TherapeuticsMD, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 11, 2012. TherapeuticsMD is a specialty pharmaceutical company focused on women’s health products, including OTC and prescription products. The company launched its first prescription prenatal vitamin in March 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior balance date |
|---|---|---|
| Revenue | $721,692 | $485,856 |
| Gross profit | $385,568 | $282,100 |
| Gross margin | About 53% | About 58% |
| Operating expenses | $3,253,589 | $1,053,541 |
| Operating loss | $(2,868,021) | $(771,441) |
| Net loss | $(13,289,603) | $(774,365) |
| Net cash used in operations | $(2,451,985) | $(760,737) |
| Cash at period end | $195,169 | $126,421 at Dec. 31, 2011 |
| Working capital | Deficit of about $1.3 million | — |
| Accumulated deficit | About $30.3 million | About $17.0 million at Dec. 31, 2011 |
At March 31, 2012, total assets were $1.49 million and total liabilities were $4.84 million; stockholders’ deficit was $3.35 million. Balance-sheet notes payable were $1.35 million current and $2.21 million long-term, net of debt discount, plus $200,000 of related-party notes. The company’s principal secured notes bear 6% interest, mature February 24, 2014, and are secured by substantially all company assets. The bank line of credit had $300,000 outstanding and was extended to March 1, 2013.
Material changes and unusual items
- Revenue rose about 49%, which management attributed to more sales territories and representatives and the March prescription-product launch. Cost of goods sold increased about 65%; gross margin consequently declined from about 58% to 53%.
- Operating expenses increased $2.20 million, or 209%, primarily from higher staffing and commissions, product development, professional fees, sales and marketing, and travel.
- A $10.31 million loss on extinguishment of debt drove most of the increase in net loss. It arose from the February debt restructuring and warrants issued in connection with modifying prior notes; the warrant valuation was a major noncash accounting charge.
- Financing activities provided $2.57 million, including $2.4 million of note proceeds and $166,000 from warrant exercises. Cash increased by $68,748 during the quarter.
- On February 24, the company issued secured notes with aggregate base principal of about $2.72 million, received $1.0 million of new funding, and issued warrants for 9 million shares. It received a further $500,000 loan in March. The filing reports an additional $1.5 million of loans in April and May.
Outlook, risks and other disclosures
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing operating losses, negative operating cash flow and accumulated deficit. Management planned to seek additional debt and equity funding and grow sales, but stated there was no assurance these efforts would succeed.
- Liquidity and plans: Management said it believed resources would be sufficient for the next 12 months, but also said additional financing might be necessary to fund working capital, product development, inventory and marketing. It expected at least $3 million of R&D spending in 2012 and estimated an approximately $800,000 increase in inventory needs. Management did not expect profitable operations until 2013, with no assurance that profitability would be achieved.
- Product development: The company expected to pursue prescription products for menopausal symptoms, including clinical studies and seeking FDA approval. It also estimated about $1.5 million in additional 2012 fees related to product research and development.
- Controls: The CEO and CFO concluded disclosure controls and procedures were not effective as of March 31, 2012. They reported no significant changes in internal control during the quarter.
- Concentration and related parties: One supplier represented approximately 87% of purchases in Q1 2012. The company purchased about $96,000 from Pernix Therapeutics, a related party, and owed it about $98,400 at quarter end.
- Other obligations: The Boca Raton office lease had approximately $135,000 in future minimum rental payments as of March 31, 2012. No legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the company can raise sufficient capital and maintain liquidity, given the going-concern warning, working-capital deficit and continuing cash burn.
- The terms, security, maturity and subsequent funding of the secured notes, including the April–May 2012 advances and potential dilution from warrants and equity awards.
- The nature and accounting of the $10.31 million debt-extinguishment loss, including warrant valuations and the effect on reported results versus cash flow.
- Whether revenue growth and new product launches can improve gross margin and support the company’s planned 2013 profitability target.
- Progress, cost and regulatory requirements for planned R&D and prescription products, alongside supplier concentration and related-party transactions.
- Remediation of the disclosed ineffective disclosure controls and procedures.