC2 Global Public Health Sector. FC2’s use is for the prevention of HIV/AIDS and the transmission of other sexually transmitted diseases and prevention of unplanned pregnancies, and the global public health sector has been an important market for FC2. Within the global public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.

FC2 has been distributed in the U.S. and 149 other countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other sexually transmitted infections and unplanned pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries can be volatile and result in unpredictable delays in program development, tender applications and processing orders.

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

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

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

On August 27, 2018, the Company announced that through six of its distributors in the Republic of South Africa, the Company had received a tender award to supply 75% of a tender covering up to 120 million female condoms over three years. The tender was extended until January 2022. The Company began shipping units under this tender award in the third quarter of fiscal 2019 and we have shipped approximately 16.1 million units through September 30, 2021.In October 2020, the Company was awarded up to 20 million units through its distributor in Brazil under the new Brazil female condom tender. These units are expected to be delivered over two years. The Company began shipping units under this tender award in the first quarter of fiscal 2021 and we have shipped approximately 9.7 million units through September 30, 2021.

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

Revenues. The Company's revenues are primarily derived from sales of FC2 in the U.S. prescription channel and global public health sector. The Company also had revenues from sales of PREBOOST® (Roman Swipes) through the date the PREBOOST® business was sold on December 8, 2020. These sales are recognized upon shipment or delivery of the product to the customers depending on contract terms.

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

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

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

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We have recently seen an increase in the cost of the nitrile polymer used to produce FC2 and may experience increases in other material costs due to the impact of COVID-19 and increased inflation. Our costs of sales and gross margins may be adversely impacted if we are unable to pass along cost increases to our customers.

Conducting research and development is central to our business model. The Company’s Research and Development segment includes multiple products and management routinely evaluates each product in its portfolio of products. Advancement is limited to available working capital and management’s understanding of the prospects for each product. If future prospects do not meet management’s strategic goals, advancement may be discontinued. We have invested and expect to continue to invest significant time and capital in our research and development operations. Our research and development expenses were $32.7 million and $16.9 million for fiscal 2021 and 2020, respectively. In fiscal 2022, we expect to continue this trend of increased expenses relating to research and development due to advancement of multiple drug candidates.

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Results of Operations

YEAR ENDED SEPTEMBER 30, 2021 COMPARED TO YEAR ENDED SEPTEMBER 30, 2020

The Company generated net revenues of $61.3 million and net income of $7.4 million, or $0.10 per basic common share and $0.09 per diluted common share, in fiscal 2021, compared to net revenues of $42.6 million and net loss of $19.0 million, or $(0.28) per basic and diluted common share, in fiscal 2020. Net revenues increased 44% year over year.

FC2 net revenues increased 49% year over year. There was a 15% increase in total FC2 unit sales and an increase in FC2 average sales price per unit of 29%. The principal factor for the increase in the FC2 average sales price per unit compared to prior year was the change in the sales mix with the U.S. prescription channel representing 77% of total FC2 net revenues in fiscal 2021 compared to 67% of total FC2 net revenues in fiscal 2020. The Company experienced an increase of 71% in FC2 net revenues in the U.S. prescription channel and an increase of 4% in FC2 net revenues in the global public health sector.

Cost of sales increased to $13.3 million in fiscal 2021 from $11.8 million in fiscal 2020 primarily due to an increase in unit sales. An increase in cost of raw materials was substantially offset by decreases in labor, transportation, and equipment maintenance costs.

Gross profit increased to $47.9 million in fiscal 2021 from $30.8 million in fiscal 2020. Gross profit margin for fiscal 2021 was 78% of net revenues, compared to 72% of net revenues for fiscal 2020. In fiscal 2021, the Company experienced an increase in FC2 sales in the U.S. prescription channel with higher profit margins, contributing to the increase in overall gross profit and gross profit margin.

Significant quarter-to-quarter variances in the Company’s results have historically resulted from the timing and shipment of large orders rather than from any fundamental changes in the business or the underlying demand for FC2. The Company is experiencing a significant increase in revenue from sales in the U.S prescription channel, which is helping grow net revenues quarter to quarter and year to year. The Company is also currently seeing pressure on pricing for FC2 by large global agencies and donor governments in the developed world. As a result, the Company may continue to experience challenges for revenue from sales of FC2 in the global public health sector.

Research and development expenses increased to $32.7 million in fiscal 2021 from $16.9 million in fiscal 2020. The increase is primarily due to increased costs associated with the multiple in-process research and development projects and increased personnel costs. In fiscal 2021, the Company initiated two Phase 3 clinical trials and one Phase 2 clinical trial with additional clinical trial initiations planned to soon commence. This ongoing clinical trial activity has resulted in increased costs. Additionally, in fiscal 2020, research and development expenses were reduced by $0.1 million due to the funds received under the Paycheck Protection Program. See Note 15 to the financial statements included in this report for additional information related to the Paycheck Protection Program.

Selling, general and administrative expenses increased to $20.7 million in fiscal 2021 from $14.5 million in fiscal 2020. The increase is primarily due to increased personnel costs, drug commercialization costs, and insurance costs. Additionally, in fiscal 2020, selling, general, and administrative costs were reduced by $0.4 million due to the funds received under the Paycheck Protection Program. See Note 15 to the financial statements included in this report for additional information related to the Paycheck Protection Program.

During the first quarter of fiscal 2021, we recorded a pre-tax gain on sale of the Company’s PREBOOST® business of $18.4 million. See Note 2 to the financial statements included in this report for additional information.

During the fourth quarter of fiscal 2020, we recorded an impairment charge of $14.1 million related to IPR&D associated with the APP Acquisition. The charge was primarily a result of deferred development timelines and the decision to cease development work on Tamsulosin DRS, VERU-722 (male infertility), and VERU-112 (gout), in response to management’s strategic decision to prioritize the development of other research projects. The Company has several other highly differentiated, unique, patent-protected drugs under development addressing larger and potentially more profitable markets. The Company met the criteria for abandonment under applicable accounting standards. This resulted in writing off the carrying amounts for these three IPR&D assets during the year ended September 30, 2020. The remaining book value of other IPR&D assets acquired in the APP Acquisition is $3.9 million as of September 30, 2021 and 2020. There was no impairment charge recorded in fiscal 2021.

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Interest expense, which primarily consists of items related to the Credit Agreement and Residual Royalty Agreement, was $4.9 million in fiscal 2021, increased from $4.6 million in fiscal 2020. The increase is due to an increase in the accretion of the Residual Royalty Agreement, for which payments began during fiscal 2021, partially offset by decreases in the amortization of discounts and deferred issuance costs related to the Credit Agreement.

Expense associated with the change in fair value of the embedded derivatives related to the Credit Agreement and Residual Royalty Agreement was $3.7 million in fiscal 2021 compared to expense of $0.6 million in fiscal 2020. The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. The increase in the fair value of the embedded derivates is due to an increase in projected FC2 net revenues in future periods and decrease in the discount rates used, driven by external market factors. See Note 3 and Note 9 to the financial statements included in this report for additional information.

The income tax benefit in fiscal 2021 was $3.1 million, compared to the income tax benefit of $1.1 million in fiscal 2019. The increase in the income tax benefit of $2.0 million is primarily due an increase in the income tax benefit of $2.4 million for the change in U.K. tax rates, $3.8 million due to the exercise of stock options and warrants, and $2.8 million in R&D credits, partially offset by the increase in income tax expense of $5.5 million resulting from the increase in income before income taxes and $1.3 million from the increase in the valuation allowance.

Liquidity and Sources of Capital

Liquidity

Our cash and cash equivalents on hand on September 30, 2021 was $122.4 million, compared to $13.6 million on September 30, 2020. On September 30, 2021, the Company had working capital of $136.0 million and stockholders’ equity of $152.3 million compared to working capital of $12.3 million and stockholders’ equity of $30.1 million as of September 30, 2020. The increase in working capital is primarily due to the increase in cash on hand and an increase in prepaid research and development costs.

We anticipate that we will continue to consume cash as we develop our drug candidates. Because of the numerous risks and uncertainties associated with the development of pharmaceutical products, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to fund development of our drug candidates and obtain regulatory approvals. Our future capital requirements will depend on many factors. See Part I, Item 1A, “Risk Factors - Risks Related to Our Financial Position and Need for Capital” for a description of certain risks that will affect our future capital requirements.

The Company believes its current cash position and cash expected to be generated from sales of the Company’s commercial product are adequate to fund planned operations of the Company for the next 12 months. To the extent the Company may need additional capital for its operations or the conditions for raising capital are favorable, the Company may access financing alternatives that may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities and may include financings under the Company’s current effective shelf registration statement on Form S-3 (File No. 333-239493) or under a new registration statement.

Operating activities

Our operating activities used cash of $15.6 million in fiscal 2021. Cash used in operating activities included net income of $7.4 million, adjustments to reconcile net income to net cash provided by operating activities totaling a reduction of $15.7 million and changes in operating assets and liabilities of $7.3 million. Adjustments to net income primarily consisted of $18.4 million for the gain on sale of the PREBOOST® business, $3.6 million of interest paid in excess of interest expense, and $3.6 million of deferred income taxes, partially offset by share-based compensation of $5.1 million and an increase in the fair value of derivative liabilities of $3.7 million. The decrease in cash from changes in operating assets and liabilities included an increase in accounts receivable of $3.6 million and an increase in prepaid expenses and other assets of $8.6 million, partially offset by a decrease in accrued expenses and other current liabilities of $4.2 million.

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Our operating activities used cash of $1.9 million in fiscal 2020. Cash used in operating activities included a net loss of $19.0 million, adjustments for non-cash items totaling $21.4 million and changes in operating assets and liabilities of $4.3 million. Adjustments for non-cash items primarily consisted of $14.1 million of impairment of intangible assets, $4.3 million of non-cash interest expense, and $2.6 million of share-based compensation, partially offset by deferred income taxes of $1.3 million. The decrease in cash from changes in operating assets and liabilities included an increase in inventory of $3.3 million and a decrease in accrued expenses and other current liabilities of $1.0 million.

Investing activities

Net cash from investing activities was $14.6 million in fiscal 2021, attributed to $15.0 million received from the sale of the Company’s PREBOOST® business, partially offset by $0.4 million in capital expenditures for manufacturing and office equipment.

Net cash used in investing activities in fiscal 2020 $0.1 million, associated with capital expenditures.

Financing activities

Net cash provided by financing activities in fiscal 2021 was $109.7 million and primarily consisted of proceeds from the underwritten public offering of the Company’s common stock, net of fees and costs paid through September 30, 2021, of $108.0 million (see discussion below) and proceeds from stock option exercises of $1.8 million.

Net cash provided by financing activities in fiscal 2020 was $9.3 million and primarily consisted of $13.4 million from the sale of shares under the 2020 Purchase Agreement and 2017 Purchase Agreement with Aspire Capital (see discussion below), less principal payments on the Credit Agreement (see discussion below) totaling $4.4 million.

Sources of Capital

Common Stock Offering

On February 22, 2021, we completed an underwritten public offering of 7,419,354 shares of our common stock, which included the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $15.50 per share. Net proceeds to the Company from this offering were $108.0 million after deducting underwriting discounts and commissions and costs incurred by the Company. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239493).

Credit Agreement

On March 5, 2018, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with the financial institutions party thereto from time to time (the “Lenders”) and SWK Funding LLC, as agent for the Lenders (the “Agent”), for a synthetic royalty financing transaction. On and subject to the terms of the Credit Agreement, the Lenders provided the Company with a term loan of $10.0 million, which was advanced to the Company on the date of the Credit Agreement. Under the Credit Agreement, the Company was required to make quarterly payments on the term loan based on the Company’s product revenue from net sales of FC2 until the earlier of receipt by the Lenders of a return premium specified in the Credit Agreement or a required payment upon termination of the Credit Agreement on March 5, 2025 or an earlier change of control of the Company or sale of the FC2 business. The Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement.

In connection with the Credit Agreement, Veru and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2, which continues after the repayment of the loan and return premium under 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.

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The Company made total payments under the Credit Agreement of $7.3 million and $4.7 million during fiscal 2021 and 2020, respectively. The Company began making payments under the Residual Royalty Agreement during fiscal 2021, totaling $1.1 million during the year. The Company currently estimates the aggregate amount of quarterly revenue-based payments payable during the 12-month period subsequent to September 30, 2021 will be approximately $3.2 million under the Residual Royalty Agreement.

Common Stock Purchase Agreements

On June 26, 2020, the Company entered into a common stock purchase agreement (the “2020 Purchase Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right, from time to time in its sole discretion during the 36-month term of the 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $23.9 million of the Company’s common stock in the aggregate. Upon execution of the 2020 Purchase Agreement, the Company issued and sold to Aspire Capital under the 2020 Purchase Agreement 1,644,737 shares of common stock at a price per share of $3.04, for an aggregate purchase price of $5,000,000. Other than the 212,130 shares of common stock issued to Aspire Capital in consideration for entering into the 2020 Purchase Agreement and the initial sale of 1,644,737 shares of common stock, the Company has no obligation to sell any shares of common stock pursuant to the 2020 Purchase Agreement and the timing and amount of any such sales are in the Company's sole discretion subject to the conditions and terms set forth in the 2020 Purchase Agreement. As of September 30, 2021, there was $18.9 million remaining under the 2020 Purchase Agreement, which is registered under the Company’s shelf registration statement on Form S-3 (File No. 333-239493). Effective June 26, 2020, upon the execution of the 2020 Purchase Agreement, the Company’s prior purchase agreement with Aspire Capital was terminated.

Critical Accounting Estimates

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. The Company is required to adopt various accounting policies and to make estimates and assumptions in preparing its financial statements that affect the reported amounts of assets, liabilities, net revenues and expenses. On an ongoing basis, the Company evaluates its estimates and assumptions. The Company bases its estimates on historical experience to the extent practicable and on various other assumptions that it believes are reasonable under the circumstances and at the time they are made. If the Company’s assumptions prove inaccurate or if future results are not consistent with historical experience, the Company may be required to make adjustments in its policies that affect reported results. The Company’s significant accounting policies are disclosed in Note 1 to the financial statements included in this report.

The Company’s most critical accounting estimates include: valuation of tax assets and liabilities, measurement of fair value, and valuation of goodwill and intangible assets. The Company has other key accounting policies that are less subjective and, therefore, their application is less subject to variations that would have a material impact on the Company’s reported results of operations. The following is a discussion of the Company’s most critical policies, as well as the estimates and judgments involved.

Income Taxes

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

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

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The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to its attention that would indicate that a revision to its estimates is necessary. In evaluating the Company’s ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country by country basis, including past operating results and forecasts of future taxable income, and the potential Section 382 limitation on the net operating loss carryforwards due to a change in control. In determining future taxable income, management makes assumptions to forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the forecasts of the future taxable income in each tax jurisdiction and are consistent with the forecasts used to manage the Company’s business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis. From fiscal 2006 through fiscal 2015, the Company generated taxable income on a consolidated basis. However, the Company had a cumulative pretax loss in the U.S. for fiscal 2020 and the three preceding fiscal years. Forming a conclusion that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses in recent years. Management has projected future pretax losses in the U.S. driven by the investment in research and development and based on their analysis concluded that an additional valuation allowance of $4.7 million should be recorded against the U.S. deferred tax assets related to federal and state net operating loss carryforwards as of September 30, 2021. In addition, the Company’s U.K. holding company for the non-U.S. operating companies, The Female Health Company Limited, continues to have a full valuation allowance of $3.2 million, which increased by $0.8 million due to the change in U.K. tax rates (see below). The operating U.K. subsidiary, The Female Health Company (UK) plc does not have a valuation allowance due to projections of future taxable income for the next 10 years.

Although management uses the best information available, it is reasonably possible that the estimates used by the Company will be materially different from the actual results. These differences could have a material effect on the Company's future results of operations and financial condition.

On June 10, 2021, the U.K. Finance Act 2021 was enacted increasing the U.K. tax rate from 19% to 25% effective April 1, 2023. The increase in the tax rate increased the value of the deferred tax assets in the U.K. by $3.7 million with a corresponding valuation allowance of $0.8 million, which resulted in a net income tax benefit of $3.0 million.

Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes and addition of the valuation allowance against the NOL carryforwards. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, and accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Fair Value Measurements

As of September 30, 2021, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, represents the fair value of the change of control provisions in the Residual Royalty Agreement. See Note 9 to the financial statements included in this report.

The fair value of these liabilities were estimated based on unobservable inputs (Level 3 measurement), which requires highly subjective judgment and assumptions. The Company determined the fair values of the embedded derivatives using a Monte Carlo simulation model. This valuation model incorporates the contractual terms of the instruments and assumptions including projected FC2 revenues over a 10-year period, expected cash outflows, probability and estimated dates of a change of control, expected volatility, and risk-free interest rates and applicable credit risk. The assumptions used in calculating the fair value of financial instruments represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company’s financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. See Note 3 to the financial statements included in this report.

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The fair value of the embedded derivatives at September 30, 2021 was $7.9 million compared to $4.2 million at September 30, 2020. The Company recognized non-operating expense of $3.7 million to adjust the fair value of these instruments. The increase in the fair value of the embedded derivates is due to an increase in projected FC2 net revenues in future periods and decreases in the discount rates, resulting from external market factors.

Goodwill and Intangible Assets

The Company has $6.9 million recorded as goodwill at September 30, 2021 and 2020 and $4.0 million and $5.8 million in intangible assets at September 30, 2021 and 2020, respectively. The Company evaluates the carrying value of its goodwill and indefinite-lived intangible assets, which consists of in-process research and development (IPR&D), on an annual basis in the fourth quarter of each fiscal year or more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value. Intangible assets with finite lives are tested for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If these facts and circumstances exist, the Company assesses for recovery by comparing the carrying values of the assets with their future undiscounted net cash flows. Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected undiscounted cash flows.

IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. During the period the assets are considered indefinite-lived, they are tested for impairment. If the related project is terminated or abandoned, the Company may have a full or partial impairment related to the IPR&D assets, calculated as the excess of their carrying value over fair value. The valuation process is very complex and requires significant input and judgment using internal and external sources with respect to the Company’s future volume, revenue and expense growth rates, changes in working capital use, the selection of an appropriate discount rate, asset groupings, and other assumptions and estimates. See further discussion in Note 1 and Note 8 to the financial statements included in this report.

Recent Accounting Pronouncements

See Note 1 to the financial statements included in this report for additional information on recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

Impact of Inflation and Changing Prices

Although the Company cannot accurately determine the precise effect of inflation, the Company has experienced increased costs of product, supplies, salaries and benefits, and increased general and administrative expenses. The Company has, where possible, increased selling prices to offset such increases in costs.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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The Company's exposure to market risk is limited to fluctuations in raw material commodity prices, particularly the nitrile polymer used to manufacture FC2, and foreign currency exchange rate risk associated with the Company's foreign operations. The Company does not utilize financial instruments for trading purposes or to hedge risk and holds no derivative financial instruments which would expose it to significant market risk. Effective October 1, 2009, the Company's U.K. subsidiary and Malaysia subsidiary each adopted the U.S. dollar as its functional currency. 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 Company’s distributors are subject to exchange rate risk as their orders are denominated in U.S. dollars and they generally sell to their customers in the local country currency. If currency fluctuations have a material impact on a distributor it may ask the Company for pricing concessions or other financial accommodations. The Company currently has no significant exposure to interest rate risk.

Item 8. Financial Statements and Supplementary Data

The response to this item is submitted in a separate section of this report. See “Index to Consolidated Financial Statements” for a list of the financial statements being filed herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. As required by Rule 13a-15(c) under the Securities Exchange Act of 1934, our management has carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”) in 2013.

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Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of September 30, 2021, based on criteria in “Internal Control - Integrated Framework” issued by the COSO in 2013.

Report of Independent Registered Public Accounting Firm

Because we are a non-accelerated filer, our independent registered public accounting firm is not required to express an opinion on the effectiveness of our internal control over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information with respect to this item is incorporated herein by reference to the discussion under the headings “Proposal 1: Election of Directors,” “Executive Officers,” “Delinquent Section 16(a) Reports,” “Corporate Governance Matters-Director Nominations” and “Audit Committee Matters – Audit Committee Financial Expert” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022. Information regarding the Company’s Code of Business Ethics is incorporated herein by reference to the discussion under “Corporate Governance Matters –Code of Business Ethics” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022.

The Audit Committee of the Company’s Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Lucy Lu, M.D. (Chairperson), Michael L. Rankowitz and Mario Eisenberger, M.D.

Item 11. Executive Compensation

Information with respect to this item is incorporated herein by reference to the discussion under the headings “Director Compensation and Benefits” and “Executive Compensation” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to this item is incorporated herein by reference to the discussion under the heading “Security Ownership” and “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information with respect to this item is incorporated herein by reference to the discussion under the heading “Certain Relationships and Related Transactions” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022. Information regarding director independence is incorporated by reference to the discussion under “Corporate Governance Matters – Director Independence” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022.

Item 14. Principal Accountant Fees and Services.

Information with respect to this item is incorporated herein by reference to the discussion under the heading “Audit Committee Matters – Fees of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed with the SEC on or before January 28, 2022.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1.Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of September 30, 2021 and 2020

Notes to Consolidated Financial Statements

2.Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or the required information is shown in the financial statements or notes thereto, and therefore, have been omitted.

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3.Exhibits

Exhibit Number Description

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4.3 Description of Capital Stock. **

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21 Subsidiaries of Registrant. **

23.1 Consent of RSM US LLP. **

24.1 Power of Attorney (included as part of the signature page hereof).

___________

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* Management contract or compensatory plan or arrangement

** Filed herewith

Item 16. Form 10-K Summary

Not Applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: December 2, 2021 VERU INC.

BY: /s/ Mitchell S. Steiner

Mitchell S. SteinerChairman, Chief Executive Officer and President

BY: /s/ Michele Greco

Michele GrecoChief Financial Officer and Chief Administrative Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Mitchell S. Steiner and Michele Greco, and each of them individually, as his or her true and lawful attorney-in-fact and agent, with power to act with or without the other and with full power of substitution and resubstitution, in any and all capacities, to sign any or all amendments to the Form 10-K and file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature Title Date

/s/ Mitchell S. Steiner Chairman of the Board, Chief Executive December 2, 2021

Mitchell S. Steiner Officer, President and Director

(Principal Executive Officer)

/s/ Michele Greco Chief Financial Officer and Chief December 2, 2021

Michele Greco Administrative Officer

(Principal Accounting and Financial Officer)

/s/ Mario Eisenberger Director December 2, 2021

Mario Eisenberger

/s/ Harry Fisch Vice Chairman of the Board and Director December 2, 2021

Harry Fisch

/s/ Grace S. Hyun Director December 2, 2021

Grace S. Hyun

/s/ Lucy Lu Director December 2, 2021

Lucy Lu

/s/ Michael L. Rankowitz Director December 2, 2021

Michael L. Rankowitz

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Veru Inc.

Index to Consolidated Financial Statements

Page No.

Audited Consolidated Financial Statements.

Report of RSM US LLP, Independent Registered Public Accounting Firm. F-1

Consolidated Balance Sheets as of September 30, 2021 and 2020. F-3

Notes to Consolidated Financial Statements. F-7

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Veru Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Veru Inc. (the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-1

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Valuation Allowance for Deferred Tax Assets

As described in Note 14 to the consolidated financial statements, the Company has recorded net deferred tax assets totaling approximately $13.0 million and net deferred tax liabilities totaling approximately $63,000 at September 30, 2021. The Company has recorded a valuation allowance of approximately $19.6 million at September 30, 2021 against its deferred tax assets in the United States and certain deferred tax assets in the United Kingdom. The Company has approximately $12.9 million of net deferred tax assets in the United Kingdom (U.K.) for which there is no valuation allowance. Management assesses the need for valuation allowances at least annually. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. 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 (NOL) 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.

We identified the deferred tax valuation allowance as a critical audit matter because of the assumptions management makes in determining the estimate which consists of forecasting future taxable income by jurisdiction. Auditing management's forecast of future taxable income in the U.K. involved a high degree of subjectivity and auditor judgment as changes in the assumptions could have a significant impact on the realization of the deferred tax assets in the U.K.

Our audit procedures related to the realization of the Company's deferred tax assets included the following, among others:

We evaluated management's ability to accurately forecast revenue and taxable income by comparing management's prior forecasts to historical results for the U.K.

We evaluated the reasonableness of management's forecasted revenue and taxable income, including revenue growth rates and margins, by comparing the projections to historic results and industry expectations.

We evaluated the reasonableness of management's forecasted revenue by comparing the projections and assumptions utilized to evidence obtained in other areas of the audit.

With the assistance of tax specialists, we compared tax rates and remaining lives of NOLs utilized by management to regulations in effect.

We tested the mathematical accuracy of the calculation.

/s/ RSM US LLP

We have served as the Company's auditor since 1996.

Chicago, Illinois

December 2, 2021

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F-2

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VERU INC.

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2021 AND 2020

Assets

Current assets:

Liabilities and Stockholders' Equity

Current liabilities:

Credit agreement liability (Note 9) — 5,841,874

Operating lease liability, short-term portion 497,903 586,769

Commitments and contingencies (Note 13)

Stockholders' equity:

See notes to consolidated financial statements.

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VERU INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2021 AND 2020

Operating expenses:

Gain on sale of PREBOOST® business 18,410,158 —

Impairment of intangible assets — (14,100,000)

Non-operating expenses:

Change in fair value of derivative liabilities (3,669,000) (557,000)

Net income (loss) per basic common share outstanding $ 0.10 $ (0.28)

Net income (loss) per diluted common share outstanding $ 0.09 $ (0.28)

See notes to consolidated financial statements.

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VERU INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED SEPTEMBER 30, 2021 AND 2020

Accumulated

Additional Other Treasury

Common Stock Paid-in Comprehensive Accumulated Stock,

Shares Amount Capital Loss Deficit at Cost Total

See notes to consolidated financial statements.

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VERU INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 2021 AND 2020

OPERATING ACTIVITIES

Impairment of intangible assets — 14,100,000

Gain on sale of PREBOOST® business (18,410,158) —

Changes in operating assets and liabilities:

(Increase) decrease in prepaid expenses and other assets (8,643,316) 621,777

INVESTING ACTIVITIES

Cash proceeds from sale of PREBOOST® business 15,000,000 —

Net cash provided by (used in) investing activities 14,623,351 (105,760)

FINANCING ACTIVITIES

Proceeds from sale of shares in public offering, net of fees 108,099,988 —

Payment of costs related to public offering (137,690) —

Installment payments on SWK credit agreement — (4,421,915)

Proceeds from sale of shares under common stock purchase agreement — 13,399,999

Payment of costs related to common stock purchase agreement — (50,284)

Installment payments on premium finance agreement (1,061,442) (836,780)

Cash paid for debt portion of finance lease (19,435) (13,783)

Supplemental disclosure of cash flow information:

Schedule of non-cash investing and financing activities:

Notes receivable for sale of PREBOOST® business $ 5,000,000 $ —

Right-of-use assets recorded in exchange for lease liabilities $ — $ 1,673,215

Shares issued in connection with common stock purchase agreement $ — $ 680,937

See notes to consolidated financial statements.

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VERU INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Business and Significant Accounting Policies

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, 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. The Company is an oncology biopharmaceutical company with a focus on developing novel medicines for the management of breast and prostate cancers. The Company has two operating segments: the Research and Development segment and the Sexual Health Business segment. The Company has multiple drug products under clinical development. Activities related to these potential drug products are included in the Research and Development segment. The Company’s Sexual Health Business segment includes its commercial product, FC2, an FDA-approved product for the dual protection against unintended pregnancy and sexually transmitted infections. During fiscal 2020, the Sexual Health Business segment also included PREBOOST® 4% benzocaine medicated individual wipe for the treatment of premature ejaculation. The PREBOOST® business was sold on December 8, 2020. See Note 2 for additional information. Most of the Company’s net revenues during fiscal 2021 and 2020 were derived from sales of FC2.

FC2 has been distributed in either or both commercial (private sector) and public health sector markets in 150 countries. It is marketed to consumers in 22 countries through distributors, public health programs, and/or retailers and in the U.S. by prescription.

Reclassifications: Certain prior period amounts in the accompanying 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.

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States (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.

Cash and cash equivalents and concentration: Cash and cash equivalents, which primarily consist of cash on deposit with financial institutions and highly liquid money market funds, are recorded in the consolidated balance sheets at cost, which approximates fair value. The Company treats short-term, highly liquid funds that are readily convertible to known amounts of cash and have original maturities of three months or less as cash equivalents. The Company’s cash is maintained primarily in three financial institutions, located in Chicago, Illinois; London, England; and Kuala Lumpur, Malaysia.

Accounts receivable and concentration of credit risk: Accounts receivable are carried at original invoice amount less an estimate made for returns, discounts, and doubtful receivables based on a review of all outstanding amounts on a periodic basis.

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.

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

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Leases: Leases are classified as either operating or finance leases at inception. A right-of-use (ROU) asset and corresponding lease liability are established at an amount equal to the present value of fixed lease payments over the lease term at the commencement date. The ROU asset includes any initial direct costs incurred and lease payments made at or before the commencement date and is reduced by lease incentive payments. The Company has elected not to separate the lease and nonlease components for all classes of underlying assets. The Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases that do not have a readily determinable implicit discount rate. The incremental borrowing rate is the rate of interest that the Company would be charged to borrow on a collateralized basis over a similar term and amount in a similar economic environment. The Company determines the incremental borrowing rates for its leases by adjusting the risk-free interest rate with a credit risk premium corresponding to the Company’s credit rating.

Operating lease costs are recognized for fixed lease payments on a straight-line basis over the term of the lease. Finance lease costs are a combination of the amortization expense for the ROU asset and interest expense for the outstanding lease liability using the applicable discount rate. Variable lease payments are recognized when incurred based on occurrence or usage. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for short-term leases on a straight-line basis over the lease term.

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

Goodwill and intangible assets: The Company’s goodwill and intangible assets, primarily developed technology and in-process research and development (IPR&D), arose from the acquisition of APP (the “APP Acquisition”) on October 31, 2016. Goodwill and indefinite-lived intangible assets are not amortized. IPR&D is accounted for as indefinite-lived intangible assets until the underlying project receives regulatory approval, at which point the intangible asset will be accounted for as a finite-lived intangible asset, or discontinuation, at which point the intangible asset will be written off. Goodwill and indefinite-lived assets are subject to an impairment review annually, in the fourth quarter of each fiscal year, and more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value. Intangible assets with finite lives are tested for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These intangible assets are carried at cost less accumulated amortization.

Goodwill consists of the cost of an acquired business in excess of the fair value of the net assets acquired. The Company’s goodwill is assigned to the Company’s sole reporting unit in the Company’s Research and Development reporting segment. The Company tests goodwill and indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than its carrying amount, a quantitative impairment test is performed. For its quantitative impairment tests, the Company uses an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The estimates and assumptions used are consistent with the Company's business plans and a market participant's views. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the Company's results of operations. Actual results may differ from the Company's estimates. The fair value of the reporting unit is compared with its carrying amount and an impairment charge would be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value.

Regarding goodwill, the estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. 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.

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Intangible assets are highly vulnerable to impairment charges, particularly IPR&D. 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. During the fourth quarter of fiscal 2020, the Company recorded an impairment charge of $14.1 million related to IPR&D. The charge was primarily a result of deferred development timelines on certain drug candidates due to the prioritization of other drug candidates. See Note 8 for additional information. Considering the high-risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, additional IPR&D impairment charges are likely to occur in future periods.

Deferred financing costs: Costs incurred in connection with the common stock purchase agreements discussed in Note 10 have been included in other assets on the accompanying consolidated balance sheets at September 30, 2021 and 2020. 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.

Costs incurred in connection with the issuance of debt discussed in Note 9 are presented as a reduction of the credit agreement liability on the accompanying consolidated balance sheet at September 30, 2020. These issuance costs were amortized using the effective interest method over the repayment period of the debt. The debt was repaid in August 2021. The amortization is included in interest expense on the accompanying 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 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 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.

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 9.

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. See Note 4 for further discussion on revenue.

Government grants: U.S. GAAP for profit-oriented entities does not define government grants nor is there specific guidance applicable to government grants. Under the Company’s accounting policy for government grants and consistent with non-authoritative guidance, government grants are recognized as a reduction of the related expense. Government grants are recognized when there is reasonable assurance that the Company has met the requirements of the grant and there is reasonable assurance that the grant will be received. Grants that compensate the Company for expenses incurred are recognized as a reduction of the related expenses in the same period in which the expenses are recognized. The Company has elected to treat forgivable loans from a government as a government grant when it is probable that the Company will meet the terms for forgiveness of the loan.

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Research and development costs: Research and development costs are expensed as they are incurred and include salaries and benefits, costs to conduct clinical trials, 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 material capitalized nonrefundable advance payments as of September 30, 2021 and September 30, 2020.

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 rate.

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 years ended September 30, 2021 and 2020.

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, resulting in the adoption of the U.S. dollar as the functional currency for all foreign subsidiaries. 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 accumulated other comprehensive loss was $0.6 million as of September 30, 2021 and September 30, 2020. Assets located outside of the U.S. totaled approximately $8.5 million and $9.2 million at September 30, 2021 September 30, 2020, 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 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. In fiscal 2021 and 2020, comprehensive income (loss) is equivalent to the reported net income (loss).

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Recently adopted accounting pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model requires the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP, which generally require that a loss be incurred before it is recognized. The new standard also applies to receivables arising from revenue transactions such as accounts receivable. The Company adopted ASU 2016-13 on a modified-retrospective basis effective October 1, 2020. The adoption of ASU 2016-13 did not impact our consolidated financial statements and 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 implied 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 which the carrying value exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 on a prospective basis effective October 1, 2020. The adoption of ASU 2017-04 did not impact our consolidated financial statements and related disclosures.

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. The Company adopted ASU 2018-13 on a retrospective basis effective October 1, 2020. The adoption of ASU 2018-13 did not impact our financial position, results of operations, or cash flows as it modified disclosure requirements only.

Recent accounting pronouncements not yet adopted: In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and the applicable amendments will be applied on a prospective basis. Early adoption is permitted. The adoption of ASU 2019-12 is not expected to have a material effect on our consolidated financial statements and related disclosures.

Note 2 – Sale of PREBOOST® Business

On December 8, 2020, the Company entered into an Asset Purchase Agreement, pursuant to which the Company sold substantially all of the assets related to the Company's PREBOOST business. PREBOOST is a 4% benzocaine medicated individual wipe for the treatment of premature ejaculation and was a commercial product in the Company’s Sexual Health Division until the date of the sale. The transaction closed on December 8, 2020. The purchase price for the transaction was $20.0 million, consisting of $15.0 million paid at closing, a $2.5 million note receivable due 12 months after closing and a $2.5 million note receivable due 18 months after closing. Total assets sold, consisting of intangible assets, had a net book value of approximately $1.6 million, resulting in a pre-tax gain on sale of approximately $18.4 million. The Company had income before income taxes of $327,000 and $1.2 million during fiscal 2021 and 2020, respectively, related to the PREBOOST business before the sale.

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.

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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.

There were no transfers between Level 1, Level 2 and Level 3 during fiscal 2021 and 2020.

Amounts capitalized as IPR&D are subject to impairment testing until the completion or abandonment of the associated research and development efforts. We use probability-adjusted discounted cash flow calculations using Level 3 fair value measurements and inputs including estimated revenues, costs, probability of technical and regulatory success and discount rates to measure impairment, if any. During the fourth quarter of fiscal 2020, we recognized an impairment charge of $14.1 million associated with IPR&D intangible assets acquired in connection with the APP Acquisition. See Note 8 for additional information.

As of September 30, 2021 and 2020, the Company’s financial liabilities measured at fair value on a recurring basis, which consisted of embedded derivatives, are also 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, considering 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 years ended September 30, 2021 and 2020:

The expense or income associated with the change in fair value of the embedded derivatives is presented as a separate line item in the accompanying consolidated statements of operations.

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The liabilities associated with embedded derivatives represent the fair value of the change of control provisions in the Credit Agreement and Residual Royalty Agreement. See Note 9 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 the contractual terms of the instruments and assumptions including projected FC2 revenues, expected cash outflows, expected repayment dates, probability and estimated dates of a change of control, expected volatility, and risk-free interest rates and applicable credit risk. The assumptions used in calculating the fair value of financial instruments represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in the Company’s financial statements. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement at future reporting dates, which could have a material effect on our results of operations. The increase in fair value of derivative liabilities in fiscal 2021 was driven by decreases in the discount rates used, due primarily to external market factors, and an increase in the expected cash outflows under the Residual Royalty Agreement, due to increases in projected FC2 net revenues in future periods. The increase in fiscal 2020 was driven by changes in the estimated change of control dates and an increase in the expected cash outflows under the Residual Royalty Agreement.

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 September 30, 2021 and 2020:

Weighted Average (range, if applicable)

Valuation Methodology Significant Unobservable Input 2021 2020

Probability of change of control 20% to 90% 20% to 90%

Note 4 – Revenue from Contracts with Customers

The Company generates nearly all 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 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.

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The Company’s revenue is from sales of FC2 in the U.S. prescription channel and direct sales of FC2 in the global public health sector, and also included sales of PREBOOST® medicated wipes for the treatment of premature ejaculation through the date the PREBOOST® business was sold on December 8, 2020. The following table presents net revenues from these three categories for the years ended September 30, 2021 and 2020:

The following table presents net revenue by geographic area for the years ended September 30, 2021 and 2020:

The Company’s performance obligations consist mainly of transferring control of products identified in the contracts which occurs either when: i) the product is made available to the customer for shipment; ii) the product is shipped via common carrier; or iii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. Some of the Company’s contracts require the customer to make advanced payments prior to transferring control of the products. These advanced payments create a contract liability for the Company. The balances of the Company’s contract liability, included in accrued expenses and other current liabilities on the accompanying consolidated balances sheets, was approximately $132,000 and $6,000 at September 30, 2021 and 2020, respectively.

The amount of revenue recognized that was included in the contract liabilities and unearned revenues balance at the beginning of the period was $6,000 and $249,000 during the years ended September 30, 2021 and 2020, respectively, after satisfying its contract obligations and transferring control.

Note 5 – 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 sales 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. For sales to the Company’s distributor in Brazil, the Company has agreed to credit terms of up to 90 days subsequent to clearance of the product by the Ministry of Health in Brazil.

The components of accounts receivable consist of the following at September 30, 2021 and 2020:

Less: allowance for doubtful accounts (20,643) (25,643)

Less: allowance for sales returns and payment term discounts (123,982) (79,906)

No customer had a current accounts receivable balance that represented 10% of current assets at September 30, 2021 and 2020.

At September 30, 2021, three customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 90% of net accounts receivable in the aggregate. At September 30, 2020, three customers had an accounts receivable balance greater than 10% of net accounts receivable, representing 89% of the Company’s net accounts receivable in the aggregate.

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For the year ended September 30, 2021, there were two customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 75% of the Company’s net revenues in the aggregate. For the year ended September 30, 2020, there were three customers whose individual net revenue to the Company exceeded 10% of the Company’s net revenues, representing 76% of the Company’s net revenues in the aggregate.

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 years ended September 30, 2021 and 2020:

Charge-offs, net of recoveries (5,000) (7,500)

Recoveries of accounts receivable previously charged-off are recorded when received. The Company’s customers are primarily health care distributors, 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 and, in the U.S. prescription channel, telemedicine providers.

Note 6 – Inventory

Inventory consisted of the following at September 30, 2021 and 2020:

PREBOOST®

Note 7 – Property and Equipment

Property and equipment consisted of the following at September 30, 2021 and 2020:

Estimated

Property and equipment:

Less: accumulated depreciation and amortization (3,573,173) (3,542,533)

Depreciation expense for the years ended September 30, 2021 and 2020 was approximately $98,000 and $146,000, respectively.

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The Company has a finance lease for office equipment, furniture, and fixtures. The value of the assets under finance lease was $44,000 at September 30, 2021 and 2020 and is included in office equipment, furniture and fixtures above.

Note 8 –Intangible Assets and Goodwill

Intangible Assets

Intangible assets includes IPR&D, developed technology consisting of PREBOOST® medicated wipes for the treatment of premature ejaculation, and covenants not-to-compete.

The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2021:

Gross Carrying Accumulated Net Book

Amount Amortization Value

Intangible asset with finite life:

Indefinite-lived intangible assets:

Acquired in-process research and development assets 3,900,000 — 3,900,000

The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2020:

Gross Carrying Accumulated Net Book

Amount Amortization Value

Intangible assets with finite lives:

Acquired in-process research and development assets 3,900,000 — 3,900,000

During the fourth quarter of fiscal 2020, we performed quantitative impairment testing of our IPR&D intangible assets using a probability-weighted income approach that discounts expected future cash flows to present value. The estimated net cash flows were discounted using a discount rate of 41%, which is based on the estimated weighted-average cost of capital for companies with profiles similar to our profile and represents the rate that market participants would use to value the intangible assets. In response to management’s strategic decision during the fourth quarter of fiscal 2020 to prioritize the development of other research projects, we adjusted the development timelines for Tamsulosin DRS, VERU-722 (male infertility), and VERU-112 (gout) IPR&D assets. The Company has several other highly differentiated, unique, patent-protected drugs under development addressing larger and potentially more profitable markets. The delay in timing of expected future cash flows for Tamsulosin DRS, VERU-722, and VERU-112 reduced the fair value of these IPR&D intangible assets to zero, which was significantly below the carrying value, resulting in an impairment charge of $14.1 million, which is presented as a separate line item in the accompanying consolidated statement of operations. Further, the Company decided to cease its development work on Tamsulosin DRS, VERU-722, and VERU-112 and met the criteria for abandonment under the accounting standards. This resulted in writing off the carrying amounts for these three IPR&D assets during the year ended September 30, 2020.

As discussed in Note 2, the Company sold its intangible assets related to PREBOOST® as part of the sale of the PREBOOST® business on December 8, 2020. The remaining net book value of the PREBOOST® technology, acquired in the acquisition of APP, was $1.6 million on the date of the sale. Amortization was 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 consolidated statements of operations.

Amortization expense was approximately $113,000 and $316,000, for the years ended September 30, 2021 and 2020, respectively. Based on finite-lived intangible assets recorded as of September 30, 2021, the estimated future amortization expense is approximately $71,000 per year through fiscal 2023 and $6,000 in fiscal 2024.

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Goodwill

The carrying amount of goodwill at September 30, 2021 and 2020 was $6.9 million. There was no change in the balance during the years ended September 30, 2021 and 2020.

Note 9 – Debt

SWK Credit Agreement and Residual Royalty 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 provided the Company with a term loan of $10.0 million, which was advanced to the Company on the date of the Credit Agreement. 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 $10.0 million loan under the Credit Agreement.

The Lenders were 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 paid 176.5% of the aggregate amount advanced to the Company under the Credit Agreement. The Company repaid the loan and return premium specified in the Credit Agreement in August 2021, and as a result has no further obligations under the Credit Agreement.

In connection with the Credit Agreement, the Company and the Agent also entered into a Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the “Residual Royalty Agreement”), which provides for an ongoing royalty payment of 5% of product revenue from net sales of FC2, which commenced after the Company paid 175% of the aggregate amount advanced to the Company under the Credit Agreement based on a calculation of revenue-based payments under 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 or sale of the FC2 business occurs, 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.

For accounting purposes, the $10.0 million advance under the Credit Agreement was allocatedbetween 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 are adjusted to fair market value at each 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, which totaled $11.3 million, were 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 werepresented as a reduction of the Credit Agreement obligation and were amortized to interest expense over the expected term of the loan using the effective interest method.

At September 30, 2021 and 2020, the Credit Agreement liability consisted of the following:

Remaining repayment obligation — 7,335,505

Less: unamortized discounts — (1,459,330)

Less: unamortized deferred issuance costs — (34,301)

Credit agreement liability $ — $ 5,841,874

The Company made its final payment to repay the original principal of $10.0 million during the quarter ended September 30, 2020. Remaining quarterly payments under the Credit Agreement were classified as interest payments, consistent with the terms of the Credit Agreement.

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At September 30, 2021 and 2020, the Residual Royalty Agreement liability consisted of the following:

Add: accretion of liability using effective interest rate 5,582,110 2,189,687

Less: cumulative payments (1,144,763) —

Residual royalty agreement liability, short-term portion (3,237,211) (1,100,193)

Residual royalty agreement liability, long-term portion $ 9,397,136 $ 5,617,494

The short-term portion of the Residual Royalty Agreement liability represents the aggregate of the estimated quarterly royalty payments payable during the 12-month period subsequent to September 30, 2021.

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 years ended September 30, 2021 and 2020, interest expense related to the Credit Agreement and Residual Royalty Agreement was as follows:

Amortization of deferred issuance costs 34,301 73,609

Premium Finance Agreement

On November 1, 2020, the Company entered into an agreement to finance $1.1 million of its directors and officers liability insurance premium at an annual percentage rate of 3.94%. The financing agreement was payable in three quarterly installments of principal and interest, which began on January 1, 2021. The last payment was made in June 2021 and there was no balance outstanding as of September 30, 2021

On November 1, 2019, the Company entered into an agreement to finance $837,000 of its directors and officers liability insurance premium at an annual percentage rate of 4.18%. The financing agreement was payable in three quarterly installments of principal and interest, which began on January 1, 2020. The last payment was made in July 2020 and there was no balance outstanding as of September 30, 2020.

Note 10 – 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 authorized. There were no shares of Class A Preferred Stock of any series issued and outstanding at September 30, 2021 or September 30, 2020. 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 September 30, 2021 or September 30, 2020 and there was no activity during the years then ended.

Common Stock

We are authorized to issue up to 154,000,000 shares of common stock, $0.01 par value per share. Holders are entitled to one vote for each share of common stock.

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Shelf Registration Statements

In June 2020, the Company filed a shelf registration statement on Form S-3 (File No. 333-239493) with a capacity of $150 million, which was declared effective by the Securities and Exchange Commission (“SEC”) on July 1, 2020. At September 30, 2021, $16.1 million remains available under that shelf registration statement.

Common Stock Offering

On February 22, 2021, we completed an underwritten public offering of 7,419,354 shares of our common stock, which included the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $15.50 per share. Net proceeds to the Company from this offering were approximately $108.0 million after deducting underwriting discounts and commissions and costs paid by the Company. All of the shares sold in the offering were by the Company. The offering was made pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239493).

Common Stock Purchase Warrants

In connection with the closing of the APP Acquisition, the Company issued warrants 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 Warrants”). The Financial Advisor Warrants had a five-year term expiring October 31, 2021, a cashless exercise feature and an exercise price equal to $1.93 per share. The Financial Advisor Warrants vested upon issuance. During fiscal 2021, Financial Advisor Warrants to purchase 2,326,841 shares of the Company’s common stock were exercised using the cashless exercise feature, resulting in the issuance of 1,574,611 shares of common stock. During fiscal 2020, Financial Advisor Warrants to purchase 258,538 shares of the Company’s common stock were exercised using the cashless exercise feature, resulting in the issuance of 109,143 shares of common stock. As of September 30, 2021, there were no outstanding common stock purchase warrants.

Aspire Capital Purchase Agreements

On June 26, 2020, the Company entered into a common stock purchase agreement (the “2020 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 2020 Purchase Agreement, to direct Aspire Capital to purchase up to $23.9 million of the Company’s common stock in the aggregate. Concurrently with entering into the 2020 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 one or more 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 2020 Purchase Agreement.

Under the 2020 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 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.

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In consideration for entering into the 2020 Purchase Agreement, concurrently with the execution of the 2020 Purchase Agreement, the Company issued to Aspire Capital 212,130 shares of the Company’s common stock. The shares of common stock issued as consideration were valued at $681,000, based on the closing price per share of the Company’s common stock on the date the shares were issued. This amount and related expenses of $50,000, which total approximately $731,000, were recorded as deferred costs. As of September 30, 2021, the amount remaining under the 2020 Purchase Agreement was $18.9 million, which is registered under the Company’s 2020 shelf registration statement on Form S-3 (File No. 333-239493).

Upon execution of the 2020 Purchase Agreement, the Company issued and sold 1,644,737 shares of common stock to Aspire Capital under the 2020 Purchase Agreement, resulting in proceeds to the Company of $5 million. As a result of this sale, we recorded approximately $153,000 of deferred costs to additional paid-in capital. There was no activity under the 2020 Purchase Agreement in fiscal 2021. The unamortized amount of deferred costs related to the 2020 Purchase Agreement of $578,000 at September 30, 2021 and 2020 is included in other assets on the accompanying consolidated balance sheets. As of September 30, 2021, the amount remaining under the 2020 Purchase Agreement is $18.9 million.

Effective June 26, 2020, upon the execution of the 2020 Purchase Agreement, the Company’s prior purchase agreement with Aspire Capital dated December 29, 2017 (the “2017 Purchase Agreement”) was terminated. Under the 2017 Purchase Agreement, the Company had the right, upon the terms and subject to the conditions and limitations set forth therein, from time to time in its sole discretion during the 36-month term of the 2017 Purchase Agreement, to direct Aspire Capital to purchase up to $15.0 million of the Company’s common stock in the aggregate. As of the date of termination of the 2017 Purchase Agreement, the Company had sold an aggregate of 6,214,343 shares of common stock to Aspire Capital resulting in proceeds to the Company of $15.0 million.

We sold 2,497,333 shares of common stock to Aspire Capital under the 2017 Purchase Agreement during the year ended September 30, 2020 resulting in proceeds to the Company of $8.4 million. As a result of these sales, we recorded approximately $238,000 of deferred costs to additional paid-in capital.

In consideration for entering into the 2017 Purchase Agreement, concurrently with the execution of the 2017 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, based on the closing price per share of the Company's common stock on the date the shares were issued. This amount and related expenses of approximately $78,000, which total approximately $425,000, were recorded as deferred costs. All deferred costs related to the 2017 Purchase Agreement were amortized to additional paid-in capital as shares under the agreement were sold.

Note 11 – 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. We recorded income tax benefits for share-based compensation expense of approximately $1.1 million and $599,000 in fiscal 2021 and 2020, respectively. For fiscal 2021 and 2020, we recorded share-based compensation expenses as follows:

We have issued share-based awards to employees and non-executive directors under the Company’s approved equity plans. Upon the exercise of share-based awards, new shares are issued from authorized common stock.

Equity Plans

In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (the “2018 Plan”). On March 24, 2020, the Company’s stockholders approved an increase in the number of shares that may be issued under the 2018 Plan to 11.0 million. As of September 30, 2021, 2,872,354 shares remain available for issuance under the 2018 Plan.

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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 September 30, 2021, 18,433 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 closing price per share 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 years ended September 30, 2021 and 2020:

Weighted Average Assumptions:

Expected Dividend Yield 0.00% 0.00%

Risk-free Interest Rate 0.67% 1.63%

Expected Term (in years) 5.9 5.9

Fair Value of Options Granted $ 3.58 $ 1.14

During the years ended September 30, 2021 and 2020, 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.

The following table summarizes the stock options outstanding and exercisable at September 30, 2021:

Weighted Average

Remaining Aggregate

Number of Exercise Price Contractual Term Intrinsic

Shares Per Share (years) Value

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 the last trading day of the year ended September 30, 2021 of $8.53, less the respective weighted average exercise price per share at period end.

The total intrinsic value of options exercised was approximately $9.2 million and $1.1 million during the years ended September 30, 2021 and 2020, respectively. Cash received from options exercised was $1.8 million and $415,000in the years ended September 30, 2021 and 2020, respectively. During the year ended September 30, 2020, options to purchase 223,415 shares of common stock were exercised using the cashless exercise feature available under the 2017 Plan and 2018 Plan, which resulted in the issuance of 143,958 shares of common stock. There were no options exercised using the cashless exercise feature during the year ended September 30, 2021.

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As of September 30, 2021, the Company had unrecognized compensation expense of approximately $9.2 million related to unvested stock options. This expense is expected to be recognized over a weighted average period of 1.6 years.

During fiscal 2021, the Company modified stock options held by certain optionees upon termination of their employment by the Company or resignation from the board of directors. As permitted under the 2018 Plan and with the approval of the Compensation Committee of the Board of Directors, the stock options were primarily modified to accelerate vesting or to allow for continued vesting. The aggregate amount of expense recognized in connection with these modifications for the year ended September 30, 2021 was approximately $550,000.

Stock Appreciation Rights

In fiscal 2017, the Company issued stock appreciation rights based on 50,000 shares of the Company’s common stock to an employee that vested on October 31, 2018. The stock appreciation rights have a ten-year term and an exercise price per share of $0.95. Upon exercise, the stock appreciation rights will be settled in common stock issued under the 2017 Plan. As of September 30, 2021 and 2020, vested stock appreciation rights based on 50,000 shares of common stock remain outstanding.

Note 12 – Leases

The Company has operating leases for its office, manufacturing and warehouse space, and office equipment. The Company has a finance lease for office equipment, furniture, and fixtures.

Corporate Headquarters

On June 20, 2019, the Company executed a lease for its corporate headquarters in Miami, Florida. Under the terms of the lease, which was amended on August 13, 2019, the Company is leasing approximately 4,640 square feet of office space for a 30-month term commencing on September 1, 2019 and ending on February 27, 2022. Annual base rent payments are $33.00 per square foot and are subject to a 2.9% annual escalation on September 1 of each subsequent year. Based on the terms of the lease agreement, the Company paid a security deposit of approximately $12,000. The lease included a finance lease for office equipment, furniture, and fixtures.

In June 2021, the Company executed a lease for its new corporate headquarters in Miami, Florida. The Company will be leasing approximately 12,000 square feet of office space for an eight year term commencing on the later of March 1, 2022 or the date the landlord substantially completes tenant improvements. The space will replace the Company’s current corporate headquarters in Miami, Florida when the existing lease terminates at the end of February 2022. Annual base rent payments will be $58.00 per square foot and are subject to a 3% annual escalation. Based on the terms of the lease agreement, the Company paid a security deposit of approximately $117,000, which is included in other assets on the accompanying consolidated balance sheet as of September 30, 2021.

Chicago Lease

The Company leases approximately 6,600 square feet of office space located in Chicago, Illinois. The Company executed the lease for this office in May 2016, for a seven-year period commencing on November 1, 2016 and ending on October 31, 2023. The lease granted the Company a seven-month lease holiday beginning November 1, 2016, a five-month lease abatement beginning June 1, 2017, and provided a tenant improvement allowance. Annual base rent payments were $14.00 per square foot in year one and increase on an annual basis to $17 per square foot in the final year of the lease. The lease also requires payment of related expenses, including real estate taxes, common area maintenance, utilities and insurance expenses from June 1, 2017 to October 31, 2023. Based on the terms of the lease agreement, the Company paid a security deposit of $55,000. Effective September 1, 2017, the Company entered into a sublease for this office space through October 31, 2023. Monthly sublease payments of approximately $15,200 commenced in January 2018 and will end in August 2023. The monthly sublease payment is subject to annual increases in September of each year and will increase to approximately $17,300 per month in the final year of the sublease. Sublease income is recognized as a reduction to operating lease costs as the sublease is outside of the Company’s normal business operations. This is consistent with the Company’s recognition of sublease income prior to the adoption of FASB ASC Topic 842. The tenant under the sublease provided a security deposit of $30,000 to the Company. The Company continues to be responsible for performance under the lease until it expires on October 31, 2023.

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International Leases

The Company leases approximately 6,400 square feet of office space located in London, England. The Company executed this lease in June 2010, for a ten-year term, which ended in June 2020 and was extended through August 2020. The lease required quarterly payments of approximately $24,100. Based on the terms of the lease agreement, the Company paid a security deposit of approximately $58,000. The lease was renewed effective August 2020 with a five year term and a tenant’s option to cancel after three years with no penalty to the Company. It is reasonably certain that the Company will exercise that option. The renewed lease requires quarterly payments of approximately $41,100. The security deposit under the original lease did not change.

The Company leases 45,800 square feet of manufacturing and warehouse space in Selangor D.E., Malaysia. The Company executed the lease for this space in August 2019, for a three-year term commencing September 1, 2019 and ending August 31, 2022. The Company has an option to extend the term of the lease for a period of three years and it is reasonably certain that the Company will exercise that option. The lease requires monthly payments of approximately $15,400. Based on the terms of the lease agreement, the Company maintains a security deposit of approximately $46,000.

Certain of our lease agreements include variable lease payments for common area maintenance, real estate taxes, and insurance or based on usage for the office equipment leases. The components of the Company’s lease cost were as follows for the year ended September 30, 2021:

Finance lease cost:

Amortization of right-of-use assets $ 8,731 $ 8,713

Interest on lease liabilities 2,765 5,189

The Company paid cash of $650,000 and $479,000 for amounts included in the measurement of operating lease liabilities during the year ended September 30, 2021 and 2020, respectively. The Company’s operating lease ROU assets and related lease liabilities are presented as separate line items on the accompanying consolidated balance sheet as of September 30, 2021 and 2020. The Company’s finance lease ROU asset was $25,000 and $34,000 as of September 30, 2021 and 2020, respectively, and is included in property and equipment, net on the accompanying consolidated balance sheet. The current finance lease liability as of September 30, 2021 was $9,000 and the current and long-term finance lease liabilities were $21,000 and $8,000, respectively, and are included in accrued expenses and other current liabilities and other liabilities, respectively, on the accompanying consolidated balance sheet as of September 30, 2020.

Other information related to the Company’s leases as of September 30, 2021 and 2020 was as follows:

Operating Leases

Weighted-average remaining lease term 2.9 3.6

Weighted-average discount rate 11.5% 11.5%

Finance Leases

Weighted-average remaining lease term 0.4 1.4

Weighted average discount rate 13.9% 13.9%

The Company’s lease agreements do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value.

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As of September 30, 2021, maturities of lease liabilities were as follows:

Operating Finance Sublease

Leases Leases Income

Fiscal year ended September 30,

Thereafter — — —

As of September 30, 2021, we have additional operating lease commitments that have not yet commenced of approximately $5.9 million for our new corporate headquarters with a lease term of 8 years.

The lease liabilities presented above do not include variable lease payments for common area maintenance, real estate taxes, and insurance or based on usage for the office equipment leases. These amounts are not fixed and can fluctuate from year to year.

Note 13 – 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 $20.0 million.

Litigation

From time to time we may be involved in litigation or other contingencies arising in the ordinary course of business. Based on the information presently available, management believes there are no contingencies, claims or actions, pending or threatened, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or results of operations.

In accordance with FASB ASC 450, Contingencies, we accrue loss contingencies including costs of settlement, damages and defense related to litigation to the extent they are probable and reasonably estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.

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 consolidated financial statements for any of these contingencies.

Note 14 – 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 (NOL) and tax credit carryforwards.

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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 NOL 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. From fiscal 2006 through fiscal 2015, the Company generated taxable income on a consolidated basis. However, the Company had a cumulative pretax loss in the U.S. for fiscal 2021 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 pretax losses in the U.S. driven by the investment in research and development and based on our analysis, concluded that a full valuation allowance should be recorded related to federal and state NOL carryforwards as of September 30, 2021. The valuation allowance against U.S. deferred tax assets was increased by $4.7 million during the year ended September 30, 2021. As of September 30, 2021 and 2020 respectively, the Company has recorded a valuation allowance of $16.4 million and $11.7 million against U.S. deferred tax assets. In addition, the Company’s U.K. holding company for the non-U.S. operating companies, The Female Health Company Limited, continues to have a full valuation allowance of $3.2 million and $2.4 million as of September 30, 2021 and 2020, respectively. The increase in the valuation allowance for The Female Health Company Limited is due to the increase in the U.K. tax rate. The operating U.K. subsidiary, The Female Health Company (UK) plc does not have a valuation allowance due to projections of future taxable income.

As of September 30, 2021, the Company had U.S. federal and state NOL carryforwards of approximately $39.1 million and $24.9 million, respectively, for income tax purposes with $30.5 million and $22.5 million, respectively, expiring in fiscal years 2022 to 2040 and $8.6 million and $2.4 million, respectively, which can be carried forward indefinitely. The Company also has U.S. federal research and development tax credit carryforwards of $2.8 million, expiring in fiscal years 2040 to 2041. The Company’s U.K. subsidiary has U.K. NOL carryforwards of approximately $63.5 million as of September 30, 2021, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

Income (loss) before income taxes was taxed by the following jurisdictions for the years ended September 30, 2021 and 2020:

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A reconciliation between the effective tax rate and the U.S. statutory rate and the related income tax benefit is as follows:

VERU US Equity

VERU · 10-K · period ended 2021-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits and Financial Statement Schedules.

Item 16. Form 10-K Summary

VERU US Equity☆

VERU · 10-K · period ended 2021-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits and Financial Statement Schedules.

Item 16. Form 10-K Summary

VERU US Equity