TherapeuticsMD, Inc. (formerly AMHN, Inc.) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited and reflect the company before its October 4, 2011 acquisition of VitaMedMD, LLC. Unless noted otherwise, amounts are in U.S. dollars.
Business context and reporting period
At quarter-end, the company’s continuing activity was limited, principally to licensing and selling services connected with Spectrum Health Network’s digital-signage network. It had disposed of its former operating businesses after defaults on secured debt. On October 4, 2011, it acquired VitaMed, changed its name to TherapeuticsMD, and shifted its primary business to VitaMed’s specialty-pharmaceutical and medical-products operations. The merger is a subsequent event, not part of the reported historical results.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Continuing-operations revenue | $2,100 | $0 | $2,100 | $0 |
| General and administrative expense | $64,594 | $66,944 | $164,933 | $263,654 |
| Interest expense | $11,732 | $55,587 | $19,097 | $64,086 |
| Loss from continuing operations | $(78,530) | $(122,531) | $(181,234) | $(327,740) |
| Net income (loss) | $(78,530) | $29,951 | $477,843 | $(586,528) |
The nine-month 2011 net income included a $705,668 gain on disposal of discontinued operations, partly offset by $46,591 of discontinued-operation losses. It therefore does not represent earnings from the continuing business. Continuing-business margins are not meaningful given only $2,100 in revenue.
Cash flow: The statement reports $202,171 of net cash used in continuing operating activities for the first nine months of 2011, compared with $30,596 provided in 2010. Financing provided $155,000 from a shareholder loan; discontinued operations provided $50,164. Cash increased by $2,993 to $4,238. Investing cash flow was zero in both periods.
Balance sheet and liquidity at September 30: Cash was $4,238; total assets were $7,337; current liabilities were $437,046; and stockholders’ deficit was $429,709. Current liabilities included $365,000 of demand promissory notes, $41,359 of dividends payable, $15,505 of accrued interest, and $15,182 of accounts payable. The filing reports a $429,709 working-capital deficit. The company had no remaining secured Seatac note after transferring Spectrum to settle it.
Unaudited merger pro forma: As if the VitaMed merger had occurred at the start of the first nine months of 2011, combined sales were $1,533,806, gross profit was $848,356, operating expenses were $4,379,635, and net loss was $3,654,945. The pro forma balance sheet showed $2,169,531 in total assets and $2,572,027 in total liabilities. These are illustrative pro forma figures, not reported historical consolidated results.
Material changes versus the prior comparable period
- Continuing revenue began at a very small level in 2011; the prior-year continuing period had no revenue.
- General and administrative expense and interest expense declined year over year, which management attributed mainly to terminated consulting arrangements and the removal of certain debt obligations, respectively.
- Reported nine-month net income improved from a loss to a profit, but chiefly because of the one-time disposal gain; continuing operations remained loss-making.
- After quarter-end, the company issued 58,407,331 shares to VitaMed owners in the merger, following a 1-for-100 reverse split. Additional subsequent issuances included 2,631,579 shares to Pernix for $1 million and 20 million shares upon conversion of debt. Shares outstanding were 81,204,766 as of November 7, versus 16,575,209 at September 30.
Outlook, risks, contingencies, and unusual items
- Management estimated a need for approximately $5 million over the following 12 months to fund working capital, infrastructure, manufacturing, and marketing. It cautioned that additional financing may not be available, or may not be available on favorable terms.
- Management did not expect profitable operations until late 2013 and stated there was no assurance profitability would be achieved. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- The company disclosed no formal financial guidance. Subsequent commercial developments included a five-year Pernix license for VitaMed’s OPERA software in pediatric medicine at $21,700 per month.
- The former majority shareholder’s $155,000 demand loan, bearing 20% interest, plus accrued interest was forgiven after quarter-end. The $210,000 principal of convertible notes was converted into 20 million shares in October; approximately $6,300 of accrued interest was forgiven.
- Disclosure controls and procedures were assessed as ineffective as of quarter-end. Management reported no significant change in internal control over financial reporting during the nine-month period. The filing reported no legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the post-merger capitalization, including shares, options, warrants, reserved warrants, and dilution from subsequent issuances.
- Assess the company’s ability to raise the estimated $5 million and fund operations through its stated path to potential profitability.
- Review VitaMed’s standalone financials and the assumptions underlying the unaudited pro forma results; distinguish those results from the pre-merger historical statements.
- Evaluate the going-concern warning, weak quarter-end liquidity, and ineffective disclosure controls.
- Verify the commercial and economic terms of the Pernix license and other post-quarter agreements, including any performance or collection conditions.