TherapeuticsMD, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 27, 2012. This is an annual report, not a standalone fourth-quarter report. The company’s focus shifted to women’s health products through its October 4, 2011 merger with VitaMed; it discontinued its prior Spectrum Health Network services by year-end.
Business context
TherapeuticsMD sells women’s health products, including OTC nutritional supplements, primarily through online channels and physician relationships. Its prescription product line was at an early stage: its first prescription prenatal vitamin launched in March 2012, after the reporting period. The company reported product sales in 46 states and described its patent-pending OPERA technology as part of its business model.
Financial results and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $2.09 million | $1.24 million |
| Gross profit | $1.14 million | $0.69 million |
| Gross margin | 54.6% | 55.2% |
| Operating expenses | $6.57 million | $3.55 million |
| Operating loss | $5.43 million | $2.87 million |
| Net loss | $12.91 million | $2.87 million |
| Net cash used in operations | $4.97 million | $2.84 million |
| Cash at year-end | $126,421 | $422,939 |
Revenue increased approximately 68%, attributed to more sales territories and sales personnel. Operating expenses rose about 85%, notably from higher personnel, sales and marketing, product development, travel, and professional fees. Gross margin was slightly lower year over year.
At December 31, 2011, current assets were $1.24 million and current liabilities were $3.15 million, producing a $1.91 million working-capital deficit. Total assets were $1.44 million; stockholders’ deficit was $1.71 million; accumulated deficit was $16.99 million. The balance sheet reported $2.15 million of notes payable and $200,000 of related-party notes payable. The filing’s debt descriptions and balance-sheet classifications should be reconciled when reviewing the underlying statements.
The independent auditor and management identified substantial doubt about the company’s ability to continue as a going concern, citing operating losses, negative operating cash flow, and accumulated losses. Management said it planned to seek debt and equity financing and grow sales, but gave no assurance of success.
Material changes and unusual items
- The VitaMed merger resulted in 58.4 million shares issued to former VitaMed members. A 1-for-100 reverse split preceded the merger; year-end shares outstanding were approximately 83.0 million. The 2010 comparative financial statements were restated for errors in stock-option valuation.
- A $210,000 convertible debt balance was settled by issuing 20 million shares valued at $7.6 million, creating a reported $7.39 million debt-settlement expense. This was the principal reason net loss substantially exceeded operating loss.
- The company raised funds through equity and debt. It reported $2.15 million of notes payable and $200,000 of related-party notes payable at year-end. Certain notes were extended, converted, or repaid after year-end.
- In February 2012, the company issued secured notes with stated principal base amounts totaling about $2.72 million, including the exchange of prior notes; it received $1 million of new funding in that transaction and reported another $1 million advanced in March. The notes bear 6% interest, mature in 24 months, and are secured by all company assets. Lenders also received warrants for 9 million shares at $0.38 per share.
- The company’s 2010 results were restated to reduce reported non-cash compensation and net loss by $186,149 for that year.
Outlook, risks, and controls
- Management expected profitability in 2013, while acknowledging there was no assurance it could be achieved. It estimated 2012 research and development spending of approximately $1.2 million and an approximately $0.8 million increase in inventory needs.
- Management stated it believed resources would be sufficient for the next 12 months, but also warned that additional financing might be required and could dilute shareholders; inability to raise capital could force reduced or discontinued operations.
- The company depended on Lang for more than 90% of its products/manufacturing; the financial statements separately report approximately 95% of purchases from one supplier in 2011. This concentration creates supply risk.
- Products and commercial practices face FDA, FTC, and healthcare-law requirements. Regulatory action, compliance costs, product claims, or manufacturing deficiencies could impair sales or require corrective action.
- Disclosure controls and internal control over financial reporting were reported ineffective at year-end due to material weaknesses, including limited accounting expertise and insufficient segregation of duties. Management said it lacked funds to hire additional control personnel.
- The filing reported no pending material legal proceedings and no material off-balance-sheet arrangements. It did not provide a separate Item 1A risk-factor discussion because the company qualified as a smaller reporting company.
Important facts for investors to verify
- Reconcile the balance-sheet debt amounts with the individual notes, credit line, maturities, collateral, and subsequent refinancing and advances.
- Review the going-concern disclosures and assess cash runway, financing availability, and the impact of secured borrowing on assets and future dilution.
- Verify the $7.39 million debt-settlement expense and the share valuation underlying the issuance of 20 million shares for $210,000 of principal.
- Track sales, gross margin, operating cash burn, and whether the prescription launches and stated 2013 profitability objective were achieved.
- Assess supplier concentration, product and regulatory compliance, and progress in remediating the disclosed internal-control weaknesses.
- Review potential dilution from outstanding options and warrants and the 9 million warrants issued in connection with the 2012 secured financing.