We need substantial amounts of cash to complete the commercialization of IMVEXXY®, BIJUVA™ and ANNOVERA™ and the clinical development and commercialization of future hormone therapy drug candidates. Our existing cash may not be sufficient to fund these requirements. In addition, changing circumstances may cause us to consume funds significantly faster than we currently anticipate, and we may need to spend more money than currently expected on these programs. We may attempt to raise additional capital from the issuance of equity securities, collaborations with third parties, licensing of rights to our products, the issuance of debt securities and the incurrence of debt, to the extent permitted under the Credit Agreement, dated May 1, 2018, as amended, by and among us and our subsidiaries party thereto from time to time, each as a borrower, MidCap Financial Trust, as an agent and as lender, and the additional lenders party thereto from time to time, or the Credit Agreement, or other means, or a combination of any of the foregoing. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of management’s attention away from our day-to-day activities, which may adversely affect our ability to conduct our day-to-day operations.
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We cannot guarantee that future debt or equity financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to take one or more of the following actions:
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significantly delay, scale back, or discontinue our commercialization and product development efforts;
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seek collaborators for our hormone therapy drug products and candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be the case; or
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license, potentially on unfavorable terms, our rights to our hormone therapy drug products and candidates that we otherwise would seek to develop or commercialize ourselves.
The Credit Agreement does, and any agreements governing future debt financing, if available, may, include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or proposed products or grant licenses on terms that may not be favorable to us.
If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development and commercialization efforts, and our ability to generate revenue and achieve or sustain profitability will be substantially harmed.
We are subject to extensive and costly government regulation.
The products we currently market, including IMVEXXY® and our prenatal vitamins, the products that we are currently commercializing, including BIJUVA™ and ANNOVERA™, and the pharmaceutical products we are developing and planning to develop in the future, are subject to extensive and rigorous domestic government regulation, including regulation by the FDA, the Centers for Medicare & Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services, including its Office of Inspector General, the U.S. Department of Justice, the Departments of Defense and Veterans Affairs, to the extent our products are paid for directly or indirectly by those departments, state and local governments, and their respective foreign equivalents. The FDA regulates dietary supplements, cosmetics, and drugs under different regulatory schemes. For example, the FDA regulates the processing, formulation, safety, manufacturing, packaging, labeling, and distribution of dietary supplements and cosmetics under its dietary supplement and cosmetic authority, respectively. The FDA also regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import, and export of pharmaceutical products under various regulatory provisions. If any drug products we develop are tested or marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.
We are also subject to additional health care regulation and enforcement by the federal government and the states in which we conduct our business. Applicable federal and state health care laws and regulations include the following:
| ● | The federal health care Anti-Kickback Statute, or AKS, prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good or service, for which payment may be made under federal health care programs, such as Medicare, Medicaid, TriCare, and Children’s Health Insurance Program. Liability may be established without proving actual knowledge of the statute or specific intent to violate it. In addition, federal law provides that the government may assert that a claim including items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the FCA, described below. Violations of the AKS carry potentially significant civil and criminal penalties, including imprisonment, fines, administrative civil monetary penalties, and exclusion from participation in government health care programs. |
| ● | The Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark Law, and its corresponding regulations, prohibit physicians from referring patients for designated health services, including outpatient drugs, reimbursed under the Medicare or Medicaid programs to entities with which the physicians or their immediate family members have a financial relationship or an ownership interest, subject to narrow regulatory exceptions, and prohibits those entities from submitting claims to Medicare or Medicaid for payment of items or services provided to a referred beneficiary. |
| ● | The federal False Claims Act, or FCA, imposes criminal and civil penalties, and authorizes civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, claims for payment involving federally funded programs that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money with respect to a federal program. The FCA prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health care benefits, items, or services. Government enforcement agencies and private whistleblowers have asserted liability under the FCA for, among other things, claims for items or services not provided as claimed, with inaccurate coding or for medically unnecessary items or services, kickbacks, promotion of off-label uses, and misreporting of drug prices to federal agencies. |
| ● | Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and their respective implementing regulations, or collectively, HIPAA, imposes criminal and civil liability for executing a scheme to defraud any health care benefit program, including private payers, or falsifying, concealing, or covering up a material fact, or making any materially false statements in connection with the delivery of or payment for health care benefits, items, or services. HIPAA also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information. State laws may also govern the privacy and security of health information or other personal information in certain circumstances. |
| ● | Federal laws require pharmaceutical manufacturers to report certain calculated product prices to the government or provide certain discounts or rebates to government authorities or private entities, often as a condition of reimbursement under government health care programs. |
| ● | The Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the ACA, imposes annual reporting requirements for certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under certain government health care programs for certain payments and “transfers of value” provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Numerous state laws may also require disclosure of transfers of value to health care providers, pharmaceutical pricing information and marketing expenditures. |
| ● | Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to interactions between pharmaceutical manufacturers and health care providers, sales or marketing arrangements, and claims involving health care items or services reimbursed by commercial third-party payers, including private health care insurers and health maintenance organizations; further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government. |
Many aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations that increases the risk of potential violations. In addition, these laws and their interpretations are subject to change. Many state laws differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts. Moreover, the number and complexity of both federal and state laws continues to increase, and additional governmental resources are being used to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the ACA includes a number of provisions aimed at strengthening the government’s ability to pursue AKS and FCA cases against pharmaceutical manufacturers and other health care entities, including substantially increased funding for health care fraud enforcement activities, enhanced investigative powers, and amendments to the FCA that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations. We anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us to the risk of government investigations and enforcement actions. For example, federal enforcement agencies recently have shown interest in pharmaceutical companies’ product and patient assistance programs, including manufacturer reimbursement support services and relationships with specialty pharmacies. Some of these investigations have resulted in significant civil and criminal settlements.
Efforts to ensure that our operations, including our business arrangements with third parties, comply with applicable health care laws and regulations could be costly. In connection with the commercial launch of IMVEXXY®, we have grown our compliance program and are in the process of developing a program based on industry best practices and tailored to evolving risks as we launch additional products, identify new distribution channels and target new customer types. As this program has not yet been tested and the requirements in this area are constantly evolving, our program may not eliminate all areas of potential exposure. Although effective compliance programs can help mitigate the risk of investigation, regulatory and enforcement actions, and prosecution for violations of these laws, the risks cannot be entirely eliminated. Moreover, achieving and sustaining compliance with applicable federal and state fraud, privacy, security, and reporting laws may prove costly. Although we believe that our business practices are structured to be compliant with applicable laws, it is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, or case law involving applicable fraud and abuse or other health care laws and regulations. If our past or present operations, including activities conducted by our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal, and administrative penalties, damages, fines, exclusion from government health care programs, and the curtailment or restructuring of our operations. If any of the physicians, providers, or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil, or administrative sanctions, including exclusion from government health care programs. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business, and damage our reputation. In addition, even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, and could result in related shareholder suits, any of which could also have an adverse effect on our business, financial condition and results of operations.
In addition, from time to time in the future, we may become subject to additional laws or regulations administered by the FDA, the FTC, or by other federal, state, local, or foreign regulatory authorities, to the repeal of laws or regulations that we generally consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or to more stringent interpretations of current laws or regulations. We are not able to predict the nature of such future laws, regulations, repeals, or interpretations, and we cannot predict what effect additional governmental regulation, if it occurs, would have on our business in the future. Such developments could, however, require reformulation of certain products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, additional personnel, or other new requirements. Any such developments could have a material adverse effect on our business.
Coverage and reimbursement may not be available for our products, which could make it difficult for us to sell our products profitably, or if available, government mandated rebates may be too high and may adversely affect our profitability.
Market acceptance and sales of our products, including IMVEXXY®, BIJUVA™ and ANNOVERA™, and our hormone therapy drug candidates or prescription vitamins, will depend on coverage and reimbursement policies and may be affected by health care reform measures. Government health care programs and third-party payers decide which prescription drug products they will pay for and establish reimbursement levels. Payers generally do not cover OTC products, and coverage for prescription vitamins and dietary supplements varies. Many private third-party payers, such as managed care plans, manage access to drug products’ coverage partly to control costs to their plans, and may use drug formularies and medical policies to limit their exposure. Factors considered by these payers include product efficacy, cost effectiveness, and safety, as well as the availability of other treatments including generic prescription drugs. Our ability to commercialize IMVEXXY®, BIJUVA™ and ANNOVERA™ successfully depends on coverage and reimbursement levels set by government health care programs and third-party private payers. Obtaining and maintaining favorable reimbursement can be a time-consuming and expensive process, and we may not be able to negotiate or continue to negotiate reimbursement or pricing terms for our products with payers at levels that are profitable to us, or at all.
In both the United States and some foreign jurisdictions, there have been several legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and certain others by establishing a new Part D to the Medicare program. However, unlike Medicare Part A and Part B—through which Medicare provides coverage for certain drugs in certain circumstances—coverage under Part D is provided by private insurers operating under contract with CMS. In addition, this legislation provided authority for limiting the number of certain outpatient drugs that will be covered in any therapeutic class. Because of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These and future cost-reduction initiatives could decrease the coverage and price that we receive for our products from Medicare, if any, including IMVEXXY®, BIJUVA™ and ANNOVERA™, and could significantly harm our business. It was historically unclear whether products approved to treat moderate-to-severe dyspareunia, a symptom of vulvar and vaginal atrophy due to menopause, such as IMVEXXY®, were excluded under Medicare Part D, which resulted in limited Medicare coverage for such products. Recent clarification issued by CMS in May 2018 indicated that drugs, such as IMVEXXY®, that are approved for the treatment of moderate-to-severe dyspareunia (as well as drugs approved for the treatment of moderate-to-severe symptoms of vulvar and vaginal atrophy associated with menopause) are not excluded from Medicare Part D coverage. CMS’s clarification, however, is no guarantee that such coverage will be obtained for IMVEXXY®, and obtaining Medicare or other government health care program reimbursement for any new drug products may take up to several years following FDA approval. While the MMA applies only to drug benefits for Medicare beneficiaries, third-party payers often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement under Medicare may result in a similar reduction in payments from third-party payers.
Our ability to commercialize ANNOVERA™ depends on coverage and reimbursement levels set by government health care programs and third-party private payers. The ACA mandates that private health plans provide coverage for women’s preventative services, without imposing patient cost-sharing requirements, as recommended by HRSA. HRSA Guidelines require private health plans to cover, with no patient out-of-pocket costs, at least one form of treatment (e.g., one product) in each of the methods (e.g., classes of contraception) identified by the FDA for women in its Birth Control Guide. To the extent ANNOVERA™ is deemed a new class of contraception by the FDA, such a designation could allow for coverage by private health plans with no patient out-of-pocket costs. However, there is no guarantee that such coverage will be obtained, and it is possible that other FDA-approved products could also be included in this new class. Pursuant to HRSA Guidelines, private payers need only provide no-cost coverage for one product in each class, and may use reasonable medical management to determine whether and to what extent to cover other products in the class. To the extent ANNOVERA™ is not the only FDA-approved product in a designated class of contraception, private payers may choose not to cover our one-year vaginal contraceptive system, or may require patient cost-sharing obligations.
To the extent we obtain coverage for our products by state Medicaid programs, we may be required to pay a rebate to each state Medicaid program for any covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program, and to comply with all Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Healthcare Act of 1992. Moreover, federal law requires that any company participating in the Medicaid Drug Rebate program also participate in the Public Health Service’s 340B Program, which impose additional requirements. In addition, if our products are made available to authorized users of the Federal Supply Schedule of the General Services Administration or to low income patients of certain hospitals, additional laws and requirements may apply.
We expect to experience pricing pressures in connection with the sale of our products generally due to the trend toward managed health care, the increasing influence of health maintenance organizations, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional legislative proposals. As discussed more below, the goal of the ACA, as enacted in 2010, was to reduce the cost of health care and substantially change the way health care is financed by both government health care programs and third-party payers. Among other measures, the ACA increased rebates on manufacturers for certain covered drug products reimbursed by state Medicaid programs. While we cannot predict the full effect that the ACA will have on government health care programs’ reimbursement policies in general or on our business specifically, the ACA may result in downward pressure on drug reimbursement, which could negatively affect market acceptance of our products. In addition, we cannot predict whether new proposals will be made or adopted, when they may be adopted, or what impact they may have on us if they are adopted.
The availability of generic products at lower prices than branded products may substantially reduce the likelihood of reimbursement for branded products, such as IMVEXXY®, BIJUVA™ and ANNOVERA™.
If we fail to successfully secure and maintain adequate coverage and reimbursement for our products or are significantly delayed in doing so, we could have difficulty achieving market acceptance of our products and our business, financial condition, results of operations, and prospects could be harmed.
Future legislation or regulations may adversely affect reimbursement from government health care programs and third-party payers.
Legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction, triggering the legislation’s automatic reduction of several government programs. This includes aggregate reductions to Medicare payments to health care providers of up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several categories of health care providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Under the Trump administration, there have been ongoing efforts to modify or repeal all or certain provisions of the ACA. If the ACA or parts of it are repealed, it is unclear what impact that would have on drug reimbursements or coverage and it is also unclear what programs, if any, Congress might enact to replace the repealed portions of the ACA. The Trump administration may also take executive action in the absence of legislative action. For example, in October 2017, the President announced that the administration will withhold the cost-sharing subsidies paid to health insurance exchange plans serving low-income enrollees. With respect to IMVEXXY®, BIJUVA™ and ANNOVERA™, and to the extent we ever obtain regulatory approval and commercialization of our other drug candidates, these new laws and policies (as well as proposed legislation, if enacted) may result in additional reductions in Medicare and other health care funding, which could have a material adverse effect on our customers and accordingly, our financial operations.
On December 13, 2016, President Obama signed into law the 21st Century Cures Act, which, among other things, may increase the types of clinical trial designs that would be acceptable to support an NDA. It is unclear, at this time, how these provisions will be implemented or whether they would have any effect on our company. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on our drug products and drug candidates may be.
There have also been efforts by government officials or legislators to implement measures to regulate prices or payment for pharmaceutical products, including legislation on drug importation. Recently, there has been considerable public and government scrutiny of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals; proposed and enacted legislation generally have focused on increasing transparency around drug costs or limiting drug prices, including drug rebates. For example, in 2017, California enacted a new law, which went into effect on January 1, 2018, to facilitate greater transparency in brand-name and generic drug pricing through the implementation of specific price reporting requirements for pharmaceutical manufacturers. If adequate reimbursement levels are not maintained by government and third-party payers for our products, our ability to sell our products may be limited and/or our ability to establish acceptable pricing levels may be impaired, thereby reducing anticipated revenues and profitability.
Further, if a federal government shutdown were to occur for a prolonged period, federal government payment obligations, including its obligations under Medicaid and Medicare, may be delayed. Similarly, if state government shutdowns were to occur, state payment obligations may be delayed. If the federal or state governments fail to make payments under these programs on a timely basis, our ability to sell our products to government payers may be limited and/or our ability to establish acceptable pricing levels may be impaired, thereby reducing anticipated revenues and profitability.
Our dependence upon third parties for the manufacture and supply of our existing women’s health care products and our hormone therapy drug candidates may cause delays in, or prevent us from, successfully developing, commercializing, and marketing our products.
We do not currently have, nor do we currently plan to build or acquire, the infrastructure or capability to internally manufacture our existing women’s health care products, IMVEXXY®, BIJUVA™, or ANNOVERA™, or our hormone therapy drug candidates. We have relied, and will continue to rely, on third parties to manufacture these products in accordance with our specifications and in compliance with applicable regulatory requirements. We have entered into long-term supply agreements with Catalent for the commercial supply of IMVEXXY® and BIJUVA™. Under the terms of the agreements, we are obligated to purchase certain minimum annual amounts of each product once we commence commercial sales of such product following regulatory approval of Catalent as a manufacturer of such product. We have also entered into a long-term supply contract with QPharma for ANNOVERA™. Under the terms of the QPharma agreement, we are obligated to purchase certain minimum annual amounts of ANNOVERA™. We depend on Lang, a full-service, private label and corporate brand manufacturer, to supply approximately 100% of our vitaMedMD and BocaGreen products. We do not have long-term contracts for the commercial supply of our existing women’s health care products, however, in certain circumstances, including our failure to satisfy our production forecasts to Lang, we may be obligated to reimburse Lang for the costs of excess raw materials purchased by Lang that it cannot use in another product category that it then sells. We intend to enter into agreements with Crystal Pharma SAU for the commercial supply of one of the active pharmaceutical ingredients for ANNOVERA™. However, if we experience delays in finalizing this agreement or are unable to execute this agreement on commercially reasonable terms, we may need to find alternative manufacturing facilities, which would result in disruption in our commercialization of ANNOVERA™.
Regulatory requirements could pose barriers to the manufacture of our existing women’s health care products and our hormone therapy drug product and drug candidates. Holders of NDAs, or other forms of FDA approvals or clearances, or those distributing a regulated product under their own name, are ultimately responsible for compliance with manufacturing obligations even if the manufacturing is conducted by a third-party contract manufacturing organization, or CMO. All of our existing products are manufactured by CMOs. These CMOs are required by the terms of our contracts to manufacture our products in compliance with the applicable regulatory requirements. The CMO that manufactures IMVEXXY® and BIJUVA™ has previously been inspected by the FDA and received Form 483 observations with respect to its softgel manufacturing plant that is used for the manufacture of the commercial supply of IMVEXXY® and BIJUVA™. QPharma, the CMO that will manufacture ANNOVERA™, has previously been inspected by the FDA and received Form 483 observations on December 15, 2017, with respect to its facility that will be used for the commercial supply of ANNOVERA™.
If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, our regulatory submissions may be delayed or disapproved, and our marketed products may be affected. If these facilities are not in compliance for the manufacture of our vitamin products, our hormone therapy drug product and our drug candidates, we may need to find alternative manufacturing facilities, which would result in disruptions of our sales and significant delays of up to several years in obtaining approval for our hormone therapy drug candidates. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMP regulations or other applicable requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, violation letters, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply, recalls, withdrawals, issuance of safety alerts, and criminal prosecutions, any of which could have a material adverse impact on our business, financial condition, results of operations, and prospects. We do not currently have alternative manufacturers, and we may not be able to enter into a long-term agreement with alternative manufacturers, or do so on commercially reasonable terms, which could have a material adverse impact on our business. Finally, we also could experience manufacturing delays if our CMOs give greater priority to the supply of other products over our products and proposed products to the delay or other detriment of our products and proposed products, or otherwise do not satisfactorily perform according to the terms of their agreements with us.
We also do not have long-term contracts for the supply of the active pharmaceutical ingredient, or API, used in IMVEXXY®, BIJUVA™ and ANNOVERA™. If any supplier of the API or other products used in our approved products or hormone therapy drug candidates experiences any significant difficulties in its respective manufacturing processes, does not comply with the terms of an agreement between us, or does not devote sufficient time, energy, and care to providing our manufacturing needs, we could experience significant interruptions in the supply of our approved products or hormone therapy drug candidates, which could impair our ability to supply our approved products or hormone therapy drug candidates at the levels required for commercialization and prevent or delay their successful commercialization.
Even after the approval of IMVEXXY®, BIJUVA™ and ANNOVERA™, and even if we obtain regulatory approval for our other hormone therapy drug candidates, we will still face extensive, ongoing regulatory requirements and review, and our products may face future development and regulatory difficulties.
With respect to IMVEXXY®, BIJUVA™ and ANNOVERA™, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or to the conditions for approval or impose ongoing requirements for potentially costly post-approval studies, including phase 4 clinical trials or post-market surveillance. As a condition to granting marketing approval of a product, the FDA may require a company to conduct additional clinical trials. The results generated in these post-approval clinical trials could result in loss of marketing approval, changes in product labeling, or new or increased concerns about side effects or efficacy of a product. For example, the labeling for IMVEXXY®, BIJUVA™ and ANNOVERA™ contains restrictions on use and warnings. The Food and Drug Administration Amendments Act of 2007, or FDAAA, gives the FDA enhanced post-market authority, including the Risk Evaluation and Mitigation Strategy, explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information, and compliance with FDA-approved REMS programs. IMVEXXY®, BIJUVA™ and ANNOVERA™ will also be subject to ongoing FDA requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record keeping, and reporting of safety and other post-market information. The FDA’s exercise of its authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements, and potential restrictions on sales of approved products. As part of the FDA’s approval of IMVEXXY®, we have committed to conduct a post-approval observational study to evaluate the risk of endometrial cancer in post-menopausal women with a uterus who use a low-dose vaginal estrogen unopposed by a progestogen such as IMVEXXY®. As part of the FDA’s approval of ANNOVERA™, the FDA has required a post-approval observational study be performed to measure the risk of venous thromboembolism. Foreign regulatory agencies often have similar authority and may impose comparable costs. Post-marketing studies, whether conducted by us or by others and whether mandated by regulatory agencies or voluntary, and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of our hormone therapy drug candidates once approved, and potentially our other marketed products. Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of our approved products. Accordingly, new data about our products could negatively affect demand because of real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal or recall. Furthermore, new data and information, including information about product misuse, may lead government agencies, professional societies, and practice management groups or organizations involved with various diseases to publish guidelines or recommendations related to the use of our products or the use of related therapies or place restrictions on sales. Such guidelines or recommendations may lead to lower sales of our products.
The holder of an approved NDA also is subject to obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the NDA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. Legal requirements have also been enacted to require disclosure of certain clinical trial results on a publicly available database.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with the FDA’s cGMPs regulations and other regulatory requirements, such as adverse event reporting. If we or a regulatory agency discovers problems with a product, such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility, or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing, requiring new warnings or other labeling changes to limit use of the drug, requiring that we conduct additional clinical trials, imposing new monitoring requirements, or requiring that we establish a REMS program. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws, and are subject to review by FDA. If the FDA raises concerns regarding our promotional materials or messages, we may be required to modify or discontinue using them and may be required to provide corrective information. Should we fail to comply with these requirements, we may be subject to significant liability including civil and administrative actions as well as criminal sanctions. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act and its implementing regulations.
Our activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or our third-party suppliers fail to comply with applicable regulatory requirements, a regulatory agency may take any of the following actions:
| ● | conduct an investigation into our practices and any alleged violation of law; |
| ● | issue warning letters or untitled letters asserting that we are in violation of the law; |
| ● | seek an injunction or impose civil or criminal penalties or monetary fines; |
| ● | suspend or withdraw regulatory approval; |
| ● | require that we suspend or terminate any ongoing clinical trials; |
| ● | refuse to approve pending applications or supplements to applications filed by us; |
| ● | suspend or impose restrictions on operations, including costly new manufacturing requirements; |
| ● | seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; or |
| ● | exclude us from providing our products to those participating in government health care programs, such as Medicare and Medicaid, and refuse to allow us to enter into supply contracts, including government contracts. |
Recent government enforcement has targeted pharmaceutical companies for violations of fraud, abuse and other laws.
The AKS has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, pharmacies, and formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical products, including certain discounts, or engagement of speakers or consultants, may be subject to scrutiny if they do not fit squarely within an exemption or safe harbor. Further, the Trumps administration has taken steps to limit applicability of some of these safe harbors, including those related to discounts and rebates, in regulations proposed in February 2019. Our practices with respect to interactions with health care professionals, including but not limited to consultant relationships, speaker programs, advisory boards, and scientific/educational grant programs, as well as our arrangements with pharmacies, may not in all cases meet all of the criteria for safe harbor protection from AKS liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs. In addition, several states have recently enacted legislation requiring pharmaceutical companies to establish marketing and promotional compliance programs or codes of conduct and/or to file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities. Several states have also adopted laws that prohibit certain marketing-related activities, including the provision of gifts, meals or other items to certain health care providers.
We cannot ensure that our compliance controls, policies and procedures will be sufficient to protect against acts of our employees, business partners or vendors that may violate federal or state fraud and abuse laws or other applicable requirements.
Federal enforcement agencies and private whistleblowers recently have shown interest in pharmaceutical companies’ product and patient assistance programs, including reimbursement support, co-pay support, nursing, adherence and educational services, referrals to other providers, donations to independent patient assistance charities, and relationships with specialty pharmacies. Co-pay assistance programs are intended to assist qualified patients with private insurance with any out-of-pocket financial obligations but must exclude any government health care program beneficiaries. Several investigations into patient assistance practices have resulted in significant civil and criminal settlements. We offer co-pay assistance for our vitamin products and IMVEXXY®, including co-pay assistance and free drug sample starter packs for IMVEXXY®, and potentially will do so for BIJUVA™ and ANNOVERA™. If we fail to structure these and other support programs to comply with applicable law, we risk becoming subject to government investigations, and potentially, facing penalties or consequences for violations under fraud and abuse laws. In addition, to the extent we, our subsidiary, VitaCare Prescription Services, or our other contractors or agents receive or obtain individually identifiable health information from patients, health care professionals, pharmacies, or other individuals or entities, although we are not directly subject to HIPAA, we could be subject to criminal penalties if we mishandle individually identifiable health information in a manner that is not authorized or permitted by HIPAA. Claims that we have violated individuals’ privacy rights or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business. In addition, VitaCare Prescription Services' activities could be subject to regulation and enforcement by the federal government and the states in which VitaCare conducts its business, including as a result of potential increased scrutiny of innovation in hub services.
The occurrence of any of the foregoing events or penalties may force us to expend significant amounts of time and money and may significantly inhibit our ability to bring to market or continue to market our products and generate revenue. Similar regulations apply in foreign jurisdictions.
Any failure to adequately expand a direct sales force will impede our growth.
We expect to be substantially dependent on a direct sales force to attract new business and to manage customer relationships. We plan to expand our direct sales force and believe that there is significant competition for qualified, productive direct sales personnel with advanced sales skills and technical knowledge. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training, and retaining direct sales personnel. New and future hires may not become as productive as expected, and we may be unable to hire enough qualified individuals in the future in the markets in which we do business. If we are unable to hire and develop enough productive sales personnel or are required to hire more sales personnel than we expect our business prospects could suffer.
Other pharmaceutical companies with which we compete for qualified personnel may have greater financial and other resources, different risk profiles, and longer histories than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we offer. If we are unable to continue to attract and retain high-quality personnel, our ability to commercialize IMVEXXY®, BIJUVA™ and ANNOVERA™ may be limited.
Licensing of intellectual property involves complex legal, business and scientific issues, and disputes could jeopardize our rights under such agreements. Additionally, our current licensing agreements contain limitations and restrictions that could limit or adversely affect our ability to develop and commercialize other products in the future.
We are currently and may in the future be a party to license agreements of importance to our business and to our current product and product candidates, and we expect to be subject to additional such agreements in the future. Disputes may arise between us and any of these counterparties regarding intellectual property subject to and each parties’ obligations under such agreements, including:
| ● | our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product and product candidates, and what activities satisfy those diligence obligations; |
| ● | the scope of rights granted under the agreement and other interpretation-related issues; |
| ● | our obligations to make milestone, royalty or other payments under those agreements; |
| ● | whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the agreement; |
| ● | our right to sublicense patent and other rights to third parties; |
| ● | the ownership of inventions and know-how arising under the agreement or resulting from the joint creation or use of intellectual property by our licensors and us and our partners; |
| ● | our right to transfer or assign the license; and |
| ● | the effects of termination. |
These or other disputes over our obligations or intellectual property that we have licensed may prevent or impair our ability to maintain our current arrangements on acceptable terms, or may impair the value of the arrangement to us. Any such dispute could have an adverse effect on our business.
If we fail to meet our obligations under a license agreement in a material respect, the respective licensor could have the right to terminate the respective agreement and upon the effective date of such termination, have the right to re-obtain the related technology as well as, potentially, aspects of any intellectual property controlled by us and developed during the period the agreement was in force that relate to the applicable technology. This means that the licensor to each of these agreements could effectively take control of the development and commercialization of the applicable product or product candidate after an uncured, material breach of the agreement by us. This may also be the case if we voluntarily terminate the relevant agreement. Any uncured, material breach under a license agreement could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization efforts for the applicable product or product candidates.
In July 2018, we entered into a license agreement with the Population Council to obtain exclusive U.S. rights to commercialize the Population Council’s segesterone acetate/ethinyl estradiol one-year vaginal system for human contraceptive indications, which was approved by the FDA in August 2018 and which we intend to commercialize under the name ANNOVERA™. The agreement requires us to commercialize this product and enter into certain manufacturing agreements, make timely milestone and other payments, provide certain information regarding our activities under the agreement, and indemnify the other party with respect to our development and commercialization activities under the terms of the agreements.
In addition, our current licensing agreement with the Population Council contains limitations and restrictions, including limitations that could limit or adversely affect our ability to develop and commercialize this or other product candidates including the following:
| ● | we cannot sublicense the rights licensed to us without the consent of the Population Council; |
| ● | neither we nor the Population Council may develop a competitive product (as defined with respect to each party in the agreement) for six years from the date of the agreement; |
| ● | currently there are no Orange Book listable patents or patent applications covering this system; and |
| ● | the Population Council owns any program improvements, as defined in the agreement. |
In addition, if we license international rights to our products to third parties that have the right to manufacture such products outside of the U.S., sales of our products in the U.S. and our rights to receive royalties with respect to our products sold outside the U.S. could be adversely affected if products manufactured outside of the U.S. are reimported and sold in the U.S.
Our level of indebtedness and the terms of the Credit Agreement could adversely affect our operations and limit our ability to plan for or respond to changes in our business. If we are unable to satisfy certain conditions in our Credit Agreement, we will be unable to draw down the remaining the facility and if we are unable to comply with restrictions in the Credit Agreement, the repayment of our existing indebtedness could be accelerated.
Under the Credit Agreement, we have incurred a substantial amount of debt, which could adversely affect our business. In June 2018, we drew down the first tranche of $75.0 million under the Credit Agreement and we currently intend to draw down up to an additional $125.0 million in the aggregate in two additional tranches under the terms of the Credit Agreement, when and if the conditions precedent to such tranches have been met. Our high level of indebtedness could affect our business in the following ways, among other things: make it more difficult for us to satisfy our contractual and commercial commitments; require us to use a substantial portion of our cash flow from operations to pay interest and principal, which would reduce funds available for working capital, capital expenditures and other general corporate purposes; limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments or general corporate purposes; heighten our vulnerability to downturns in our business, our industry or in the general economy; place us at a disadvantage compared to those of our competitors that may have proportionately less debt; limit management’s discretion in operating our business; and limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.
We must satisfy certain conditions to be eligible to draw down the second tranche of $75.0 million and the third tranche of $50.0 million. The second tranche may be drawn by us on or before May 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including (i) the approval by the FDA of the NDA for BIJUVA™ and (ii) that we have consummated our first commercial sale in the United States of BIJUVA™. The third tranche of $50.0 million may be drawn by us on or before December 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including that (i) tranche 2 has been drawn and (ii) we and our subsidiaries party to the Credit Agreement have generated at least $75.0 million of consolidated net revenue attributable to commercial sales of BIJUVA™ and IMVEXXY® during the twelve-month period ending immediately before the funding of tranche 3. If we are unable to satisfy those conditions, we would not be able to draw down the respective tranche of financing and may not be able to obtain alternative financing on commercially reasonable terms or at all.
The Credit Agreement requires us to make certain payments of principal and interest over time and contains several other restrictive covenants. Among other requirements of the Credit Agreement, we and our subsidiaries party to the Credit Agreement must (i) maintain a minimum cash balance of $50.0 million and (ii) achieve certain minimum consolidated net revenue amounts attributable to commercial sales of our products. The Credit Agreement also contains covenants that limit, among other things, the ability of us and our subsidiaries party to the Credit Agreement to (i) incur indebtedness, (ii) incur liens on our property, (iii) pay dividends or make other distributions, (iv) sell our assets, (v) make certain loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain permitted indebtedness and (viii) enter into transactions with affiliates, in each case subject to certain exceptions. These and other terms in the Credit Agreement have to be monitored closely for compliance and could restrict our ability to grow our business or enter into transactions that we believe would be beneficial to our business.
Our business may not generate cash flow from operations in the future sufficient to service our debt and support our growth strategies. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including under our current debt obligations.
If our products or drug candidates do not have the effects intended or cause undesirable side effects, our business may suffer.
Although many of the ingredients in our current dietary supplement products are vitamins, minerals, and other substances for which there is a long history of human consumption, they also contain innovative ingredients or combinations of ingredients. While we believe that all of these products and the combinations of ingredients in them are safe when taken as directed, the products could have certain undesirable side effects if not taken as directed or if taken by a consumer who has certain medical conditions, such as the potential effect of high doses of folic acid masking pernicious anemia. In addition, these products may not have the effect intended if they are not taken in accordance with certain instructions, which include certain dietary restrictions. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects in an unforeseen way or on an unforeseen cohort. If any of our products or products we develop or commercialize in the future are shown to be harmful or generate negative publicity from perceived harmful effects, our business, financial condition, results of operations, and prospects could be harmed significantly.
Our future success will depend in large part on our ability to commercialize our hormone therapy drug candidates designed to alleviate symptoms of and reduce the health risks resulting from menopause, including VMS and VVA.
Our future success will depend in large part on our ability to successfully develop and commercialize our hormone therapy drug candidates designed to alleviate the symptoms of and reduce the health risks resulting from menopause, including hot flashes and dyspareunia. We have submitted IND applications for five hormone therapy drug candidates, which the FDA has allowed to proceed, and which permit us to conduct clinical testing on these proposed products. In December 2015, we completed a phase 3 clinical trial of our TX-004HR drug candidate and in December 2016 we completed a phase 3 clinical trial for our TX-001HR drug candidate. In July 2014, we suspended enrollment in the phase 3 clinical trial for our TX-002HR drug candidate and in October 2014 we stopped the trial and are considering whether to update the phase 3 protocol based on discussions with the FDA. We have currently suspended further development of this drug candidate to prioritize our leading drug candidates. We have no current plans to conduct clinical trials for our TX-003HR drug candidate. Drug development is a necessarily uncertain undertaking. We may not be able to complete the development of our drug candidates, the results of the clinical trials may not be sufficient to support an NDA for any of our drug candidates, and even if we believe the results of our clinical trials are sufficient to support any NDA that we submit, the FDA may disagree and may not approve our NDA. In addition, even if the FDA approves one or more of our NDAs, it may do so with restrictions on the intended uses that may make commercialization of the product or products financially untenable. The failure to commercialize or obtain necessary approval for any one or more of these products could substantially harm our prospects and our business.
We may not be able to complete the development and commercialization of our hormone therapy drug candidates if we fail to obtain additional financing.
We need substantial amounts of cash to complete the clinical development and commercialization of our hormone therapy drug candidates. Our existing cash may not be sufficient to fund these requirements. In addition, changing circumstances may cause us to consume funds significantly faster than we currently anticipate, and we may need to spend more money than currently expected on these programs. We do not currently have any committed external source of funds. We may attempt to raise additional capital from the issuance of equity or debt securities, collaborations with third parties, licensing of rights to our products, or other means, or a combination of any of the foregoing. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from our day-to-day activities, which may adversely affect our ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to take one or more of the following actions:
Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or proposed products or grant licenses on terms that may not be favorable to us.
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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development, and commercialization efforts, and our ability to generate revenue and achieve or sustain profitability will be substantially harmed
We have no experience as a company in bringing a drug to regulatory approval
We have never obtained regulatory approval for, or commercialized, a drug. It is possible that the FDA may refuse to accept any or all of our planned NDAs for substantive review or may conclude, after review of our data, that our applications are insufficient to obtain regulatory approval of any of our hormone therapy drug candidates. We have begun to conduct validation and scale up of the manufacturing processes for TX-001HR, our proposed combination estradiol and progesterone drug candidate, and TX-004HR, our proposed applicator-free vaginal estradiol softgel drug candidate. The FDA may also require that we conduct additional clinical or manufacturing validation studies, which may be costly and time-consuming, and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA required studies, approval of any NDA that we submit may be significantly delayed, possibly for years, or may require us to expend more resources than we have available or can secure. Any delay or inability in obtaining regulatory approvals would delay or prevent us from commercializing our hormone therapy drug candidates, generating revenue from these proposed products, and achieving and sustaining profitability. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDA we submit. If any of these outcomes occur, we may be forced to abandon our planned NDAs for one or more of our hormone therapy drug candidates, which would materially adversely affect our business and could potentially cause us to cease operations
We have recently completed our phase 3 clinical trials of TX-001HR for the treatment of moderate to severe VMS due to menopause in post-menopausal women with an intact uterus and TX-004HR for the treatment of moderate to severe dyspareunia in postmenopausal women with VVA. Although we have discussed our clinical development plans for each drug candidate with the FDA, the agency may ultimately determine that our phase 3 clinical trials for one or both candidates are not sufficient for regulatory approval. If we are required to conduct additional clinical trials or non-clinical studies, our development of TX-001HR or TX-004HR, as applicable, will be more time-consuming and costly than we presently anticipate, which could have a material adverse effect on our business, results of operations and financial condition.
On December 5, 2016, we announced positive top-line results from the REPLENISH Trial, our phase 3 clinical trial to evaluate the safety and efficacy of TX-001HR, an investigational bio-identical hormone therapy combination of 17ß-estradiol and progesterone in a single, oral softgel, for the treatment of moderate to severe VMS due to menopause in post-menopausal women with an intact uterus. The REPLENISH Trial evaluated four doses of TX-001HR and placebo in 1,835 post-menopausal women between 40 and 65 years old. The doses studied were: 17ß-estradiol 1 mg/progesterone 100 mg; 17ß-estradiol 0.5 mg/progesterone 100 mg; 17ß-estradiol 0.5 mg/progesterone 50 mg; and 17ß-estradiol 0.25 mg/progesterone 50 mg (n = 424). The REPLENISH Trial results demonstrated that TX-001HR estradiol 1 mg/progesterone 100 mg and TX-001HR estradiol 0.5 mg/progesterone 100 mg both achieved all four of the co-primary efficacy endpoints and the primary safety endpoint and demonstrated a statistically significant and clinically meaningful reduction from baseline in both the frequency and severity of hot flashes compared to placebo. TX-001HR estradiol 0.5 mg/progesterone 50 mg and TX-001HR estradiol 0.25 mg/progesterone 50 mg were not statistically significant at all of the co-primary efficacy endpoints; the estradiol 0.25 mg/progesterone 50 mg dose was included in the clinical trial as a non-effective dose to meet the recommendation of the FDA guidance to identify the lowest effective dose. The incidence of consensus endometrial hyperplasia or malignancy was 0 percent across all four TX-001HR doses, meeting the recommendations established by the FDA’s draft guidance. Based on the results of the REPLENISH Trial, we currently intend to seek regulatory approval for the estradiol 1 mg/progesterone 100 mg and estradiol 0.5 mg/progesterone 100 mg doses of TX-001HR for the treatment of moderate to severe VMS due to menopause in post-menopausal women with an intact uterus in the U.S
On December 7, 2015, we announced positive top-line results from the REJOICE Trial, our phase 3 clinical trial to evaluate the safety and efficacy of three doses—25 mcg, 10 mcg and 4 mcg (compared to placebo)—of TX-004HR for the treatment of moderate to severe dyspareunia in postmenopausal women with VVA. Both the 25 mcg dose and the 10 mcg dose of TX-004HR demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo across all four co-primary efficacy endpoints. The 4 mcg dose of TX-004HR also demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo for the endpoints of vaginal superficial cells, vaginal parabasal cells, and vaginal pH; the change from baseline compared to placebo in the severity of dyspareunia was statistically significant at the p = 0.0149 level. On July 7, 2016, we submitted an NDA for all three doses of TX-004HR that were evaluated in the REJOICE Trial. As discussed below, where an NDA is supported by a single clinical trial, as is the case with TX-004HR, the FDA has taken the position initially that the results of our trial would have to achieve statistical significance at the 0.01 level or better. Statistical significance at the 0.0149 level may not be sufficient to satisfy this requirement. If the FDA continues to maintain this position, we may have to either conduct an additional trial or eliminate the 4 mcg dose formulation from the TX-004HR NDA. The elimination of this low dose from our product line could adversely affect our sales of TX-004HR, if approved.
We cannot assure you that the FDA will approve all or any doses of TX-001HR or TX-004HR for commercialization. The FDA may not agree with one or more aspects of our clinical trial designs, including the duration of the trials, clinical endpoints, controls, dose ranges, collection of safety data, level of statistical significance, or adequacy of our non-clinical studies. In addition, to date we have only analyzed the top line data of the REPLENISH Trial; further safety and efficacy analyses of the trial data are ongoing. If the further analyses suggest the data are not as positive as we currently believe them to be, we may need to conduct additional clinical or non-clinical trials or studies, which could result in delays in approval or could prevent approval of TX-001HR
Our TX-001HR or TX-004HR hormone therapy drug candidates are currently undergoing stability testing. The FDA will review the period of time that our drug candidates are stable, which will dictate the amount of time post-manufacturing that the products may be used by patients, if approved. If our hormone therapy drug candidates fail to remain stable or the period of time that they remain stable is too short, it could limit the commercial viability of our products, which could materially adversely impact our business, results of operations and financial condition.
In addition, prior to approval of an NDA, the FDA may audit one or more of the sites where the applicable phase 3 clinical trial was conducted to ensure the integrity of the data, inspect our clinical records in our corporate offices, and will inspect the facilities of our third party contract manufacturers where the applicable drug candidate will be manufactured commercially, if approved and where the drug was manufactured for clinical trials. If one or more site audits reveals anomalies, or if the manufacturing facilities do not pass inspection, full consideration of the NDA by the FDA could be delayed, or the FDA may require us to undertake further clinical or non-clinical trials or could require our contract manufacturers to improve or change their processes, any of which would delay or prevent commercialization of the applicable drug candidate and could materially adversely impact our business, results of operations and financial condition.
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Clinical trials are lengthy and expensive with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
Clinical trials are expensive, can take many years to complete and have highly uncertain outcomes. For example, we suspended enrollment in and subsequently stopped the SPRY trial for our progesterone aloneprogesterone-alone drug candidate in order to update the phase 3 protocol based on discussions with the FDA. Failure can occur at any time during the clinical trial process as a resultbecause of inadequate performance of a drug, inadequate adherence by patients or investigators to clinical trial protocols, or other factors. New drugs in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through earlier clinical trials. A number ofSeveral companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials as a result of a lack of efficacy or adverse safety profiles, despite promising results in earlier trials. Our future clinical trials may not be successful or may be more expensive or time-consuming than we currently expect. Prior toBefore approving a new drug, the FDA generally requires that the safety and efficacy of the drug be demonstrated in two adequate and well-controlled clinical trials. In some situations, the FDA approves drugs on the basis of a single well-controlled clinical trial. We believe we may be required to conduct only a single phase 3 clinical trial of each of TX-001HR, our proposed combination estradiol and progesterone drug candidate, TX-002HR, our progesterone alone drug candidate, and TX-004HR, our applicator-free vaginal estradiol softgel drug candidate. However, in connection with our TX-004HR drug candidate, the FDA has previously indicated to us that in order to approve the drug based on a single trial, the trial would need to show statistical significance at the 0.01 level or lower for each endpoint, and that a trial that is merely statistically significant at a higher numerical level may not provide sufficient evidence to support an NDA filing or approval of a drug candidate where the NDA relies on a singlewell-controlled clinical trial. If clinical trials for any of our hormone therapy drug candidates fail to demonstrate safety or efficacy to the satisfaction of the FDA, the FDA will not approve that drug and we would not be able to commercialize it, which could have a material adverse effect on our business, financial condition, results of operations, and prospects
Our dependence upon third parties for the manufacture and supply of our existing women’s health care products and our hormone therapy drug candidates may cause delays in, or prevent us from, successfully developing, commercializing, and marketing our products.
We do not currently have, nor do we plan to build, the infrastructure or capability to internally manufacture our existing women’s health care products or our hormone therapy drug candidates. We have relied, and will continue to rely, on third parties to manufacture these products in accordance with our specifications and in compliance with applicable regulatory requirements. We have entered into long-term supply agreements with Catalent for the commercial supply of our TX-001HR and TX-004HR hormone therapy drug candidates. Under the terms of the agreements, we will be obligated to purchase certain minimum annual amounts of each product once we commence commercial sales of such product following regulatory approval of Catalent as a manufacturer of the product. We depend on Lang, a full-service, private label and corporate brand manufacturer, to supply approximately 98% of our vitaMedMD and BocaGreen products. We do not have long-term contracts for the commercial supply of our existing women’s health care products, however, in certain circumstances, including our failure to satisfy our production forecasts to Lang, we may be obligated to reimburse Lang for the costs of excess raw materials purchased by Lang that it cannot use in another product category that it then sells.
Regulatory requirements could pose barriers to the manufacture of our existing women’s health care products and our hormone therapy drug candidates. Our third-party manufacturers are required to comply with cGMP regulations. As a result, the facilities used by any of our current or future manufacturers must be approved by the FDA. Holders of NDAs, or other forms of FDA approvals or clearances, or those distributing a regulated product under their own name, are responsible for manufacturing even though that manufacturing is conducted by a third-party CMO. All of our existing products are, and our hormone therapy drug candidates, if approved, will be manufactured by CMOs. These CMOs are required by the terms of our contracts to manufacture our products in compliance with the applicable regulatory requirements. The CMO that will manufacture our hormone therapy drug candidates, if approved, has previously been inspected by the FDA and received Form 483 observations with respect to its softgel manufacturing plant that will be used for the manufacture of the commercial supply of TX-001HR and TX-004HR, if approved. We anticipate that as part of the PAI of our NDA for TX-004HR, the FDA may inspect Catalent’s manufacturing facilities that would be used to manufacture the product. If this inspection results in Form 483 observations, the approval of our NDA could be delayed significantly. The CMO that manufactured the hormone therapy drug candidates used in our recently completed phase 3 clinical trials for TX-001HR and TX-004HR was recently inspected by the FDA, which issued it a Form FDA-483 listing various observations, some of which pertained to the clinical supply of our TX-001HR and TX-004HR drug candidates. The CMO has submitted its written response to the Form 483 observations to the FDA, however, neither we nor the CMO has been informed by the FDA as to whether the CMO’s response addresses and remediates these observations in a manner satisfactory to the FDA. If this CMO is not able to address and remediate the FDA’s observations pertaining to the clinical supply of our TX-001HR and TX-004HR drug candidates in a manner satisfactory to the FDA, it could have a material adverse effect on the FDA’s review of our NDA for TX-004HR or the timing of our anticipated submission of an NDA for TX-001HR.
If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for the commercial manufacture of our existing products or our hormone therapy drug candidates, we may need to find alternative manufacturing facilities, which would result in disruptions of our sales and significant delays of up to several years in obtaining approval for our hormone therapy drug candidates. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMP regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply, recalls, withdrawals, issuance of safety alerts, and criminal prosecutions, any of which could have a material adverse impact on our business, financial condition, results of operations, and prospects. Finally, we also could experience manufacturing delays if our CMOs give greater priority to the supply of other products over our products and proposed products or otherwise do not satisfactorily perform according to the terms of their agreements with us.
We also do not have long-term contracts for the supply of the API used in hormone therapy drug candidates. If any supplier of the API or other products used in our hormone therapy drug candidates experiences any significant difficulties in its respective manufacturing processes, does not comply with the terms of the agreement between us, or does not devote sufficient time, energy, and care to providing our manufacturing needs, we could experience significant interruptions in the supply of our hormone therapy drug candidates, which could impair our ability to supply our hormone therapy drug candidates at the levels required for commercialization and prevent or delay their successful commercialization
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Delays in clinical trials are common for many reasons, and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales as currently contemplated.
We may experience delays in clinical trials for our hormone therapy drug candidates. Our planned clinical trials might not begin on time; may be interrupted, delayed, suspended, or terminated once commenced; might need to be redesigned; might not enroll a sufficient number of patients; or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:
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Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Any of these delays in completing our clinical trials could increase our costs, slow down our product development and approval process, and jeopardize our ability to commence product sales and generate revenue from our hormone therapy drug candidates.
We may be required to suspend or discontinue clinical trials because of adverse side effects or other safety risks that could preclude approval of our hormone therapy drug candidates.
Our clinical trials may be suspended or terminated at any time for a number of reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA, or other regulatory authorities because of a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the DSMB or the IRB for a clinical trial. An IRB may also suspend or terminate our clinical trials for failure to protect patient safety or patient rights. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe the clinical trials are not being conducted in accordance with applicable regulatory requirements or present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any proposed product that we develop, the commercial prospects of such proposed product will be harmed and our ability to generate product revenue from any of these proposed products will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations, and prospects significantly.
We rely on third parties to conduct our research and development activities, including our clinical trials, and we may experience delays in obtaining or may be unsuccessful in obtaining regulatory approval for, or in commercializing, our hormone therapy drug candidates if these third parties do not successfully carry out their contractual duties or meet expected deadlines.
We do not have the resources to independently conduct research and development activities. Therefore, we have relied, and plan to continue to rely, on various third-party CROs to conduct our research and development activities and to recruit patients and monitor and manage data for our on-going clinical programs for our hormone therapy drug candidates, as well as for the execution of our clinical studies. Although we control only certain aspects of our CROs’ activities, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We cannot assure you that the CROs will conduct the research properly or in a timely manner, or that the results will be reproducible. We and our CROs are required to comply with the FDA’s cGCPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable or invalid, and the FDA may require us to perform additional clinical trials before approving our proposed products. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, to evaluate the safety and effectiveness compared to placebo of our hormone therapy drug candidates to a statistically significant degree, our clinical trials will require an adequately large number of test subjects. Any clinical trial that a CRO conducts abroad on our behalf is subject to similar regulation. Accordingly, if our CROs fail to comply with these regulations or recruit a sufficient number of patients, we may be required to repeat clinical trials, which would delay the regulatory approval process.
In addition, we do not employ the personnel of our CROs, and, except for remedies available to us under our agreements with such organizations, we cannot control whether or not they will devote sufficient time and resources to our on-going clinical and pre-clinical programs. Our CROs may also have relationships with other commercial entities, including one or more of our competitors, for which they may also be conducting clinical studies or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised because of the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our hormone therapy drug candidates that we seek to develop. As a result, our financial results and the commercial prospects for our hormone therapy drug candidates that we seek to develop could be harmed, our costs could increase, and our ability to generate revenue could be delayed or end.
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We typically engage one or more CROs on a project-by-project basis for each study or trial. While we have developed and plan to maintain our relationships with CROs that we have previously engaged, we also expect to enter into agreements with other CROs to obtain additional resources and expertise in an attempt to accelerate our progress with regard to on-going clinical programs and, specifically, the compilation of clinical trial data for submission with an NDA for each of our hormone therapy drug candidates. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially affect our ability to meet our desired clinical development timelines and can increase our costs significantly. Although we try to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, results of operations, or prospects.
Future legislation, or the absence of such legislation, regulations, and policies adopted by the FDA or other regulatory authorities may increase the time and cost required for us to conduct and complete clinical trials for our hormone therapy drug candidates.
The FDA has established regulations, guidelines, and policies to govern the drug development and approval process, as have foreign regulatory authorities. Any change in regulatory requirements resulting from the adoption of new legislation, regulations, or policies may require us to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols or clinical trial applications or the need for new ones, may significantly and adversely affect the cost, timing, and completion of the clinical trials for our hormone therapy drug candidates.
In addition, the FDA’s policies may change and additional government regulations may be issued that could prevent, limit, or delay regulatory approval of our drug candidates, or impose more stringent product labeling and post-marketing testing and other requirements. For example, in the past the FDA has indicated it would regulate prenatal vitamins containing greater than 0.8 mg of folic acid as a drug under the FDCA. More recently the FDA indicated that there is no specified upper limit on the amount of folic acid permitted in a dietary supplement. If the FDA were to seek to regulate products with higher amounts of folic acid as drugs, it may require us to stop selling certain of our dietary supplement products and otherwise adversely affect our business. If we are slow or unable to adapt to any such changes, our business, prospects, and ability to achieve or sustain profitability could be adversely affected.
Current NDAs are governed by the Prescription Drug User Fee Act, known as PDUFA. Under PDUFA, those filing a New Drug Application are required to pay a user fee; those fees are used by the FDA to hire additional reviewers so that applications can more efficiently reviewed. PDUFA also establishes a so-called PDUFA target action date, which is the target date on which the FDA is supposed to make a decision on whether to approve the application or send it back to the filer for additional information or studies. The PDUFA date is a target date and is usually set at 10 months after the NDA is accepted for filing. The NDA for our TX-004HR hormone therapy drug candidate has a PDUFA target action date of May 7, 2017. We anticipate filing an NDA for our TX-001HR hormone therapy drug candidate during the third quarter of this year. PDUFA is set to expire on September 30, 2017; we anticipate that it will be reauthorized. However, there is a possibility that it will not be reauthorized. Any failure or delay of Congress to reauthorize PDUFA could delay FDA review or approval of any pending NDA, which in turn could have material adverse impact on our business, financial condition, results of operations, or prospects.
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Even ifafter we obtain regulatory approval for our hormone therapy drug candidates, we will still face extensive, ongoing regulatory requirements and review, and our products may face future development and regulatory difficulties.
Even ifafter we obtain regulatory approval for one or more of our hormone therapy drug candidates in the United States, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or to the conditions for approval, or impose ongoing requirements for potentially costly post-approval studies, including phase 4 clinical trials or post-market surveillance. For example, as part of the FDA’s approval of IMVEXXY®, we have committed to conduct a post-approval observational study to evaluate the risk of endometrial cancer in post-menopausal women with a uterus who use a low-dose vaginal estrogen unopposed by a progestogen such as IMVEXXY®. As part of the FDA’s approval of ANNOVERA™, the FDA has required a post-approval observational study be performed to measure the risk of venous thromboembolism. As a condition to granting marketing approval of a product, the FDA may require a company to conduct additional clinical trials. The results generated in these post-approval clinical trials could result in loss of marketing approval, changes in product labeling, or new or increased concerns about side effects or efficacy of a product. For example, the labeling for our hormone therapy drug candidates if approved, may includeincludes restrictions on use or warnings. The Food and Drug Administration Amendments Act of 2007, or FDAAA, gives the FDA enhanced post-market authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information, and compliance with FDA-approved REMS programs. If approved, ourOur hormone therapy drug candidates will also be subject to ongoing FDA requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record keeping, and reporting of safety and other post-market information. The FDA’s exercise of its authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements, and potential restrictions on sales of approved products. Foreign regulatory agencies often have similar authority and may impose comparable costs. Post-marketing studies, whether conducted by us or by others and whether mandated by regulatory agencies or voluntary, and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of our hormone therapy drug candidates once approved, and potentially our other marketed products. Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of our approved products. Accordingly, new data about our products could negatively affect demand because of real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal or recall. Furthermore, new data and information, including information about product misuse, may lead government agencies, professional societies, and practice management groups or organizations involved with various diseases to publish guidelines or recommendations related to the use of our products or the use of related therapies or place restrictions on sales. Such guidelines or recommendations may lead to lower sales of our products.
The holder of an approved NDA also is subject to obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the NDA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. Legal requirements have also been enacted to require disclosure of clinical trial results on publicly available databases.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with the FDA’s cGMPs regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility, or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing, requiring new warnings or other labeling changes to limit use of the drug, requiring that we conduct additional clinical trials, imposing new monitoring requirements, or requiring that we establish a REMS program. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act. Sales, marketing, and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, and similar state laws. We would also be required under the Sunshine provision of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Affordable Care Act or ACA, to report annually to the Centers for Medicare & Medicaid Services on payments that we make to physicians and teaching hospitals and ownerships interests in the company held by physicians. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Healthcare Act of 1992. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration and to low income patients of certain hospitals, additional laws and requirements apply. Our activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or our third-party collaborators fail to comply with applicable regulatory requirements, a regulatory agency may take any of the following actions:
| ● | conduct an investigation into our practices and any alleged violation of law; | |
| ● | issue warning letters or untitled letters asserting that we are in violation of the law; | |
| ● | seek an injunction or impose civil or criminal penalties or monetary fines; | |
| ● | suspend or withdraw regulatory approval; | |
| ● | require that we suspend or terminate any ongoing clinical trials; |
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| ● | refuse to approve pending applications or supplements to applications filed by us; | |
| ● | suspend or impose restrictions on operations, including costly new manufacturing requirements; | |
| ● | seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; or | |
| ● | exclude us from providing our products to those participating in government health care programs, such as Medicare and Medicaid, and refuse to allow us to enter into supply contracts, including government contracts. |
The occurrence of any of the foregoing events or penalties may force us to expend significant amounts of time and money and may significantly inhibit our ability to bring to market or continue to market our products and generate revenue. Similar regulations apply in foreign jurisdictions.
The commercial success of our existing products and ourother hormone therapy drug candidatesdrugs that we may develop, if approved in the future, will depend upon gaining and retaining significant market acceptance of these products among physicians and payors.payers.
Physicians may not prescribe our products including any of our hormone therapy drug candidates, if approved by the appropriate regulatory authorities for marketing and sale, which would prevent us from generating revenue or becoming profitable. Market acceptance of our products, including our hormone therapy drug candidates, by physicians, patients, and payors,payers, will depend on a number of factors, many of which are beyond our control, including the following:
| ● | the clinical indications for which our hormone therapy drug candidates are approved, if at all; | |
| ● | acceptance by physicians and | |
| ● | the cost of treatment in relation to alternative treatments, including numerous generic drug products; | |
| ● | the relative convenience and ease of administration of our products in the treatment of the symptoms for which they are intended; | |
| ● | the availability and efficacy of competitive drugs; | |
| ● | the effectiveness of our sales force and marketing efforts; | |
| ● | the extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations; | |
| ● | the availability of coverage and adequate reimbursement by third parties, such as insurance companies and other health care | |
| ● | limitations or warnings contained in a product’s FDA-approved labeling; and | |
| ● | prevalence and severity of adverse side effects. |
Even if the medical community accepts that our products are safe and efficacious for their approved indications, physicians may not immediately be receptive to the use or may be slow to adopt our products as an accepted treatment for the symptoms for which they are intended. We cannot assure you that any labeling approved by the FDA will permit us to promote our products as being superior to competing products. If our products including, in particular our hormone therapy drug candidates, if approved, do not achieve an adequate level of acceptance by physicians and payors,payers, we may not generate sufficient or any revenue from these products and we may not become profitable. In addition, our efforts to educate the medical community and third-party payorspayers on the benefits of our products may require significant resources and may never be successful.
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Our products including our hormone therapy drug candidates if approved, face significant competition from branded and generic products, and our operating results will suffer if we fail to compete effectively.
Development and awareness of our brand will depend largely upon our success in increasing our customer base.base and maintaining adequate pricing through our exclusivities. The dietary supplement and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our products including any hormone therapy drug candidates that are approved, face intense competition, including from major multinational pharmaceutical and dietary supplement companies, established biotechnology companies, specialty pharmaceutical, and generic drug companies. A new non-hormonal product, Brisdelle, produced by Noven Pharmaceuticals, was approved by the FDA for treatment of VMS in June 2013. Many of these companies have greater financial and other resources, such as larger research and development staffs and more experienced marketing and manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly and may be more effective in selling and marketing their products. They also may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the products that we sell or develop obsolete. As a result, our competitors may succeed in commercializing products before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. If we are unable to economically promote or maintain our brand, our business, results of operations and financial condition could be severely harmed. In addition, our efforts to provide an alternative to the non-FDA-approved compound bioidentical market for estradiol and progesterone products sold by compounding pharmacies may not be successful. Finally, loss of exclusivity may provide opportunity for competing products, particularly generics, to erode pricing and siphon off our customers.
Coverage and reimbursement may not be available for our products, which could make it difficult for us to sell our products profitably, or if available, government mandated rebates may be too high and may adversely affect our profitability.
Market acceptance and sales of our products, including any hormone therapy drug candidates, will depend on coverage and reimbursement policies and may be affected by health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which products they will pay for and establish reimbursement levels. Third-party payors generally do not cover OTC products, and coverage for vitamins and dietary supplements varies. We cannot be sure that coverage and reimbursement will be available for our products, including any hormone therapy drug candidates, if approved, or whether the amount of such coverage and reimbursement, if any, will be sufficient to enable us to successfully compete with other products.
Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and certain others by establishing a new Part D to the Medicare program. However, unlike traditional Medicare—which provides coverage for outpatient drugs—coverage under Part D is provided by private insurers operating under contract with CMS. In addition, this legislation provided authority for limiting the number of certain outpatient drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These and future cost-reduction initiatives could decrease the coverage and price that we receive for our products from Medicare, if any, including our hormone therapy drug candidates, if approved, and could significantly harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement under Medicare may result in a similar reduction in payments from private payors.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Affordable Care Act or ACA, became law in the United States. The goal of ACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. Among other measures, ACA increased rebates on manufacturers for certain covered drug products reimbursed by state Medicaid programs. While we cannot predict the full effect that the Affordable Care Act will have on federal reimbursement policies in general or on our business specifically, the Act may result in downward pressure on drug reimbursement, which could negatively affect market acceptance of our products. In addition, we cannot predict whether new proposals will be made or adopted, when they may be adopted, or what impact they may have on us if they are adopted. In that regard, Congress has taken the first step in repealing the funding mechanism for certain aspects of the ACA. If the ACA or parts of it are repealed, it is unclear what impact that would have on drug reimbursements or coverage and it is equally unclear what programs, if any, Congress might enact to replace the repealed portions of the ACA.
The availability of generic products at lower prices than branded products may also substantially reduce the likelihood of reimbursement for branded products, such as our hormone therapy drug candidates, if approved. We expect to experience pricing pressures in connection with the sale of our products generally due to the trend toward managed health care, the increasing influence of health maintenance organizations, and additional legislative proposals. If we fail to successfully secure and maintain adequate coverage and reimbursement for our products or are significantly delayed in doing so, we could have difficulty achieving market acceptance of our products and our business, financial condition, results of operations, and prospects could be harmed.
Failure to obtain regulatory approval outside the U.S. will prevent us from marketing our drug candidateshormone therapy drugs in non- U.S.non-U.S. markets.
We may attemptare presently attempting, through certain partnering relationships, to market certain of our drug candidateshormone therapy drugs in non-U.S. markets. In order toTo market our drug candidateshormone therapy drugs in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited interactions with non-U.S. regulatory authorities, the approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval or clearance. Approval or clearance by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory authorities does not ensure approval by other regulatory authorities in other countries or by the FDA. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval or clearance. If we pursueFor these non-U.S. regulatory approvals, we may not obtain them on a timely basis, if at all. If we pursue non-U.S. regulatory approvals, ourOur failure to receive necessary non-U.S. regulatory approvals to commercialize our drug candidateshormone therapy drugs in a given market could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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In addition, if we seek andby seeking to obtain approval to market our drug candidateshormone therapy drugs in one or more non-U.S. markets, we will be subject to rules and regulations in those markets relating to our product. In some countries, particularly countries of the European Union, each of which has developed its own rules and regulations, pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of regulatory approval for a drug. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidates to other available products. If reimbursement of our drug candidates is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to generate revenues and achieve or sustain profitability with respect to any given market, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Future legislation or regulations may adversely affect reimbursement from government programs
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. More recently, in August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reductions, triggering the legislation’s automatic reduction of several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under the Medicaid program by applying an inflation-based rebate formula to generic drugs that previously only applied to brand name drugs. If we ever obtain regulatory approval and commercialization of anyto market our hormone therapy drugs in one or more non-U.S. markets, we will have additional pharmacovigilance reporting requirements for our products. To the extent that the non-U.S. markets we distribute our products in have different pharmacovigilance reporting requirements than the U.S., there is a risk that the marketing of our drug candidates, these new laws may resultdrugs in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. On December 13, 2016, the President signed into law the 21st Century Cures Act, which, among other things,those countries may increase the typesnumber of clinical trial designs that would be acceptable to support an NDA. It is unclear, at this time, how these provisions will be implemented or whether they would have any effect onadverse events reported for our company.products.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our drug candidates may be. In that regard, and as noted above, Congress has taken the first step in repealing the funding mechanism for certain aspects of the ACA. If the ACA or parts of it are repealed, it is unclear what impact that would have on drug reimbursements or coverage and it is equally unclear what programs, if any, Congress and the Trump Administration might enact and sign into law to replace the repealed portions of the ACA.
Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.
We face an inherent risk of product liability claims as a result of the marketing of our current products and the clinical testing of our hormone therapy drug candidates despite obtaining appropriate informed consents from our clinical trial participants. Additionally, in light of the history of product liability claims related to other hormone replacement therapy products, we will face an even greater risk if we obtain FDA approval and commercializethrough commercialization of our hormone therapy drug candidates in the United States or other additional jurisdictions or if we engage in the clinical testing of proposed new products or commercialize any additional products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing, or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, failures to warn of dangers inherent in the product, negligence, strict liability, or breaches of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our existing products or hormone therapy drug candidates, if approved.drugs. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, product liability claims may result in any of the following:
| ● | the inability to commercialize our products or hormone therapy drug candidates; | |
| ● | difficulty recruiting subjects for clinical trials or withdrawal of these subjects before a trial is completed; |
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| ● | labeling, marketing, or promotional restrictions; | |
| ● | product recalls or withdrawals; | |
| ● | decreased demand for our products or products that we may develop in the future; | |
| ● | loss of revenue; | |
| ● | injury to our reputation; | |
| ● | initiation of investigations by regulators; | |
| ● | costs to defend the related litigation; | |
| ● | a diversion of management’s time and our resources; | |
| ● | substantial monetary awards to trial participants or patients; | |
| ● | exhaustion of any available insurance and our capital resources; and | |
| ● | a decline in our stock price. |
Although we maintain general liability insurance of up to $10 million in the aggregate and clinical trial liability insurance of $10 million in the aggregate for our hormone therapy drugs and drug candidates, this insurance may not fully cover potential liabilities. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, financial condition, results of operations, and prospects.
Our business may be affected by unfavorable publicity or lack of consumer acceptance.
We are highly dependent upon consumer acceptance of the safety and quality of our products, as well as similar products distributed by other companies. Consumer acceptance of a product can be significantly influenced by scientific research or findings, national media attention, and other publicity about product use. A product may be received favorably, resulting in high sales associated with that product that may not be sustainable as consumer preferences change. Future scientific research or publicity could be unfavorable to our industry or any of our particular products and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our consumers as less than favorable or that may question earlier favorable research or publicity could have a material adverse effect on our ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities or otherwise, whether or not accurate, that associates consumption of our product or any other similar product with illness or other adverse effects, or that questions the benefits of our product or a similar product, or that claims that such products do not have the effect intended could have a material adverse effect on our business, reputation, financial condition, or results of operations.
If we use hazardous materials in a manner that causes injury or violates applicable law, we may be liable for damages.
Our research and development activities involve the controlled use of potentially hazardous substances, including chemical, biological, and radioactive materials. In addition, our operations produce hazardous waste products. Federal, state, and local laws and regulations in the United States govern the use, manufacture, storage, handling, and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing, and disposing of these materials (all of which only occur at third-party sites operated by our contractors) comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. We also cannot predict the impact on our business of new or amended environmental laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources, and we do not carry liability insurance covering the use of hazardous materials. If we fail to comply with applicable requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs, or capital expenditures for control equipment or operational changes necessary to achieve or maintain compliance. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, and may adversely affect our business, financial condition, results of operations, and prospects.
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We are subject to extensive and costly government regulation.
The products we currently market, including the vitamins, and the pharmaceutical products we are developing and planning to develop in the future, are subject to extensive and rigorous domestic government regulation, including regulation by the FDA, the Centers for Medicare & Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services, including its Office of Inspector General, the U.S. Department of Justice, the Departments of Defense and Veterans Affairs, to the extent our products are paid for directly or indirectly by those departments, state and local governments, and their respective foreign equivalents. The FDA regulates dietary supplements, cosmetics, and drugs under different regulatory schemes. For example, the FDA regulates the processing, formulation, safety, manufacturing, packaging, labeling, and distribution of dietary supplements and cosmetics under its dietary supplement and cosmetic authority, respectively. The FDA also regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import, and export of pharmaceutical products under various regulatory provisions. If any drug products we develop are tested or marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.
Government regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling products. Our failure to comply with these regulations could result in, by way of example, significant fines, criminal and civil liability, product seizures, recalls, withdrawals, withdrawals of approvals, and exclusion and debarment from government programs. Any of these actions, including the inability of our hormone therapy drug candidates to obtain and maintain regulatory approval, could have a materially adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to additional federal and state laws and regulations relating to our business, and our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.
We are subject to additional health care regulation and enforcement by the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include the following:
Further, the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity can now be found guilty of fraud or false claims under ACA without actual knowledge of the statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other government programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations, and financial condition.
The ACA also imposes new reporting requirements on device and pharmaceutical manufacturers to make annual public disclosures of payments to certain health care providers and physician ownership of their stock by health care providers. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value, or ownership or investment interests that are not reported. Manufacturers were required to begin data collection on August 1, 2013 and were required to report such data to CMS by March 31, 2014.
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In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation, and other remuneration to physicians.
The scope and enforcement of these laws is uncertain and subject to change in the current environment of health care reform, especially in light of the lack of applicable precedent and regulations. We cannot predict the impact on our business of any changes in these laws. Federal or state regulatory authorities may challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations, and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming.
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive pharmaceutical industry depends in large part on our ability to attract and retain highly qualified managerial, scientific, and medical personnel. In order toTo induce valuable employees to remain with us, we have, among other things, provided stock-based compensation that vests over time. The value to employees of stock-based compensation will be significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific, and medical teams may terminate their employment with us on short notice. We do not have employment agreements with a numberseveral of our key employees. As a result, most employees are employed on an at-will basis, which means that any of these employees could leave our employment at any time, with or without notice, and may go to work for a competitor. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results, and financial condition. Our success also depends on our ability to continue to attract, retain, and motivate highly skilled scientific and medical personnel.
Any failure to adequately expand a direct sales force will impede our growth.
We expect to be substantially dependent on a direct sales force to attract new business and to manage customer relationships. We plan to expand our direct sales force and believe that there is significant competition for qualified, productive direct sales personnel with advanced sales skills and technical knowledge. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training, and retaining sufficient direct sales personnel. New and future hires may not become as productive as expected, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets in which we do business. If we are unable to hire and develop sufficient numbers of productive sales personnel our business prospects could suffer.
Other pharmaceutical companies with which we compete for qualified personnel may have greater financial and other resources, different risk profiles, and longer histories than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we offer. If we are unable to continue to attract and retain high-quality personnel, our ability to commercialize drug candidates may be limited.
Our success is tied to our distribution channels.
We sell our prescription prenatal vitamin products and hormone therapy drug products to wholesale distributors and retail pharmacy distributors. During the year ended December 31, 2016, three2018, four customers each generated more than 10% of our total revenues; revenue generated from these threefour customers combined accounted for approximately 41%76% of our total revenue during the year ended December 31, 2016.2018. Our business would be harmed if any of these customers refused to distribute our products or refused to purchase our products on commercially favorable terms to us.
A failure to maintain optimal inventory levels to meet commercial demand for our products could harm our reputation and subject us to financial losses.
Our ability to maintain optimal inventory levels to meet commercial demand depends on the performance of third-party contract manufacturers. In some instances, our products have unique ingredients used under license arrangements. If our manufacturers are unsuccessful in obtaining raw materials, if we are unable to manufacture and release inventory on a timely and consistent basis, if we fail to maintain an adequate level of product inventory, if inventory is destroyed or damaged, or if our inventory reaches its expiration date, patients might not have access to our products, our reputation and brands could be harmed, and physicians may be less likely to recommend our products in the future, each of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Delays in clinical trials are common for many reasons, and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.
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We may experience delays in future clinical trials for our drug candidates. Clinical trials might not begin on time; may be interrupted, delayed, suspended, or terminated once commenced; might need to be redesigned; might not enroll enough patients; or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:
| ● | delays in obtaining regulatory approval to commence a trial; | |
| ● | imposition of a clinical hold following an inspection of clinical trial operations or trial sites by the FDA or other regulatory authorities; | |
| ● | imposition of a clinical hold because of safety or efficacy concerns by the DSMB, FDA, or IRB, or us; | |
| ● | delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites; | |
| ● | delays in obtaining required IRB approval at each site; | |
| ● | delays in identifying, recruiting, and training suitable clinical investigators; | |
| ● | delays in recruiting suitable patients to participate in a trial; | |
| ● | delays in having patients complete participation in a trial or return for post-treatment follow-up; | |
| ● | clinical sites dropping out of a trial to the detriment of enrollment; | |
| ● | time required to add new sites; | |
| ● | delays in obtaining sufficient supplies of clinical trial materials, including suitable API; or | |
| ● | delays resulting from negative or equivocal findings of DSMB for a trial. |
Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Any of these delays in completing future clinical trials could increase our costs, slow down our product development and approval process, and jeopardize our ability to commence product sales and generate revenue from our drug candidates subject to the trial.
We may be required to suspend or discontinue clinical trials because of adverse side effects or other safety risks that could preclude approval of our drug candidates.
Clinical trials may be suspended or terminated at any time for many reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA, or other regulatory authorities because of a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the DSMB or the IRB for a clinical trial. An IRB may also suspend or terminate our clinical trials for failure to protect patient safety or patient rights. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe the clinical trials are not being conducted in accordance with applicable regulatory requirements or present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any proposed product that we develop, the commercial prospects of such proposed product will be harmed and our ability to generate product revenue from any of these proposed products will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations, and prospects significantly.
We rely on third parties to conduct our research and development activities, including our clinical trials, and we may experience delays in obtaining or may be unsuccessful in obtaining regulatory approval for, or in commercializing, our hormone therapy drug candidates if these third parties do not successfully carry out their contractual duties or meet expected deadlines.
We do not have the resources to independently conduct research and development activities. Therefore, we have relied, and plan to continue to rely, on various third-party CROs to conduct our research and development activities and to recruit patients and monitor and manage data for our on-going clinical programs for our hormone therapy drug candidates, as well as for the execution of clinical studies. Although we control only certain aspects of our CROs’ activities, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We cannot assure you that the CROs will conduct the research properly or in a timely manner, or that the results will be reproducible. We and our CROs are required to comply with the FDA’s cGCPs, which are regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable or invalid, and the FDA may require us to perform additional clinical trials before approving our proposed products. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, to evaluate the safety and effectiveness compared to placebo of our hormone therapy drug candidates to a statistically significant degree, our clinical trials will require an adequately large number of test subjects. Any clinical trial that a CRO conducts abroad on our behalf is subject to similar regulation. Accordingly, if our CROs fail to comply with these regulations or recruit enough patients, we may be required to repeat clinical trials, which would delay the regulatory approval process.
In addition, we do not employ the personnel of our CROs, and, except for remedies available to us under our agreements with such organizations, we cannot control whether or not they will devote sufficient time and resources to our on-going clinical and pre-clinical programs. Our CROs may also have relationships with other commercial entities, including one or more of our competitors, for which they may also be conducting clinical studies or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised because of the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our hormone therapy drug candidates that we seek to develop. As a result, our financial results and the commercial prospects for our hormone therapy drug candidates that we seek to develop could be harmed, our costs could increase, and our ability to generate revenue could be delayed or end.
We typically engage one or more CROs on a project-by-project basis for each study or trial. While we have developed and plan to maintain our relationships with CROs that we have previously engaged, we also expect to enter into agreements with other CROs to obtain additional resources and expertise to accelerate our progress with regard to on-going clinical programs and, specifically, the compilation of clinical trial data for submission with an NDA for each of our hormone therapy drug candidates. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially affect our ability to meet our desired clinical development timelines and can increase our costs significantly. Although we try to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, results of operations, or prospects.
Our ability to utilize net operating loss carryforwards may be limited.
As of December 31, 2016,2018, we had federal net operating loss carryforwards, or NOLs, of approximately $268.2 million available$481.4 million. Subject to offset future taxable income through 2035. Theseapplicable limitations, these NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable.
Section 382 of the Internal Revenue Code of 1986, as amended, imposes limitations on a corporation’s ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event thatIf an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years. We may be found to have experienced an ownership change under Section 382 as a resultbecause of events in the past or the issuance of shares of our common stock in the future. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382,382.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. federal tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 34 percent to 21 percent and imposing new restrictions on the use of NOLs. The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Management assessed the valuation allowance analyses with respect to our NOLs as affected by various aspects of the Tax Act and determined that a full valuation allowance continues to be appropriate. Furthermore, the Tax Act limits the NOL carryover deduction in a taxable year to the lesser of the NOL carryforward or 80 percent of the taxpayer’s taxable income (before considering any deduction on account of such NOLs), which may result in expiration of a portion ofrestrict our ability to offset future taxable income with NOLs before utilization.and increase our future federal income taxes otherwise payable.
Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local agencies, or how judicial authorities apply tax laws.
In connection with the products we sell and intend to sell, we calculate, collect, and remit various federal, state, and local taxes, surcharges and regulatory fees (“tax” or “taxes”) to numerous federal, state and local governmental authorities. In addition, we incur and pay state and local taxes and fees on purchases of goods and services used in our business.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In many cases, the application of tax laws (including the recently enacted Tax Act) is uncertain and subject to differing interpretations, especially when evaluated against new technologies and services.
If we have incorrectly described, disclosed, calculated, assessed, or remitted amounts that were due to governmental authorities, we could be subject to additional taxes, fines, penalties, or other adverse actions, which could materially impact our business, results of operations, and financial condition.
Our success depends on how efficiently we respond to changing consumer preferences and demand.
Our success depends, in part, on our ability to anticipate and respond to changing consumer trends and preferences. We may not be able to respond in a timely or commercially appropriate manner to these changes. Our failure to accurately predict these trends could negatively impact our inventory levels, sales, and consumer opinion of us as a source for the latest product. The success of our new product offerings depends upon a number ofseveral factors, including our ability to achieve the following:
| ● | accurately anticipate customer needs; | |
| ● | innovate and develop new products; | |
| ● | successfully commercialize new products in a timely manner; | |
| ● | competitively price our products in the market; | |
| ● | procure and maintain products in sufficient volumes and in a timely manner; and | |
| ● | differentiate our product offerings from those of our competitors. |
If we do not introduce new products, make enhancements to existing products, or maintain the appropriate inventory levels to meet customers’ demand in a timely manner, our business, results of operations, and financial condition could be materially and adversely affected.
We may initiate product recalls or withdrawals or may be subject to regulatory enforcement actions that could negatively affect our business.
We may be subject to product recalls, withdrawals, or seizures if any of the products we formulate, manufacture, or sell are believed to cause injury or illness or if we are alleged to have violated governmental regulations in the manufacture, labeling, promotion, sale, or distribution of any of our products. A recall, withdrawal, or seizure of any of our products could materially and adversely affect consumer confidence in our brands and lead to decreased demand for our products. In addition, a recall, withdrawal, or seizure of any of our products would require significant management attention, would likely result in substantial and unexpected expenditures, and could materially and adversely affect our business, financial condition, and results of operations.
We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
As of December 31, 2016,2018, we had 159 full time241 employees. As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, financial, and other resources and, depending on our commercialization strategy, we may further expand our employee base for sales and marketing, and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate, and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from their day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional drug candidates. If we are unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to increase revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our hormone therapy drug candidates, if approved,drugs and compete effectively will depend, in part, on our ability to effectively manage any future growth in our organization.
37We may not be able to maintain effective and efficient information systems or properly safeguard our information systems.
Our operations are dependent on uninterrupted performance of our information systems. Failure to maintain reliable information systems, disruptions in our existing information systems or the implementation of new systems could cause disruptions in our business operations, including violations of patient privacy and confidentiality requirements and other regulatory requirements, increased administrative expenses and other adverse consequences.
In addition, information security risks have generally increased in recent years because of new technologies and the increased activities of perpetrators of cyber-attacks resulting in the theft of protected health, business, or financial information. Despite our layered security controls, experienced computer programmers and hackers may be able to penetrate our information systems and misappropriate or compromise sensitive patient or personnel information or proprietary or confidential information, create system disruptions or cause shutdowns. They also may be able to develop and deploy viruses, worms and other malicious software programs that disable our systems or otherwise exploit any security vulnerabilities. Outside parties may also attempt to fraudulently induce employees to take actions, including the release of confidential or sensitive information or to make fraudulent payments, through illegal electronic spamming, phishing or other tactics.
A failure in or breach of our information systems because of cyber-attacks or other tactics could disrupt our business, result in the release or misuse of protected health information, or PHI, confidential or proprietary business information or financial loss, damage our reputation, increase our administrative expenses, and expose us to additional risk of liability to federal or state governments or individuals. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or potential customers and disruption of our operations. In addition, breaches of our security measures and the unauthorized dissemination of patient healthcare and other sensitive information, proprietary or confidential information about us or other third-parties could expose such persons’ private information to the risk of financial or medical identity theft or expose us or such persons to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. Any of these disruptions or breaches of security could have a material adverse effect on our business, financial condition, and results of operations.
Our employees and business partners may not appropriately secure and protect confidential information in their possession.
Each of our employees and business partners is responsible for the security of the information in our systems or under our control and to ensure that private and financial information is kept confidential. Should an employee or business partner not follow appropriate security measures, including those related to cyber threats or attacks or other tactics, as well as our privacy and security policies and procedures, the improper release of personal information, including PHI, or confidential business or financial information, or misappropriation of assets could result. The release of such information or misappropriation of assets could have a material adverse effect on our business, financial condition, and results of operations.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with federal and state health care fraud and abuse laws and regulations, to report financial information or data accurately, or to disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course ofduring clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Risks Related to our Intellectual Property
Another party could develop hormone therapy products and obtain FDA regulatory exclusivity in the United States before we do, potentially preventing our ability to commercialize our hormone therapy drug candidates and other products in development.
We plan to seek to obtain market exclusivity for our hormone therapy drug candidates and any other drug candidates we develop in the future. To the extent that patent protection is not available or has expired, FDA marketing exclusivity may be the only available form of exclusivity available for these proposed products. Marketing exclusivity can delay the submission or the approval of certain marketing applications. Potentially competitive products may also be seeking marketing exclusivity and may be in various stages of development, including some more advanced than us. We cannot predict with certainty the timing of FDA approval or whether FDA approval will be granted, nor can we predict with certainty the timing of FDA approval for competing products or whether such approval will be granted. It is possible that competing products may obtain FDA approval with marketing exclusivity before we do, which could delay our ability to submit a marketing application or obtain necessary regulatory approvals, result in lost market opportunities with respect to our hormone therapy drug candidates, and materially adversely affect our business, financial condition, and results of operations.
If our efforts to protect the proprietary nature of the intellectual property covering our hormone therapy drug candidates and other products are not adequate, we may not be able to compete effectively in our market.
Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent positions as well as our ability to maintain adequate protection of other intellectual property for our hormone therapy drug candidates and other products. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The patent positions of pharmaceutical companies are highly uncertain. The legal principles applicable to patents are in transition due to changing court precedent and legislative action, and we cannot be certain that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future. Changes in patent laws in the United States, such as the America Invents Act of 2011, may affect the scope, strength, and enforceability of our patent rights or the nature of proceedings that may be brought by us related to our patent rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets.
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These risks include the possibility of the following:
| ● | the patent applications that we have filed may fail to result in issued patents in the United States or in foreign countries; | ||
| ● | patents issued or licensed to us or our partners may be challenged or discovered to have been issued on the basis of insufficient, incomplete, or incorrect information, and thus held to be invalid or unenforceable; | ||
| ● | the scope of any patent protection may be too narrow to exclude competitors from developing or designing around these patents; | ||
| ● | we or our licensors were not the first to make the inventions covered by each of our issued patents and pending patent applications; | ||
| ● | we or our licensors may not have been the first inventors to file patent applications for these technologies in the United States or were not the first to file patent applications directed to these technologies abroad; | ||
| ● | we may fail to comply with procedural, documentary, fee payment, and other similar provisions during the patent application process, which can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights; | ||
| ● | future drug candidates may not be patentable; | ||
| ● | others may claim rights or ownership | ||
| ● | delays in development, testing, clinical trials, and regulatory review may reduce the period | ||
| ● | we may fail to timely apply for patents on our technologies or products. | ||
While we apply for patents covering our technologies and products, as we deem appropriate, many third parties may already have filed patent applications or have received patents in our areas of product development. These entities’ applications, patents, and other intellectual property rights may conflict with patent applications to which we have rights and could prevent us from obtaining patents or could call into question the validity of any of our patents, if issued, or could otherwise adversely affect our ability to develop, manufacture, or commercialize our hormone therapy drug candidates. In addition, if third parties file patent applications in the technologies that also claim technology to which we have rights, we may have to participate in interference, derivation, or other proceedings with the USPTO or foreign patent regulatory authorities to determine our rights in the technologies, which may be time-consuming and expensive. Moreover, issued patents may be challenged in the courts or in post-grant proceedings at the USPTO, or in similar proceedings in foreign countries. These proceedings may result in loss of patent claims or adverse changes to the scope of the claims.
If we, our licensors, or our strategic partners fail to obtain and maintain patent protection for our products, or our proprietary technologies and their uses, companies may be dissuaded from collaborating with us. In such event, our ability to commercialize our hormone therapy drug candidates or future drug candidates, if approved,drugs may be threatened, we could lose our competitive advantage, and the competition we face could increase, all of which could adversely affect our business, financial condition, results of operations, and prospects.
In addition, mechanisms exist in much of the world permitting some form of challenge by generic drug marketers to our patents prior to,before, or immediately following, the expiration of any regulatory exclusivity, and generic companies are increasingly employing aggressive strategies, such as “at risk” launches to challenge relevant patent rights.
Our business also may rely on unpatented proprietary technology, know-how, and trade secrets. If the confidentiality of this intellectual property is breached, it could adversely impact our business.
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If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent or delay us from developing or commercializing our drug candidates.
Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and products. We are aware of numerous third-party U.S. and non-U.S. issued patents and pending applications that exist in the areas of hormone therapy, including compounds, formulations, treatment methods, and synthetic processes, which may be applied towards the synthesis of hormones. Patent applications are confidential when filed and remain confidential until publication, approximately 18 months after initial filing, while some patent applications remain unpublished until issuance. As such, there may be other third-party patents and pending applications of which we are currently unaware with claims directed towards composition of matter, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our products or drug candidates. Therefore, we cannot ever know with certainty the nature or existence of every third-party patent filing. We cannot provide assurances that we or our partners will be free to manufacture or market our drug candidates as planned or that we or our licensors’ and partners’ patents will not be opposed or litigated by third parties. If any third-party patent was held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture, or methods of treatment related to the use or manufacture of any of our drug candidates, the holders of any such patent may be able to block our ability to develop and commercialize the applicable drug candidate unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. There can be no assurances that we will be able to obtain a license to such patent on favorable terms or at all. Failure to obtain such license may have a material adverse effect on our business.
There is a substantial amount of litigation involving intellectual property in the pharmaceutical industry generally. If a third party asserts that we infringe its patents or other proprietary rights, we could face a number ofmany risks that could adversely affect our business, financial condition, results of operations, and prospects, including the following:
| ● | infringement and other intellectual property claims, which would be costly and time-consuming to defend, whether or not we are ultimately successful, which in turn could delay the regulatory approval process, consume our capital, and divert management’s attention from our business; | |
| ● | substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe a competitor’s patent or other proprietary rights; | |
| ● | a court prohibiting us from selling or licensing our technologies or future products unless the third party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do; | |
| ● | if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license; or | |
| ● | redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditures and time. |
We are party from time to timetime-to-time to legal proceedings relating to our intellectual property, and third parties in the future may file claims asserting that our technologies, processes, or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or our strategic partners or against the licensors of technology licensed to us, or whether those claims will harm our business. In addition, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. If we or our partners were to face infringement claims or challenges by third parties relating to our drug candidates, an adverse outcome could subject us to significant liabilities to such third parties, and force us or our partners to curtail or cease the development of some or all of our drug candidates, which could adversely affect our business, financial condition, results of operations, and prospects.
We have submitted, and intend to submit NDAs for our hormone therapy drug candidates, assuming that the clinical data justify submission, under Section 505(b)(2), which was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Section 505(b)(2) permits the filing of an NDA when at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2) NDA with respect to any patents for the approved product on which the application relies that are listed in the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book. Specifically, the applicant must certify for each listed patent that (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (iv) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product. A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification.
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If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA for 30 months beginning on the date the patent holder receives notice, or until a court deems the patent unenforceable, invalid or not infringed, whichever is earlier. The court also has the ability tocan shorten or lengthen the 30 month30-month period if either party is found not to be reasonably cooperating in expediting the litigation. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its product only to be subject to significant delay and patent litigation before its product may be commercialized. Alternatively, if the NDA or relevant patent holder does not file a patent infringement lawsuit within the specified 45 day45-day period, the FDA may approve the Section 505(b)(2) application at any time.
If we cannot certify that all of the patents listed in the Orange Book for the approved products referenced in the NDAs for each of our hormone therapy drug candidates have expired, we will be compelled to include a Paragraph IV certification in the NDA for such drug candidate. Our inability to certify that all of the patents listed in the FDA’s Orange Book for approved products referenced in the NDAs for each of our hormone therapy drug candidates could have significant adverse effects on the timing for obtaining approval of our hormone therapy drug candidates.
We may be required to file lawsuits or take other actions to protect or enforce our patents or the patents of our licensors, which could be expensive and time-consuming.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.
In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents, or those of our licensors, do not cover the technology in question or on other grounds. An adverse result in any litigation or defense proceedings could put one or more of our patents, or those of our licensors, at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications, or those of our licensors, at risk of not issuing. Moreover, we may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries in which the laws may not protect those rights as fully as in the United States or in those countries in which we do not file national phase patent applications. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, if securities analysts or investors perceive public announcements of the results of hearings, motions, or other interim proceedings or developments to be negative, the price of our common stock could be adversely affected. The occurrence of any of the above could adversely affect our business, financial condition, results of operations, and prospects.
If we are unable to protect the confidentiality of certain information, the value of our products and technology could be materially adversely affected.
We also rely on trade secrets, know-how, and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, independent contractors, suppliers, and collaborators. We cannot, however, ensure that these protective arrangements will be honored by third parties, and we may not have adequate remedies if these arrangements are breached. In addition, enforcement of claims that a third party has illegally obtained and is using trade secrets, know-how, or technological advancements is expensive, time-consuming, and uncertain. Non-U.S. courts are sometimes less willing than U.S. courts to protect this information. Moreover, our trade secrets, know-how, and technological advancements may otherwise become known or be independently developed by competitors in a manner providing us with no practical recourse against the competing parties. If any such events were to occur, they could adversely affect our business, financial condition, results of operations, and prospects.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers or of other third parties with whom we have obligations of confidentiality.
As is common in the pharmaceutical industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Such claims may lead to material costs for us, or an inability to protect or use valuable intellectual property rights, which could adversely affect our business, financial condition, results of operations, and prospects.
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Risks Related to Ownership of Our Common Stock
The market price of our common stock may be highly volatile, and you could lose all or part of your investment.
The trading price of our common stock on NYSE MKTNasdaq is likely to be volatile. This volatility may prevent you from being able to sell your shares at or above the price you paid for your shares. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include the following:
| ● | ||
| changes in laws or regulations applicable to our products or proposed products, including clinical trial requirements for approvals; | ||
| ● | unanticipated serious safety concerns related to the use of our hormone therapy | |
| ● | a decision to initiate a clinical trial, not to initiate a clinical trial, or to terminate an existing clinical trial; | |
| ● | adverse results or delays in clinical trials; | |
| ● | the inability to obtain adequate clinical supply for our hormone therapy drug candidates or the inability to do so at acceptable prices; | |
| ● | adverse regulatory decisions; | |
| ● | the introduction of new products or technologies offered by us or our competitors; | |
| ● | the effectiveness of our or our potential strategic partners’ commercialization efforts; | |
| ● | developments concerning our sources of manufacturing supply and any commercialization strategic partners; | |
| ● | the perception of the pharmaceutical industry by the public, legislatures, regulators, and the investment community; | |
| ● | disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; | |
| ● | the inability to effectively manage our growth; | |
| ● | actual or anticipated variations in quarterly operating results; | |
| ● | the failure to meet or exceed the estimates and projections of the investment community; | |
| ● | the overall performance of the U.S. equity markets and general political and economic conditions; | |
| ● | announcements of significant acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors; | |
| ● | additions or departures of key scientific or management personnel; | |
| ● | adverse market reaction to any indebtedness we may incur or securities we may issue in the future; | |
| ● | sales of our common stock by us or our stockholders in the future; | |
| ● | significant lawsuits, including patent or stockholder litigation; | |
| ● | changes in the market valuations of similar companies; |
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| ● | the trading volume of our common stock; | |
| ● | increases in our common stock available for sale upon expiration of lock-up agreements; | |
| ● | effects of natural or man-made catastrophic events or other business interruptions; and | |
| ● | other events or factors, many of which are beyond our control. |
In addition, the stock market in general and the stock of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of December 31, 2016,2018, our executive officers, directors, holders of 5% or more of our stock, and their affiliates beneficially owned approximately 73%69% of our common stock on an as converted basis. These stockholders may be able to determine the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
If we fail to maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required annually to deliver a report that assesses the effectiveness of our internal control over financial reporting and our independent registered public accounting firm is required annually to deliver an attestation report on the effectiveness of our internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting or if our independent auditors are unwilling or unable to provide us with an attestation report on the effectiveness of internal control over financial reporting for future periods as required by Section 404 of the Sarbanes-Oxley Act, we may not be able to produce accurate financial statements, and investors may therefore lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which might cause our stock price and trading volume to decline.
We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain any future earnings for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will be limited to the value of their stock.
Some provisions of our charter documents and Nevada law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our articles of incorporation and bylaws, as well as certain provisions of Nevada law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if an acquisition would benefit our stockholders, and could also make it more difficult to remove our current management. These provisions in our articles of incorporation and bylaws include the following:
| ● | authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; |
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| ● | prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and | |
| ● | advance notice provisions in connection with stockholder proposals that may prevent or hinder any attempt by our stockholders to bring business to be considered by our stockholders at a meeting or replace our board of directors. |
In addition, we are subject to Nevada’s Combination with Interested Stockholders statute (Nevada Revised Statute Sections 78.411 - 78.444), which prohibits an “interested stockholder” from entering into a “combination” with a company, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) 10% or more of the corporation’s capital stock entitled to vote.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. |
Our corporate headquarters is located in Boca Raton, Florida, where we lease 33,124 square feet of office space pursuant to a non-cancelable operating lease that commenced on July 1, 2013 and was subsequently amended on February 18, 2015, April 26, 2016 and October 4, 2016 to lease additional administrative space. The lease expires on October 31, 2021. The primary functions performed at this location are executive, administrative, accounting, treasury, marketing, and human resources.
In October 2018, we entered into a lease for new corporate offices in Boca Raton, Florida. The lease includes 56,212 rentable square feet, or full premises, of which 7,561 has commenced in 2018 and the remaining 48,651 square feet will commence no earlier than June 1, 2019, or full premises commencement date. The lease will expire 11 years after full premises commencement date, unless terminated earlier in accordance with the terms of the lease. We believe that our current facility is in good working order and isthat our current facility and new corporate headquarters are capable of supporting our operations for the foreseeable future.
| Item 3. | Legal Proceedings |
We have been informed by the staff, or the Staff, of the Securities and Exchange Commission that the Staff is conducting a formal investigation concerning whether certain of our communications during 2017 regarding TX-004HR may have violated Regulation FD. We are cooperating with the Staff in connection with the investigation. Any determination that our actions violated Regulation FD could result in penalties or other remedies being imposed. While we believe that any such penalties and other remedies would be immaterial from a financial perspective, no assurance can be made about the ultimate outcome of the investigation, and there can be no assurance that any such penalties and remedies would not have a material adverse effect on our business.
From time to time, we are involved in litigation and proceedings in the ordinary course of our business. We are not currently involved in any legal proceeding that we believe would have a material effect on our business or financial condition.
| Item 4. | Mine Safety Disclosures |
Not applicable.
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| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Market Information on Common Stock
Since April 23, 2013,October 9, 2017, our common stock has been listed on the NYSE MKTNasdaq Global Select Market of the Nasdaq Stock Market LLC under the symbol “TXMD.” PriorFrom April 23, 2013 to October 6, 2017, our common stock was listed on the NYSE American under the symbol “TXMD.” Before that time, our common stock was quoted on the OTCQB. The following table sets forth for the periods indicated the high and low sales prices of our common stock on the NYSE MKT.
| High | Low | |||||||
| 2016 | ||||||||
| Fourth Quarter | $ | 7.48 | $ | 4.39 | ||||
| Third Quarter | $ | 8.72 | $ | 6.18 | ||||
| Second Quarter | $ | 9.29 | $ | 6.20 | ||||
| First Quarter | $ | 10.17 | $ | 5.69 | ||||
| 2015 | ||||||||
| Fourth Quarter | $ | 11.26 | $ | 5.18 | ||||
| Third Quarter | $ | 8.83 | $ | 5.29 | ||||
| Second Quarter | $ | 8.60 | $ | 5.63 | ||||
| First Quarter | $ | 6.75 | $ | 4.00 |
On February 21, 2017,15, 2019, there were approximately 231208 record holders and as of January 30, 2017,February 8, 2019, there were approximately 22,73524,155 beneficial owners of our common stock.
Dividends
Historically, we have not paid dividends on our common stock, and we currently do not intend to pay any dividends on our common stock in the foreseeable future. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of directors. In addition, the Credit Agreement contains covenants that limit our ability to pay dividends or make other distributions on our common stock.
Performance Graph
The following line graph compares cumulative total shareholder return for the five years ended December 31, 20162018 for (i) our common stock; (ii) NASDAQNasdaq Pharmaceutical Index; and (iii) NASDAQNasdaq Stock Market.Market (U.S. companies). The graph assumes $100 invested on December 31, 20112013 and includes reinvestment of dividends. Measurement points are at December 31, 2013 and the last trading day of the fiscal years ended December 31, 2011, 2012, 2013, 2014, 2015, 2016, 2017, and 2016.2018. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
The following line graph compares cumulative total shareholder return for the five years ended December 31, 2018 for (i) our common stock; (ii) Nasdaq Pharmaceutical Index; and (iii) Nasdaq Stock Market (U.S. companies). The graph assumes $100 invested on December 31, 2013 and includes reinvestment of dividends. Measurement points are December 31, 2013 and the last trading day of the fiscal years ended December 31, 2018, 2017, 2016, 2015, and 2014 and each of the following quarters ended therein. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
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The following line graph compares cumulative total shareholder return for the period beginning when our common stock became listed on the NYSE MKT exchange (April 23, 2013) and ended December 31, 2016 for (i) our common stock; (ii) NASDAQ Pharmaceutical Index; and (iii) NASDAQ Stock Market. The graph assumes $100 invested on April 23, 2013 and includes reinvestment of dividends. Measurement points are April 23, 2013 and the last trading day of the fiscal years ended December 31, 2016, 2015, 2014 and 2013 and each of the following quarters ended therein beginning with the quarter ended June 30, 2013. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
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The performance graphs shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. The performance graphs will not be deemed incorporated by reference into any filing of our company under the Exchange Act or the Securities Act.
| Item6. | Selected Financial Data |
The following table sets forth selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report. The consolidated statements of operations for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016 and the consolidated balance sheet data as of December 31, 20162018 and 20152017 are derived from our audited consolidated financial statements included in this Annual Report. The consolidated statements of operations for the years ended December 31, 20132015 and 2012,2014, and the consolidated balance sheet data as of December 31, 2014, 2013,2016, 2015, and 2012,2014, are derived from our audited consolidated financial statements not included in this Annual Report.
THERAPEUTICSMD, INC. AND SUBSIDIARIES
(in thousands, except per share data)
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||||
| Revenue, net | $ | 19,356 | $ | 20,143 | $ | 15,026 | $ | 8,776 | $ | 3,818 | ||||||||||
| Cost of goods sold | 4,185 | 4,506 | 3,672 | 1,960 | 1,348 | |||||||||||||||
| Gross profit | 15,171 | 15,637 | 11,354 | 6,816 | 2,470 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Sales, general, and administration | 51,348 | 28,721 | 22,124 | 19,015 | 14,070 | |||||||||||||||
| Research and development | 53,943 | 72,043 | 43,219 | 13,551 | 4,492 | |||||||||||||||
| Depreciation and amortization | 133 | 63 | 52 | 58 | 56 | |||||||||||||||
| Total operating expense | 105,424 | 100,827 | 65,395 | 32,624 | 18,618 | |||||||||||||||
| Operating loss | (90,253) | (85,190 | ) | (54,041 | ) | (25,808 | ) | (16,148 | ) | |||||||||||
| Other income (expense), net | 378 | 113 | (176 | ) | (2,611 | ) | (18,972 | ) | ||||||||||||
| Net loss | $ | (89,875 | ) | $ | (85,077 | ) | $ | (54,217 | ) | $ | (28,419 | ) | $ | (35,120 | ) | |||||
| Net loss per share, basic and diluted | $ | (0.46 | ) | $ | (0.49 | ) | $ | (0.36 | ) | $ | (0.22 | ) | $ | (0.38 | ) | |||||
Weighted average number of common shares outstanding, basic and diluted | 196,088 | 173,174 | 149,727 | 127,570 | 91,630 | |||||||||||||||
| Consolidated Balance Sheet Data (at end of period) | ||||||||||||||||||||
| Total assets | $ | 142,472 | $ | 73,729 | $ | 59,079 | $ | 62,016 | $ | 5,926 | ||||||||||
| Total liabilities | $ | 14,983 | $ | 10,666 | $ | 10,690 | $ | 7,318 | $ | 7,359 | ||||||||||
| Total stockholders’ equity (deficit) | $ | 127,489 | $ | 63,063 | $ | 48,389 | $ | 54,698 | $ | (1,433 | ) | |||||||||
| Other Data: | ||||||||||||||||||||
| Capital expenditures (for the period) | $ | 1,241 | $ | 584 | $ | 617 | $ | 480 | $ | 273 | ||||||||||
| Working capital (at the end of period) | $ | 124,428 | $ | 60,014 | $ | 45,545 | $ | 52,085 | $ | 1,015 | ||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||
| Revenue, net | $ | 16,099 | $ | 16,778 | $ | 19,356 | $ | 20,143 | $ | 15,026 | |||||||||
| Cost of goods sold | 2,737 | 2,637 | 4,185 | 4,506 | 3,672 | ||||||||||||||
| Gross profit | 13,362 | 14,141 | 15,171 | 15,637 | 11,354 | ||||||||||||||
| Operating expenses: | |||||||||||||||||||
| Sales, general, and administration | 115,989 | 57,703 | 51,348 | 28,721 | 22,124 | ||||||||||||||
| Research and development | 27,299 | 33,853 | 53,943 | 72,043 | 43,219 | ||||||||||||||
| Depreciation and amortization | 294 | 213 | 133 | 63 | 52 | ||||||||||||||
| Total operating expense | 143,582 | 91,769 | 105,424 | 100,827 | 65,395 | ||||||||||||||
| Operating loss | (130,220 | ) | (77,628 | ) | (90,253 | ) | (85,190 | ) | (54,041 | ) | |||||||||
| Other (expense) income, net | (2,397 | ) | 703 | 378 | 113 | (176 | ) | ||||||||||||
| Net loss | $ | (132,617 | ) | $ | (76,925 | ) | $ | (89,875 | ) | $ | (85,077 | ) | $ | (54,217 | ) | ||||
| Net loss per share, basic and diluted | $ | (0.59 | ) | $ | (0.37 | ) | $ | (0.46 | ) | $ | (0.49 | ) | $ | (0.36 | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | 225,026 | 205,523 | 196,088 | 173,174 | 149,727 | ||||||||||||||
| Consolidated Balance Sheet Data (at end of period) | |||||||||||||||||||
| Total assets | $ | 211,984 | $ | 143,230 | $ | 142,472 | $ | 73,729 | $ | 59,079 | |||||||||
| Total liabilities | $ | 114,460 | $ | 13,321 | $ | 14,983 | $ | 10,666 | $ | 10,690 | |||||||||
| Total stockholders’ equity | $ | 97,524 | $ | 129,909 | $ | 127,489 | $ | 63,063 | $ | 48,389 | |||||||||
| Other Data: | |||||||||||||||||||
| Capital expenditures (for the period) | $ | 1,322 | $ | 827 | $ | 1,241 | $ | 584 | $ | 617 | |||||||||
| Working capital (at the end of period) | $ | 145,700 | $ | 126,233 | $ | 124,428 | $ | 60,014 | $ | 45,545 | |||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis in conjunction with the information set forth under “Selected Consolidated Financial and Other Data” and our consolidated financial statements and the notes to those financial statements included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. See “Statement Regarding Forward-Looking Information.” Our actual results may differ materially from those contained in or implied by any forward-looking statements as a result of various factors, including, but not limited to, the risks and uncertainties described under “Risk Factors” elsewhere in this Annual Report.
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Company Overview
We are a women’s health carehealthcare company focused on creating and commercializing innovative products targeted exclusivelyto support the lifespan of women and championing awareness of women’s healthcare issues, specifically, for pregnancy prevention, pregnancy, childbirth, nursing, pre-menopause, and menopause. At TherapeuticsMD, we combine entrepreneurial spirit, clinical expertise, and business leadership to develop and commercialize health solutions that enable new standards of care for women. Currently, we are focused on pursuing the regulatory approvals and pre-commercialization activities necessary for commercialization of ourOur solutions range from advanced hormone therapy pharmaceutical products. Our drug candidates that have completed clinical trials are designedproducts to alleviatepatient-controlled, long-acting contraceptive. We also manufacture and distribute branded and generic prescription prenatal vitamins under the symptoms ofvitaMedMD® and reduce the health risks resulting from menopause-related hormone deficiencies, including hot flashes, osteoporosis and vaginal discomfort. We are developing these hormone therapy drug candidates, which contain estradiol and progesterone alone or in combination, with the aim of demonstrating clinical efficacy at lower doses, thereby enabling an enhanced side effect profile compared with competing products. BocaGreenMD® brands.
With our SYMBODA™ technology, we are developing and commercializing advanced hormone therapy pharmaceutical products to enable delivery of bio-identical hormones through a variety of dosage forms and administration routes. In addition, we manufactureOur track record of commercialization allows us to efficiently leverage and distribute brandedgrow our marketing and generic prescription prenatal vitamins, as well as over-the-counter, or OTC, iron supplements.sales organization to commercialize our recently approved products.
Research and Development – Overview
We have obtainedDuring 2018, the FDA acceptance of our IND applications to conduct clinical trials for five of our proposed hormone therapy drug products: TX-001HR, our oral combination of progesterone and estradiol; TX-002HR, our oral progesterone alone; TX-003HR, our oral estradiol alone; and TX-004HR, our applicator-free vaginal estradiol softgel with estradiol alone and TX-006HR our combination estradiol and progesterone product in a topical cream form. Our IND for TX-003HR is currently inactive.
We have obtained U.S. Food and Drug Administration, or FDA, acceptanceapproval of our Investigational New Drug, or IND, applicationsdrugs has transitioned our company from predominately focused on conducting research and development to conduct clinical trials for five ofone focused on commercializing our hormone therapy drug candidates.drugs. In December 2016,July 2018, we announced positive top-line results from thelaunched our recently completed the REPLENISH Trial, our phase 3 clinical trial of TX-001HR, our bio-identical hormone therapy combination of 17ß- estradiol and progesterone in a single, oral softgel drug candidate,FDA approved product, IMVEXXY® (estradiol vaginal inserts) for the treatment of moderate to severe vasomotor symptoms, or VMS, due to menopause in post-menopausal women with an intact uterus. In December 2015, we completed the REJOICE Trial, our phase 3 clinical of TX-004HR, our applicator-free vaginal estradiol softgel drug candidate for the treatment of moderate to severemoderate-to-severe dyspareunia (vaginal pain duringassociated with sexual intercourse)activity), a symptom of vulvar and vaginal atrophy, or VVA, due to menopause. We are also focused on commercialization activities necessary for launch of BIJUVA™ and ANNOVERA™. BIJUVA™ is our hormone therapy combination of bio-identical 17ß-estradiol and bio-identical progesterone in post-menopausala single, oral softgel capsule, for the treatment of moderate-to-severe vasomotor symptoms, or VMS, due to menopause in women with a uterus, which was approved by the FDA on October 28, 2018. ANNOVERA™ (segesterone acetate/ethinyl estradiol vaginal liningssystem), is the first and only patient-controlled, procedure-free, reversible prescription contraceptive that do not receive enough estrogen.can prevent unintended pregnancy for up to a full year, which was approved by the FDA on August 10, 2018. On July 7, 2016,30, 2018, we entered into an exclusive license agreement, or the Population Council License Agreement, with the Population Council, Inc., or the Population Council, to commercialize ANNOVERA™ in the U.S. In addition, on July 30, 2018, we entered into a license and supply agreement with Knight Therapeutics Inc., or Knight, pursuant to which we granted Knight an exclusive license to commercialize IMVEXXY® and BIJUVA™ in Canada and Israel.
Product Portfolio
We are focused on activities necessary for commercialization of IMVEXXY®, BIJUVA™ and ANNOVERA™. We continue to manufacture and distribute our prescription product lines, consisting of branded prenatal vitamins under vitaMedMD® and authorized generic formulations of some of our prescription prenatal vitamin products under BocaGreenMD®. All of our prenatal vitamins are gluten-, sugar-, and lactose-free. A prenatal vitamin option that is both vegan and kosher is also available for women with special dietary needs. We believe our product attributes result in greater consumer acceptance and satisfaction than competitive products while offering the highest quality and patented ingredients.
TX-001HR: BIJUVA™
We submitted athe New Drug Application, or NDA, for all three doses of TX-004HR that were evaluated inTX-001HR to the REJOICE Trial. InFDA on December 28, 2017. On October 28, 2018, the fourth quarter of 2016 we submitted an IND for TX-006HR, our combination estradiolFDA approved BIJUVA™ (estradiol and progesterone drug candidate in a topical cream form,progesterone) capsules, 1 mg/100 mg, the first and intend to commence phase 1 clinical trials of this drug candidate in 2017. In July 2014, we suspended enrollment in the SPRY Trial, our phase 3 clinical trial for TX-002HR, our oral progesterone alone drug candidate, and, in October 2014, we stopped the trial in order to update the phase 3 protocol based on discussions with the FDA. We have currently suspended further development of this drug candidate to prioritize our leading drug candidates. We have no current plans to conduct clinical trials for TX-003HR, our oral estradiol alone drug candidate, and the IND for this drug candidate is currently inactive.
TX-001HR
TX-001HR is ouronly FDA-approved bio-identical hormone therapy combination of 17ß- estradiol and progesterone in a single, oral softgel drug candidatecapsule for the treatment of moderate to severemoderate-to-severe VMS due to menopause including hot flashes, night sweats and sleep disturbances in post-menopausal women with an intacta uterus. The hormone therapy drug candidate is bioidentical to – or havingestrogen and progesterone in BIJUVA™ have the same chemical and molecular structure as - the hormones that are naturally occurproduced in a woman’s body, namelybody. With the approval of BIJUVA™, the FDA required a post-approval commitment to further develop and validate our in-vitro dissolution method to show how BIJUVA™ is released from the capsule in an in-vitro setting for quality control assessments. The development of this method and validation were completed and submitted to FDA as required in our approval.
TX-004HR: IMVEXXY®
On May 30, 2018, we announced that the FDA had approved the 4 μg and 10 μg doses of IMVEXXY® (estradiol vaginal inserts) for the treatment of moderate-to-severe dyspareunia (vaginal pain associated with sexual activity), a symptom of VVA, due to menopause. The 4-μg formulation of IMVEXXY® represents the lowest FDA-approved dose of vaginal estradiol available. IMVEXXY® 10-μg became available for commercial distribution in late July 2018 and progesterone,both doses were commercially available by September 2018.
As part of the FDA’s approval of IMVEXXY®, we have committed to conduct a post-approval observational study to evaluate the risk of endometrial cancer in post-menopausal women with a uterus who use a low-dose vaginal estrogen unopposed by a progestogen. In connection with the observational study, we are required to provide progress reports to the FDA on an annual basis. The development of this method is underway, and is being studied aswe do not believe that the costs will be material. In addition, the FDA asked for post-approval information with respect to certain characteristics related to the product’s specifications, which we submitted to FDA in November 2018.
ANNOVERA™
On July 30, 2018, we entered into an exclusive license agreement with the Population Council to commercialize in the U.S. ANNOVERA™ (segesterone acetate/ethinyl estradiol vaginal system), the first and only patient-controlled, procedure-free, reversible prescription contraceptive that can prevent pregnancy for up a continuous-combined regimen, infull year, which the combination of estrogen and progesterone are taken together in one product daily. Ifwas approved by the FDA we believe this would representon August 10, 2018. ANNOVERA™ was classified by the first timeFDA as a combination product“new chemical entity,” or NCE, and thus has five years of regulatory exclusivity under the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act.
ANNOVERA™ is a one-year ring-shaped contraceptive vaginal system, or CVS. ANNOVERA™ is made of silicone elastomer, and contains segesterone acetate, a 19-nor progesterone derivative also known as Nestorone®, or NES, and ethinyl estradiol, or EE. EE is an approved active ingredient in many marketed hormonal products. Segesterone acetate, a new chemical entity is a potent progestin that is not active orally but is active when administered via non-oral routes such as vaginal rings, implants, and progesterone bioidenticaltransdermal systems. NES has been evaluated in 51 clinical studies across these delivery systems with more than 26,794 cycles of exposure.
ANNOVERA™ can be inserted and removed by the woman herself without the aid of a healthcare provider and, unlike oral contraceptives, or OCs, ANNOVERA™ does not require daily administration to obtain the contraceptive effect. After 21 days of use, the woman removes ANNOVERA™ for 7 days, thereby providing a regular bleeding pattern (i.e., withdrawal/scheduled bleeding). The same CVS is then re-inserted for additional 21/7-days in/out, for up to a total of 13 cycles (1 year).
ANNOVERA™ releases daily vaginal doses of both active ingredients (NES and EE). The claimed release rate of 150 μg/day NES and 13/day μg EE is supported by the calculated average release rate from an ex vivo analysis of ANNOVERA™ used for 13 cycles and is also supported by data from 13 cycles of in vitro release.
We assumed responsibility for marketing expenses related to the estradiol and progesterone produced by the ovaries would be approved for use in a single combined product.
On September 5, 2013, we began enrollment in the REPLENISH Trial, a multicenter, double-blind, placebo-controlled, phase 3 clinical trialcommercialization of TX-001HR in postmenopausal women with an intact uterus. The trial was designed to evaluate the efficacy of TX-001HR for the treatment of moderate to severe VMS due to menopause and the endometrial safety of TX-001HR. Patients were assigned to one of five arms, four active and one placebo, and received study medication for 12 months. The primary endpoint for the reduction of endometrial hyperplasia was an incidence of endometrial hyperplasia of less than 1% at 12 months, as determined by endometrial biopsy. The primary endpoint for the treatment of moderate to severe VMS was the mean change of frequency and severity of moderate to severe VMS at weeks four and 12 compared to placebo, as measured by the number and severity of hot flashes. Only subjects experiencing a minimum daily frequency of seven moderate to severe hot flashes at screening were included in the VMS analysis, while all subjects were included in the endometrial hyperplasia analysis. The secondary endpoints included reduction in sleep disturbances and improvement in quality of life measures, night sweats and vaginal dryness, measured at 12 weeks, six months and 12 months. The trial evaluated 1,835 patients between 40 and 65 years old at 111 sites. On December 5, 2016, we announced positive topline data for the REPLENISH Trial.ANNOVERA™.
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The REPLENISH Trial evaluated four dosesPopulation Council License Agreement includes exclusive rights for us to negotiate co-development of TX-001HRtwo other investigational vaginal contraceptive systems in development by the Population Council.
Under the terms of the Population Council License Agreement, we paid the Population Council a milestone payment of $20 million within 30 days following approval by the FDA of the NDA for ANNOVERA™ and placebo;will be required to pay the doses studied were:Population Council an additional $20 million within 30 days following the release of the first commercial batch of ANNOVERA™. The Population Council is also eligible to receive milestone payments and royalties from commercial sales of ANNOVERA™, as detailed below. We are required to pay the Population Council milestone payments of $40 million upon cumulative net sales of ANNOVERA™ in the U.S. by us and our affiliates and permitted sublicensees of each of $200.0 million, $400.0 million and $1.0 billion.
In addition, we are required to pay the Population Council, on a quarterly basis, step-based royalty payments based on annual net sales of ANNOVERA™ in the U.S. by us and our affiliates and permitted sublicensees as follows:
Annual Net Sales | ||||
| Less than or equal to $50.0 million | 5 | % |
| Greater than $50.0 million and less than or equal to $150.0 million | 10 | % |
| Greater than $150.0 million |
The REPLENISH Trial results demonstrated:
● TX-001HR estradiol 1 mg/progesterone 100 mg and TX-001HR estradiol 0.5 mg/progesterone 100 mg both achieved all fourannual royalty rate will be reduced to 50% of the co-primary efficacy endpoints andinitial rate during the primary safety endpoint.
● TX-001HR estradiol 1 mg/progesterone 100 mg and TX-001HR estradiol 0.5 mg/progesterone 100 mg both demonstrated a statistically significant and clinically meaningful reduction from baseline in bothsix-month period beginning on the frequency and severity of hot flashes compared to placebo.
● TX-001HR estradiol 0.5 mg/progesterone 50 mg and TX-001HR estradiol 0.25 mg/progesterone 50 mg were not statistically significant at alldate of the co-primary efficacy endpoints. The estradiol 0.25 mg/progesterone 50 mg dose was includedfirst arms-length commercial sale of a generic equivalent of ANNOVERA™ that is launched by a third party in the clinical trial as a non-effective doseU.S., and thereafter will be reduced to meet the recommendation20% of the FDA guidance to identifyinitial rate.
As part of the lowest effective dose.
● The incidenceapproval of consensus endometrial hyperplasia or malignancy was 0 percent across all four TX-001HR doses, meeting the recommendations established by the U.S. Food and Drug Agency’s (FDA) draft guidance.
As outlined inANNOVERA™, the FDA guidance,has required a post-approval observational study be performed to measure the co-primary efficacy endpoints inrisk of venous thromboembolism. A protocol submission for the REPLENISH Trial were the change from baseline in the number and severity of hot flashes at weeks four and 12 as compared to placebo. The primary safety endpoint was the incidence of endometrial hyperplasia with up to 12 months of treatment. General safety was also evaluated.
The results of the REPLENISH Trial are summarized in the table below (p-values of < 0.05 meet FDA guidance and support evidence of efficacy):
| Replenish Trial Co-Primary Efficacy Endpoints: Mean Change in Frequency and Severity of Hot Flashes Per Week Versus Placebo at Weeks 4 and 12, VMS-MITT Population | |||||
| Estradiol/Progesterone | 1 mg/100 mg | 0.5 mg/100 mg | 0.5 mg/50 mg | 0.25 mg/50 mg | Placebo |
| (n = 141) | (n = 149) | (n = 147) | (n = 154) | (n = 135) | |
| Frequency | |||||
| Week 4 P-value versus placebo | <0.001 | 0.013 | 0.141 | 0.001 | — |
| Week 12 P-value versus placebo | <0.001 | <0.001 | 0.002 | <0.001 | — |
Severity | |||||
| Week 4 P-value versus placebo | 0.031 | 0.005 | 0.401 | 0.100 | — |
| Week 12 P-value versus placebo | <0.001 | <0.001 | 0.018 | 0.096 | — |
| Replenish Trial Primary Safety Endpoint: Incidence of Consensus Endometrial Hyperplasia or Malignancy up to 12 months, Endometrial Safety PopulationŦ | |||||
| Endometrial Hyperplasia | 0% (0/280) | 0% (0/303) | 0% (0/306) | 0% (0/274) | 0% (0/92) |
MITT = Modified intent to treat
ŦPer FDA, consensus hyperplasia refers to the concurrence of two of the three pathologists be accepted as the final diagnosis
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We anticipate that we will submit an NDA for TX-001HRstudy is due to the FDA in August 2019. We have agreed to perform and pay the third quartercosts and expenses associated with this post-approval study, provided that if the costs and expenses associated with such post-approval study exceed $20 million, half of 2017. Assumingsuch excess will offset against royalties or other payments owed by us to the Population Council under the Population Council License Agreement. Given the observational nature of the study, we do not believe that the NDA is accepted 60 days thereafter andcosts of the study will be material on an FDA reviewannual basis.
Unless earlier terminated, the Population Council License Agreement will remain in effect until the later of the expiration of the last-to-expire of the Population Council’s U.S. patents that are licensed to us, or the date following such expiration that follows a continuous period of tensix months fromduring which we and our affiliates have not made a commercial sale of ANNOVERA™ in the receipt dateU.S. The Population Council License Agreement may also be terminated for certain breach and bankruptcy-related events and by us on 180 days prior notice to the Prescription Drug User Fee Act, or PDUFA, datePopulation Council.
As part of the Population Council License Agreement, we have the exclusive right to negotiate co-development and U.S. marketing rights for a non-new molecular entity, the NDA for TX-001HR could be approvedtwo other investigational vaginal contraceptive systems in development by the FDAPopulation Council: a three-month contraceptive ring using Nestorone® plus bio-identical estradiol, which is currently in phase 2 clinical trials, and a new one-year contraceptive ring using Nestorone® plus EE, which is designed as soon asa life cycle management product for the first half of 2018.one-year vaginal CVS that we have licensed.
Pipeline for Our Hormone Therapy Drug Candidates
TX-002HR
TX-002HR is a natural progesterone formulation for the treatment of secondary amenorrhea without the potentially allergenic component of peanut oil. The hormone therapy drug candidate is bioidenticalbio-identical to – or having the same chemical and molecular structure as -– the hormones that naturally occur in a woman’s body. We believe it will be similarly effective to traditional treatments, but may demonstrate efficacy at lower dosages. In January 2014, we began recruitment of patients in the SPRY Trial, a phase 3 clinical trial designed to measure the safety and effectiveness of TX-002HR in the treatment of secondary amenorrhea. During the first two quarters of 2014, the SPRY Trial encountered enrollment challenges because of Institutional Review Board, or IRB, approved clinical trial protocols and FDA inclusion and exclusion criteria. In July 2014, we suspended enrollment and in October 2014 we stopped the SPRY Trial, in orderour phase 3 clinical trial for TX-002HR, to update the phase 3 protocol based on discussions with the FDA. We are considering updating the phase 3 protocolOur Investigational New Drug Application, or IND, related to among other things, target only those women with secondary amenorrhea due to polycystic ovarian syndrome and to amend the primary endpoint of the trial. We believe that the updated phase 3 protocol, if proposed by us and approved by the FDA, would allow us to mitigate the enrollment challenges in, and shorten the duration of, the SPRY Trial. However, there can be no assurance that the FDA will approve the updated phase 3 protocol if we propose it.TX-002HR is currently inactive. We have currently suspended further development of this drug candidate to prioritize our leading drug candidates.drugs.
TX-003HR
TX-003HR is a natural estradiol formulation. This hormone therapy drug candidate is bioidenticalbio-identical to the hormones that naturally occur in a woman’s body. We currently do not have plans to further develop this hormone therapy drug candidate and ourcandidate. Our IND forrelated to TX-003HR is currently inactive.
TX-004HR
TX-004HR is our applicator-free vaginal estradiol softgel drug candidate for the treatment of moderate to severe dyspareunia, a symptom of VVA in post-menopausal women with vaginal linings that do not receive enough estrogen. We believe that our drug candidate will be at least as effective as the traditional treatments for VVA because of an early onset of action with less systemic exposure, inferring a greater probability of dose administration to the target tissue, and it will have an added advantage of being a simple, easier to use dosage form versus traditional VVA treatments. TX-004HR features our SYMBODATM technology. This allows for the production of cohesive, stable formulations and provides content uniformity and accuracy of dosing strengths for TX-004HR. We initiated the REJOICE Trial, a randomized, multicenter, double-blind, placebo-controlled phase 3 clinical trial during the third quarter of 2014 to assess the safety and efficacy of three doses — 25 mcg, 10 mcg and 4 mcg (compared to placebo) — of TX-004HR for the treatment of moderate to severe dyspareunia, or painful intercourse, as a symptom of VVA due to menopause.
On December 7, 2015, we announced positive top-line results from the REJOICE Trial. The pre-specified four co-primary efficacy endpoints were the changes from baseline to week 12 versus placebo in the percentage of vaginal superficial cells, percentage of vaginal parabasal cells, vaginal pH and severity of participants’ self-reported moderate to severe dyspareunia as the most bothersome symptom of VVA. The trial enrolled 764 postmenopausal women (40 to 75 years old) experiencing moderate to severe dyspareunia at approximately 89 sites across the United States and Canada. Trial participants were randomized to receive either TX-004HR at 25 mcg (n=190), 10 mcg (n=191), or 4 mcg (n=191) doses or placebo (n=192) for a total of 12 weeks, all administered once daily for two weeks and then twice weekly (approximately three to four days apart) for ten weeks.
The following table sets forth the statistical significance of the REJOICE Trial results for the four pre-specified co-primary efficacy endpoints, based on mean changes from baseline to week 12 compared to placebo. Based on our ogoing analyses of the REJOICE Trial data, statistical significance of the results for the co-primary endpoint of severity of participants’ self-reported moderate to severe dyspareunia as the most bothersome symptom of VVA has improved for all three doses from the results originally reported.
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The 25 mcg dose of TX-004HR demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo across all four co-primary endpoints. The 10 mcg dose of TX-004HR demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo across all four co-primary endpoints. The 4 mcg dose of TX-004HR also demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo for the endpoints of vaginal superficial cells, vaginal parabasal cells, and vaginal pH; the change from baseline compared to placebo in the severity of dyspareunia was statistically significant at the p = 0.0149 level. The FDA has previously indicated to us that in order to approve the drug based on a single trial, the trial would need to show statistical significance at the 0.01 level or lower for each endpoint, and that a trial that is merely statistically significant at a higher level may not provide sufficient evidence to support an NDA filing or approval of a drug candidate where the NDA relies on a single clinical trial.
Statistical improvement over placebo was also observed for all three doses at the first assessment at week two and sustained through week 12 (see table below).
Vaginal dryness was a prespecified key secondary endpoint. The 25 mcg and 10 mcg doses of TX-004HR demonstrated highly statistically significant results at the p < 0.0001 level compared to placebo for the endpoint of vaginal dryness. The 4 mcg dose of TX-004HR demonstrated statistically significant results at the p = 0.0014 level compared to placebo (see table below).
The pharmacokinetic data for all three doses demonstrated negligible to very low systemic absorption of 17 beta estradiol, estrone and estrone conjugated, supporting the previous Phase 1 trial data. TX-004HR was well tolerated, and there were no clinically significant differences compared to placebo-treated participants with respect to adverse events. There were no drug-related serious adverse events reported.
We submitted the NDA for TX-004HR with the FDA on July 7, 2016. The FDA determined that the NDA is sufficiently complete to permit a substantive review and accepted the NDA for filing. The PDUFA target action date for the completion of the FDA’s review is May 7, 2017. The NDA submission was supported by the complete TX-004HR clinical program, including positive results of the phase 3 REJOICE Trial. The NDA submission included all three doses of TX-004HR (4 mcg, 10 mcg and 25 mcg) that were evaluated in the REJOICE Trial. If approved, the 4 mcg formulation would represent a lower effective dose than the currently available VVA therapies approved by the FDA.
On November 10, 2015, the FDA held a scientific workshop on labeling “lower” dose estrogen-alone products for symptoms of VVA to provide an opportunity for the FDA to obtain input from experts on several topics related to the product label of lower dose estrogen-alone products approved solely for the treatment of moderate to severe symptoms of VVA due to menopause. According to the FDA, lower-dose estrogen products means products that contain less than the 0.625 mg of conjugated estrogens used in the WHI study and estradiol products containing 0.0375 mg and below. Discussion topics at the workshop included the relevance of the boxed warnings based on data from the WHI to the lower dose estrogen-alone products; certain members in the scientific/medical community have questioned whether the boxed warnings section in the labeling, which is currently required to be included on all estrogen products, is applicable in whole or in part to these lower-dose estrogen products. The boxed warnings include: (1) an increased risk of endometrial cancer in women with a uterus who uses unopposed estrogens, (2) estrogen therapy with or without progestins should not be used for the prevention of cardiovascular disease or dementia, (3) an increased risk of stroke and deep vein thrombosis (DVT) in women treated with estrogen-alone, (4) an increased risk of probable dementia in postmenopausal women 65 years of age and older treated with estrogen-alone, (5) an increased risk of invasive breast cancer in women treated with estrogen plus progestin, and (6) to use the lowest effective dose for the shortest duration. It is unknown at this time what, if any, changes the FDA may propose with respect to the boxed warnings on lower dose estrogen-alone products for symptoms of VVA or whether such label changes would be applicable to TX-004HR, if approved.
As of December 31, 2016, we had 17 issued patents, which included 13 utility patents that relate to our combination progesterone and estradiol formulations, two utility patent that relates to TX-004HR, which establish an important intellectual property foundation for TX-004HR, one utility patent that relates to a pipeline transdermal patch technology, and one utility patent that relates to our OPERA® information technology platform.
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Research and Development Expenses
A significant portion of our operating expenses to date have been incurred in research and development activities. Research and development expenses relate primarily to the discovery and development of our drug products.candidates. Our business model is dependent upon our company continuing to conduct a significant amount of research and development. Until one of our drug products receives IND approval from the FDA, products costs are listed as “Other research and development” costs in the table below. Our research and development expenses consist primarily of expenses incurred under agreements with contract research organizations, or CROs, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies; employee-related expenses, which include salaries and benefits, and non-cash share-based compensation; the cost of developing our chemistry, manufacturing and controls capabilities, and acquiring clinical trial materials; and costs associated with other research activities and regulatory approvals. Other research and development costs listed below consist of costs incurred with respect to drug candidates that have not received IND application approval from the FDA.
We make payments to the CROs based on agreed upon terms that may include payments in advance of a study starting date. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Advance payments to be expensed in future research and development activities were $228,933$0, $0 and $1,138,073,$228,933, at December 31, 2018, 2017, and 2016, and December 31, 2015, respectively.
The following table indicates our research and development expense by project for the periods indicated (in thousands):indicated:
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||
| (000s) | (000s) | ||||||||||||||||||||||
| TX-001HR | $ | 31,857 | $ | 33,227 | $ | 26,123 | |||||||||||||||||
| TX-001HR (BIJUVA™) | $ | 11,790 | $ | 19,381 | $ | 31,857 | |||||||||||||||||
| TX-002HR | — | 23 | 1,443 | — | — | — | |||||||||||||||||
| TX-004HR | 9,248 | 19,574 | 3,984 | ||||||||||||||||||||
| TX-004HR (IMVEXXY®) | 4,890 | 8,043 | 9,248 | ||||||||||||||||||||
| Other research and development | 12,838 | 19,219 | 11,669 | 10,619 | 6,429 | 12,838 | |||||||||||||||||
| Total research and development | $ | 53,943 | $ | 72,043 | $ | 43,219 | $ | 27,299 | $ | 33,853 | $ | 53,943 | |||||||||||
Research and development expenditures will continue to be incurred as we continue development of our drug candidates and advance the development of our proprietary pipeline of novel drug candidates. We expect to incur ongoing research and development costs as we develop our drug pipeline, continue stability testing and validation on our drug candidates, prepare regulatory submissions and work with regulatory authorities on existing submissions.
During the year ended December 31, 20162018 and since the project’s inception in February 2013, we have incurred approximately $31,857,000$11,790,000 and $96,016,000,$127,187,000, respectively, in research and development costs with respect to TX-001HR, our combination estradiol and progesterone drug candidate.BIJUVA™.
During the year ended December 31, 20162018 and since the project’s inception in April 2013, we have incurred approximately $0 and $2,525,000, respectively, in research and development costs with respect to TX-002HR, our progesterone only drug candidate.TX-002HR.
During the year ended December 31, 20162018 and since the project’s inception in August 2014, we have incurred approximately $9,248,000$4,890,000 and $32,806,000,$45,739,000, respectively, in research and development costs with respect to TX-004HR, our vaginal estradiol softgel drug candidate.IMVEXXY®.
The costs of clinical trials may vary significantly over the life of a project owing to factors that include, but are not limited to, the following: per patient trial costs; the number of patients that participate in the trials; the number of sites included in the trials; the length of time each patient is enrolled in the trial; the number of doses that patients receive; the drop-out or discontinuation rates of patients; the amount of time required to recruit patients for the trial; the duration of patient follow-up; and the efficacy and safety profile of the drug candidate. We base our expenses related to clinical trials on estimates that are based on our experience and estimates from CROs and other third parties. Research and development expenditures for the drug candidates will continue after the trial completes for on-going stability and laboratory testing, regulatory submission and response work.
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Results of Operations
Comparison of Years Ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
Year ended December 31, 20162018 compared with year ended December 31, 20152017
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| 2016 | 2015 | Change | 2018 | 2017 | Change | |||||||||||||||||||
| (000s) | (000s) | |||||||||||||||||||||||
| Revenue | $ | 19,356 | $ | 20,143 | $ | (787) | $ | 16,099 | $ | 16,778 | $ | (679 | ) | |||||||||||
| Cost of goods sold | 4,185 | 4,506 | (321) | 2,737 | 2,637 | 100 | ||||||||||||||||||
| Operating expenses | 105,424 | 100,827 | 4,597 | 143,582 | 91,769 | 51,813 | ||||||||||||||||||
| Operating loss | (90,253 | ) | (85,190 | ) | (5,063 | ) | (130,220 | ) | (77,628 | ) | (52,592 | ) | ||||||||||||
| Other income | 378 | 113 | 265 | |||||||||||||||||||||
| Other (expense) income | (2,397 | ) | 703 | (3,100 | ) | |||||||||||||||||||
| Net loss | $ | (89,875 | ) | $ | (85,077 | ) | $ | (4,798 | ) | $ | (132,617 | ) | $ | (76,925 | ) | $ | (55,692 | ) | ||||||
Revenue
Revenue is recorded net of sales discounts, chargebacks, wholesaler fees, customer rebates, coupons and estimated returns. Revenue for the year ended December 31, 20162018 decreased by approximately $787,000,$679,000, or 4%, to approximately $19,356,000,$16,099,000, compared with approximately $20,143,000$16,778,000 for the year ended December 31, 2015. This decrease was2017. Revenues, net decreased primarily attributabledue to a decrease in the average net revenue per unitprenatal vitamin sales of our products primarily related to higher estimates related to discounts and returns in 2016, and the reversal of the deferred revenue balance in the first quarter of 2015 related to products sold through wholesale distributors until the right of return no longer existed,approximately $1,737,000 partially offset by an increase in thesales of IMVEXXY® of approximately $1,058,000. The revenue decrease related to our prenatal vitamins was primarily affected by lower number of units sold.sold and higher utilization of coupons offered to customers during the year ended December 31, 2018 as compared to the prior year. We launched sales of IMVEXXY® in the third quarter of 2018. During this launch period, revenues, net related to our newly approved drug were greatly affected by the co-pay assistance program that we introduced to launch IMVEXXY®, which allowed patients to access the product at a reasonable cost regardless of insurance coverage. We expect our revenues, net related to IMVEXXY® to improve as commercial payer coverage for IMVEXXY® increases.
Cost of Goods Sold
Cost of goods sold decreasedincreased by approximately $321,000,$100,000, or 7%4%, to approximately $4,185,000$2,737,000 for the year ended December 31, 2016,2018, compared with approximately $4,506,000$2,637,000 for the year ended December 31, 20152017 primarily related to lower distributionproduct costs and more favorable product mix of our products sold,attributable to IMVEXXY®, partially offset by the reversal of the deferred balance in the first quarter of 2015 relatedlower royalty fees attributable to products sold through wholesale distributors until the right of return no longer existed.prenatal vitamins, and lower shipping costs. Our gross margins of 78%margin was 83% for the year ended December 31, 2016 remained unchanged from2018 as compared to 84% for the year ended December 31, 2015.2017. The decrease in gross margin percentage was primarily attributable to higher utilization of coupons/co-pay assistance offered in 2018 as compared with 2017.
Operating Expenses
Our principal operating costs included the following items as a percentage of total operating expenses.
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||
| 2016 | 2015 | 2018 | 2017 | ||||||||||||||||||||
| Sales and marketing costs, excluding human resource costs | Sales and marketing costs, excluding human resource costs | 43 | % | 22 | % | ||||||||||||||||||
| Human resource related costs | 23 | % | 15 | % | Human resource related costs | 25 | % | 27 | % | ||||||||||||||
| Sales and marketing costs, excluding human resource costs | 12 | % | 6 | % | |||||||||||||||||||
| Product research and development costs | 51 | % | 71 | % | Product research and development costs | 19 | % | 37 | % | ||||||||||||||
| Professional fees and consulting costs | 5 | % | 4 | % | Professional fees and consulting costs | 5 | % | 6 | % | ||||||||||||||
| Other operating expenses | 9 | % | 4 | % | Other operating expenses | 8 | % | 8 | % | ||||||||||||||
Operating expenses increased by approximately $4,597,000,$51,813,000, or 5%56%, to approximately $105,424,000$143,582,000 for the year ended December 31, 2016,2018, compared with approximately $100,827,000$91,769,000 for the year ended December 31, 2015,2017, as a result of the following items:
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | Change | ||||||||||
| (000s) | ||||||||||||
| Research and development costs | $ | 53,943 | $ | 72,043 | $ | (18,100 | ) | |||||
| Human resource related costs | 24,599 | 14,966 | 9,633 | |||||||||
| Sales and marketing, excluding human resource costs | 12,753 | 5,920 | 6,833 | |||||||||
| Professional and consulting costs | 5,301 | 3,649 | 1,652 | |||||||||
| Other operating expenses | 8,828 | 4,249 | 4,579 | |||||||||
| Total operating expenses | $ | 105,424 | $ | 100,827 | $ | 4,597 | ||||||
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| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | Change | ||||||||||
| (000s) | ||||||||||||
| Sales and marketing, excluding human resource costs | $ | 61,845 | $ | 19,614 | $ | 42,231 | ||||||
| Human resource related costs | 35,003 | 24,720 | 10,283 | |||||||||
| Research and development costs | 27,299 | 33,853 | (6,554 | ) | ||||||||
| Professional and consulting costs | 7,661 | 5,859 | 1,802 | |||||||||
| Other operating expenses | 11,774 | 7,723 | 4,051 | |||||||||
| Total operating expenses | $ | 143,582 | $ | 91,769 | $ | 51,813 | ||||||
ResearchSales and developmentmarketing costs increased by approximately $42,231,000, or 215%, to approximately $61,845,000 for the year ended December 31, 2016 decreased by2018, compared with approximately $18,100,000, or 25%, to approximately $53,943,000,$19,614,000 for the year ended December 31, 2017, primarily as a result of a decrease inincreased expenses associated with sales and marketing efforts to support launch and commercialization of IMVEXXY® and BIJUVA™, including costs related to outsourced sales personnel and their related expenses, physician education and product samples, advertising and travel expenses related to product commercialization. We expect sales and marketing expenses to continue to increase as we continue the launch of BIJUVA™, prepare for the launch of ANNOVERA™ and continue to support our phase 3 clinical trialsgrowing business and commercialization of TX-001HRour products.
Human resource related costs, including salaries and TX-004HR,benefits increased by approximately $10,283,000, or 42%, to approximately $35,003,000 for the year ended December 31, 2018, compared with approximately $24,720,000 for the year ended December 31, 2017, primarily as a result of an increase of approximately $7,975,000 in personnel costs in sales, marketing and regulatory areas to support commercialization of our new drugs and an increase in non-cash compensation expense included in this category of approximately $2,308,000 related to employee stock option amortization during 2018 as compared to 2017.
Research and development costs decreased by approximately $6,554,000, or 19%, to approximately $27,299,000 for the year ended December 31, 2018, compared with approximately $33,853,000 for the year ended December 31, 2017, primarily as a result of the completion of the REPLENISH Trial for BIJUVA™ and FDA approval of IMVEXXY® and BIJUVA™, partially offset by scale-up and manufacturing activities for BIJUVA™ before FDA approval as well as increased pre-clinical work to support our phase 3 clinical trials of TX-001HRproduct pipeline. Research and TX-004HR anddevelopment costs in 2017 included approximately $2,400,000 in NDA submission fees related to regulatory submission related to TX-004HR.BIJUVA™ and a write-off of approximately $1,000,000 of prepaid manufacturing costs. Research and developments costs during the year ended December 31, 20162018 included the following research and development projects:
During the year ended December 31, 20162018 and since the project’s inception in February 2013, we have incurred approximately $31,857,000$11,790,000 and $96,016,000,$127,187,000, respectively, in research and development costs with respect to TX-001HR, our combination estradiol and progesterone drug candidate.BIJUVA™.
During the year ended December 31, 20162018 and since the project’s inception in April 2013, we have incurred approximately $0 and $2,525,000, respectively, in research and development costs with respect to TX-002HR, our progesterone only drug candidate.
During the year ended December 31, 20162018 and since the project’s inception in August 2014, we have incurred approximately $9,248,000$4,890,000 and $32,806,000,$45,739,000, respectively, in research and development costs with respect to TX-004HR,IMVEXXY®.
For a discussion of the nature of efforts and steps necessary to complete these projects, see “Item 1. Business — Research and Development.” For a discussion of the risks and uncertainties associated with completing development of our vaginal estradiol softgel drug candidate.products, see “Item 1A. Risk Factors — Risks Related to Our Business.” For a discussion of the extent and nature of additional resources that we may need to obtain if our current liquidity is not expected to be sufficient to complete these projects, see “— Liquidity and Capital Resources.” For a discussion as to whether a future milestone such as completion of a development phase, date of filing an NDA with a regulatory agency or approval from a regulatory agency can be reliably determined, see “Item 1. Business — Our Hormone Therapy Drugs,” “Item 1. Business — Pipeline for Our Hormone Therapy Drug Candidates” and “Item 1. Business — Pharmaceutical Regulation.” Future milestones, including NDA submission dates, are not easily determinable as such milestones are dependent on various factors related to our clinical trials, including the timing of ongoing patient recruitment efforts to find eligible subjects for the applicable trials.
Professional and consulting costs increased by approximately $1,802,000, or 31%, for the year ended December 31, 2018, to approximately $7,661,000 compared with approximately $5,859,000 for the year December 31, 2017, primarily as a result of increased legal, consulting and recruiting fees.
All other costs increased by approximately $4,051,000, or 52%, to approximately $11,774,000 for the year ended December 31, 2018, compared with approximately $7,723,000 for the year ended December 31, 2017, as a result of increased information technology, travel, allowance for bad debt expense, insurance and other office expenses primarily to support commercialization of our new drugs.
Operating Loss
As a result of the foregoing, our operating loss increased approximately $52,592,000, or 68%, to approximately $130,220,000 for the year ended December 31, 2018, compared with approximately $77,628,000 for the year ended December 31, 2017, primarily as a result of increased personnel costs, sales and marketing expenses to support commercialization of IMVEXXY® and BIJUVA™, including costs related to outsourced sales personnel and their related expenses, professional fees and other operating expenses, as well a decrease in revenue, partially offset by a decrease in research and development costs.
We anticipate that we will continue to have operating losses for the near future until we successfully commercialize IMVEXXY®, BIJUVA™ and ANNOVERA™, although there is no assurance that any commercialization of IMVEXXY® and BIJUVA™ and ANNOVERA™ will be successful.
Other (Expense) Income
Other non-operating income changed by approximately $3,100,000, or 441%, to an expense of approximately $2,397,000 for the year ended December 31, 2018 compared with an income of approximately $703,000 for 2017, primarily as a result of increased interest expense related to our term loan that we obtained in 2018 partially offset by increased interest income in 2018 as compared to 2017.
Net Loss
Because of the net effects of the foregoing, net loss increased approximately $55,692,000, or 72%, to approximately $132,617,000 for the year ended December 31, 2018, compared with approximately $76,925,000 for the year ended December 31, 2017. Net loss per share of common stock, basic and diluted, was ($0.59) for the year ended December 31, 2018, compared with ($0.37) per share of common stock for the year ended December 31, 2017.
Year ended December 31, 2017 compared with year ended December 31, 2016
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | Change | ||||||||||
| (000s) | ||||||||||||
| Revenue | $ | 16,778 | $ | 19,356 | $ | (2,578 | ) | |||||
| Cost of goods sold | 2,637 | 4,185 | (1,548 | ) | ||||||||
| Operating expenses | 91,769 | 105,424 | (13,655 | ) | ||||||||
| Operating loss | (77,628 | ) | (90,253 | ) | 12,625 | |||||||
| Other income | 703 | 378 | 325 | |||||||||
| Net loss | $ | (76,925 | ) | $ | (89,875 | ) | $ | 12,950 | ||||
Revenue
Revenue is recorded net of sales discounts, chargebacks, wholesaler fees, customer rebates, coupons and estimated returns. Revenue for the year ended December 31, 2017 decreased by approximately $2,578,000, or 13%, to approximately $16,778,000, compared with approximately $19,356,000 for the year ended December 31, 2016. This decrease was attributable to a decrease in the average net revenue per unit of our products, primarily related to higher coupons in 2017 due to implementation of a new point of sale coupon system, partially offset by a slight increase in the number of units sold.
Cost of Goods Sold
Cost of goods sold decreased by approximately $1,548,000, or 37%, to approximately $2,637,000 for the year ended December 31, 2017, compared with approximately $4,185,000 for the year ended December 31, 2016, primarily related to lower distribution costs. Our gross margin was 84% for the year ended December 31, 2017 as compared to 78% for the year ended December 31, 2016. The increase in gross margin percentage was primarily attributable to the centralization of the distribution channel for both our retail pharmacy distributors and wholesale distributors which, among other things, lowered the cost to package, prepare and deliver our products to customers.
Operating Expenses
Our principal operating costs included the following items as a percentage of total operating expenses.
| Years Ended December 31, | |||||||||||||||
| 2017 | 2016 | ||||||||||||||
| Human resource related costs | 27 | % | 23 | % | |||||||||||
| Sales and marketing costs, excluding human resource costs | 22 | % | 12 | % | |||||||||||
| Product research and development costs | 37 | % | 51 | % | |||||||||||
| Professional fees and consulting costs | 6 | % | 5 | % | |||||||||||
| Other operating expenses | 8 | % | 9 | % | |||||||||||
Operating expenses decreased by approximately $13,655,000, or 13%, to approximately $91,769,000 for the year ended December 31, 2017, compared with approximately $105,424,000 for the year ended December 31, 2016, because of the following items:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | Change | ||||||||||
| (000s) | ||||||||||||
| Research and development costs | $ | 33,853 | $ | 53,943 | $ | (20,090 | ) | |||||
| Human resource related costs | 24,720 | 24,599 | 121 | |||||||||
| Sales and marketing, excluding human resource costs | 19,614 | 12,753 | 6,861 | |||||||||
| Professional and consulting costs | 5,859 | 5,301 | 558 | |||||||||
| Other operating expenses | 7,723 | 8,828 | (1,105 | ) | ||||||||
| Total operating expenses | $ | 91,769 | $ | 105,424 | $ | (13,655 | ) | |||||
Research and development costs for the year ended December 31, 2017 decreased by approximately $20,090,000, or 37%, to approximately $33,853,000, primarily because of a decrease in costs related to our phase 3 clinical trials of BIJUVA™ and IMVEXXY®, partially offset by scale-up and manufacturing activities for our phase 3 clinical trials of BIJUVA™ and IMVEXXY® and costs related to regulatory submission related to BIJUVA™. Research and development costs in 2017 included approximately a $2,400,000 in NDA submission fees related to BIJUVA™ and a write-off of approximately $1,000,000 of prepaid manufacturing costs. Research and developments costs during the year ended December 31, 2017 included the following research and development projects:
During the year ended December 31, 2017 and since the project’s inception in February 2013, we have incurred approximately $19,381,000 and $115,397,000, respectively, in research and development costs with respect to BIJUVA™.
During the year ended December 31, 2017 and since the project’s inception in April 2013, we have incurred approximately $0 and 2,525,000, respectively, in research and development costs with respect to TX-002HR.
During the year ended December 31, 2017 and since the project’s inception in August 2014, we have incurred approximately $8,043,000 and $40,849,000, respectively, in research and development costs with respect to IMVEXXY®.
For a discussion of the nature of efforts and steps necessary to complete these projects, see “Item 1. Business — Research and Development.” For a discussion of the risks and uncertainties associated with completing development of our products, see “Item 1A. Risk Factors — Risks Related to Our Business.” For a discussion of the extent and nature of additional resources that we may need to obtain if our current liquidity is not expected to be sufficient to complete these projects, see “— Liquidity and Capital Resources.” For a discussion as to whether a future milestone such as completion of a development phase, date of filing an NDA with a regulatory agency or approval from a regulatory agency can be reliably determined, see “Item 1. Business — Our Hormone Therapy Drug, Candidates,” “Item 1. Business — Products in Development”Pipeline for Our Hormone Therapy Drug Candidates” and “Item 1. Business — Pharmaceutical Regulation.” Future milestones, including NDA submission dates, are not easily determinable as such milestones are dependent on various factors related to our clinical trials, including the timing of ongoing patient recruitment efforts to find eligible subjects for the applicable trials.
Human resource related costs, including salaries and benefits, increased by approximately $9,633,000,$121,000, or 64%0.5%, to approximately $24,720,000 for the year ended December 31, 2017, compared with approximately $24,599,000 for the year ended December 31, 2016, compared with approximately $14,966,000 for the year ended December 31, 2015, primarily as a result of an increase of approximately $3,492,000$5,750,000 in personnel costs in sales, marketing and regulatory areas to support commercialization of our hormone therapy drug candidates, and an increasepartially offset by a decrease in non-cash compensation expense included in this category of approximately $6,141,000$5,629,000 related to employee stock option amortization during 20162017 as compared to 2015.2016.
Sales and marketing costs increased by approximately $6,833,000$6,861,000, or 54%, to approximately $19,614,000 for the year ended December 31, 2017, compared with approximately $12,753,000 for the year ended December 31, 2016, primarily as a result of increased expenses in the first half of 2017 associated with sales and marketing efforts to support commercialization of our hormone therapy drug candidates, which were curtailed in the third quarter of 2017 due to the status of the NDA for IMVEXXY®, higher costs related to outsourced sales personnel and their related expenses which started in the fourth quarter of 2016, together with an increase in employee incentives.
Professional and consulting costs increased by approximately $558,000, or 115%11%, to approximately $12,753,000, compared with approximately $5,920,000 for the year ended December 31, 2015,2017, to approximately $5,859,000 compared with approximately $5,301,000 for the year December 31, 2016, primarily as a result of result of increased legal and other professional expenses, partially offset by a decrease in consulting and accounting expenses.
All other costs decreased by approximately $1,105,000, or 13%, to approximately $7,723,000 for the year ended December 31, 2017, compared with approximately $8,828,000 for the year ended December 31, 2016, primarily as a result of a decrease in write-off of accounts receivable balances of approximately $2,200,000, which occurred in 2016, partially offset by an increase in rent, information technology, insurance, and other office expenses in 2017.
Operating Loss
As a result of the foregoing, our operating loss decreased approximately $12,625,000, or 14%, to approximately $77,628,000 for the year ended December 31, 2017, compared with approximately $90,253,000 for the year ended December 31, 2016, primarily as a result of decreased research and development expenses, non-cash compensation expense and other expenses, partially offset by increased sales and marketing expenses associated with sales and marketing efforts to support commercialization of our hormone therapy drug candidates coupled with an increase in employee incentives.
Professional and consulting costs increased approximately $1,652,000 for the year ended December 31, 2016, or 45%, to approximately $5,301,000 compared with approximately $3,649,000 for the year December 31, 2015, primarily as a result of increased legal, consulting, accounting expenses.
All other costs increased approximately $4,579,000, or 108%, to approximately $8,828,000 for the year ended December 31, 2016, compared with approximately $4,249,000 for the year ended December 31, 2015, primarily as a result of a write-off of accounts receivable balances of approximately $2,200,000, increased insurance, rent, information technology and other office expenses.
Operating Loss
As a result of the foregoing, our operating loss increased approximately $5,063,000, or 6%, to approximately $90,253,000 for the year ended December 31, 2016, compared with approximately $85,190,000 for the year ended December 31, 2015, primarily as a result of increasedhigher personnel costs, sales and marketing expenses to support commercialization of our hormone therapy drug candidates, coupled with a write-off of accounts receivable balances mentioned above and an increase in non-cash compensation expense, professional fees and other operating expenses as well a decrease in revenue, partially offset by a decrease in research and development costs.
As a result of the continued development of our hormone therapy drug candidates, we anticipate that we will continue to have operating losses for the near future until our hormone therapy drug candidatesdrugs are approved by the FDA and brought to market, although there is no assurance that we will attain such approvals or that any marketing of our hormone therapy drug candidates, if approved,drugs will be successful.
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Other Income
Other non-operating income increased by approximately $265,000,$325,000, or 235%86%, to approximately $378,000$703,000 for the year ended December 31, 20162017 compared with approximately $113,000$378,000 for the comparable period in 2015,2016, primarily as a resultbecause of increased interest income.
Net Loss
As a resultBecause of the net effects of the foregoing, net loss increaseddecreased approximately $4,798,000,$12,950,000, or 6%14%, to approximately $76,925,000 for the year ended December 31, 2017, compared with approximately $89,875,000 for the year ended December 31, 2016, compared with approximately $85,077,000 for the year ended December 31, 2015.2016. Net loss per share of common stock, basic and diluted, was ($0.46)0.37) for the year ended December 31, 2016,2017, compared with ($0.49)0.46) per share of common stock for the year ended December 31, 2015.2016.
Year ended December 31, 2015 compared with year ended December 31, 2014
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| (000s) | ||||||||||||
| Revenue | $ | 20,143 | $ | 15,026 | $ | 5,117 | ||||||
| Cost of goods sold | 4,506 | 3,672 | 834 | |||||||||
| Operating expenses | 100,827 | 65,395 | 35,432 | |||||||||
| Operating loss | (85,190 | ) | (54,041 | ) | (31,149 | ) | ||||||
| Financing Costs | — | (260 | ) | 260 | ||||||||
| Other income | 113 | 84 | 29 | |||||||||
| Net loss | $ | (85,077 | ) | $ | (54,217 | ) | $ | (30,860 | ) | |||
Revenue
Revenue for year ended December 31, 2015 increased by approximately $5,117,000, or 34%, to approximately $20,143,000, compared with approximately $15,026,000 for the year ended December 31, 2014. Of this $5,117,000 increase, approximately $2,437,000, or 48%, was attributable to an increase in the average sales price of our existing products, and approximately $2,680,000, or 52%, was attributable to the number of units sold during the year ended December 31, 2015.
Cost of Goods Sold
Cost of goods sold increased by approximately $834,000, or 23%, to approximately $4,506,000 for the year ended December 31, 2015, compared with approximately $3,672,000 for the year ended December 31, 2014. Our gross margins increased to approximately 78% for the year ended December 31, 2015, compared to approximately 76% for the year ended December 31, 2014. The gross margin change was primarily attributable to favorable change in product mix partially offset by increased distribution costs.
Operating Expenses
Our principal operating costs included the following items as a percentage of total operating expenses.
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Human resource related costs | 15 | % | 16 | % | ||||
| Sales and marketing costs, excluding human resource costs | 6 | % | 9 | % | ||||
| Product research and development costs | 71 | % | 66 | % | ||||
| Professional fees and consulting costs | 4 | % | 4 | % | ||||
| Other operating expenses | 4 | % | 5 | % | ||||
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Operating expenses increased by approximately $35,432,000, or 54%, to approximately $100,827,000 for the year ended December 31, 2015, compared with approximately $65,395,000 for year ended December 31, 2014, as a result of the following items:
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| (000s) | ||||||||||||
| Research and development costs | $ | 72,043 | $ | 43,219 | $ | 28,824 | ||||||
| Human resource related costs | 14,966 | 10,870 | 4,096 | |||||||||
| Sales and marketing, excluding human resource costs | 5,920 | 5,717 | 203 | |||||||||
| Professional and consulting costs | 3,649 | 2,368 | 1,281 | |||||||||
| Other operating expenses | 4,249 | 3,221 | 1,028 | |||||||||
| Total operating expenses | $ | 100,827 | $ | 65,395 | $ | 35,432 | ||||||
Research and development costs for the year ended December 31, 2015 increased by approximately $28,824,000, or 67%, to approximately $72,043,000, primarily as a result of an increase in scale-up and manufacturing activities for our phase 3 clinical trials of TX-001HR and TX-004HR. Research and developments costs during the year ended December 31, 2015 included the following research and development projects:
During the year ended December 31, 2015 and since the project’s inception in February 2013, we have incurred approximately $33,227,000 and $64,159,000, respectively, in research and development costs with respect to TX-001HR, our combination estradiol and progesterone drug candidate.
During the year ended December 31, 2015 and since the project’s inception in April 2013, we have incurred approximately $23,000 and $2,525,000, respectively, in research and development costs with respect to TX-002HR, our progesterone only drug candidate.
During the year ended December 31, 2015 and since the project’s inception in August 2014, we have incurred approximately $19,574,000 and $23,558,000, respectively, in research and development costs with respect to TX-004HR, our vaginal estradiol softgel drug candidate.
For a discussion of the nature of efforts and steps necessary to complete these projects, see “Item 1. Business — Research and Development.” For a discussion of the risks and uncertainties associated with completing development of our products, see “Item 1A. Risk Factors — Risks Related to Our Business.” For a discussion of the extent and nature of additional resources that we may need to obtain if our current liquidity is not expected to be sufficient to complete these projects, see “— Liquidity and Capital Resources.” For a discussion as to whether a future milestone such as completion of a development phase, date of filing an NDA with a regulatory agency or approval from a regulatory agency can be reliably determined, see “Item 1. Business — Our Hormone Therapy Drug Candidates,” “Item 1. Business — Products in Development” and “Item 1. Business — Pharmaceutical Regulation.” Future milestones, including NDA submission dates, are not easily determinable as such milestones are dependent on various factors related to our clinical trials, including the timing of ongoing patient recruitment efforts to find eligible subjects for the applicable trials.
Human resource related costs, including salaries and benefits, increased by approximately $4,096,000, or 38%, to approximately $14,966,000, compared with approximately $10,870,000 for the year ended December 31, 2014, primarily as a result of an increase in salary and wages and related cost of $2,617,000 associated with additional employees required for our clinical trials and by an increase in amortization of non-cash compensation totaling approximately $1,479,000 related to employee stock options issued during 2015 as compared to 2014.
Sales and marketing costs increased approximately $203,000 for the year ended December 31, 2015, or 4%, to approximately $5,920,000, compared with approximately $5,717,000 for the year ended December 31, 2014, primarily as a result of increased employee incentives partially offset by decreased marketing expenses.
Professional and consulting costs increased approximately $1,281,000 for the year ended December 31, 2015, or 54%, to approximately $3,649,000 compared with approximately $2,368,000 for the year December 31, 2014, as a result of additional costs incurred for legal, consulting, accounting and board of director fees.
All other costs increased approximately $1,028,000 for the year ended December 31, 2015, or 32%, to approximately $4,249,000, compared with approximately $3,221,000 for the year ended December 31, 2014, primarily as a result of increased insurance, rent and office expenses.
Operating Loss
As a result of the foregoing, our operating loss increased approximately $31,149,000 for the year ended December 31, 2015, or 58%, to approximately $85,190,000 for the year ended December 31, 2015, compared with approximately $54,041,000 for the year ended December 31, 2014, primarily as a result of increased research and development costs associated with our continued development of our hormone therapy drug candidates, partially offset by increased revenue from sales of our prenatal vitamin products.
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As a result of the continued development of our hormone therapy drug candidates, we anticipate that we will continue to have operating losses for the near future until our hormone therapy drug candidates are approved by the FDA and brought to market, although there is no assurance that we will attain such approvals or that any marketing of our hormone therapy drug candidates, if approved, will be successful.
Financing Costs
Financing costs decreased approximately $260,000, or 100%, during the year ended December 31, 2015, from approximately $260,000 for the year ended December 31, 2014, primarily as a result of a decrease in amortization costs associated with warrants.
Net Loss
As a result of the net effects of the foregoing, net loss increased approximately $30,860,000, or 57%, to approximately $85,077,000 for the year ended December 31, 2015, compared with approximately $54,217,000 for the year ended December 31, 2014. Net loss per share of common stock, basic and diluted, was ($0.49) for the year ended December 31, 2015, compared with ($0.36) per share of common stock for the year ended December 31, 2014.
Liquidity and Capital Resources
We have funded our operations primarily through public offerings of our common stock and private placements of equity and debt securities. For the three yearthree-year period ending December 31, 2016,2018, we received approximately $269,000,000$293,344,000 in net proceeds from the issuance of shares of our common stock. As of December 31, 2016,2018, we had a cash balance of approximately $131,500,000,$161,613,000, however, changing circumstances may cause us to consume funds significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control.
On January 6, 2016,August 1, 2018, we entered into an underwriting agreement with Goldman Sachs & Co. and Cowen and Company, LLC, as the representativesrepresentative of the several underwriters, or the Underwriters, relating to an underwritten public offering of 15,151,51512,745,098 shares of our common stock at a price to the public offering price of $8.25$5.10 per share. Under the terms of the underwriting agreement, weWe granted the Underwritersunderwriters an option, exercisable for a 30-day optionperiod of 30 days, to purchase up to an aggregate of 2,272,7271,911,764 additional shares of our common stock, whichstock. On August 2, 2018, the underwriters exercised the option was exercised in full. The net proceeds to us from the offering, including the exercise of the option to purchase additional shares, were approximately $134,864,000,$69,908,000, after deducting the underwriting discountsdiscount and commissions and other estimated offering expenses payable by us. The offering closed on January 12, 2016.
SubsequentAugust 6, 2018 and we issued 14,656,862 shares of our common stock. In connection with the Knight License Agreement, Knight entered into a subscription agreement with us, pursuant to December 31, 2016, certain individuals exercised warrants to purchase 1,800,000which Knight purchased 3,921,568 shares of our common stock concurrently with the closing of the underwritten public offering of common stock at a price of $5.10, for approximately $2,436,000 in cash.proceeds of $20,000,000.
As a result of developments in the pharmaceutical industry that negatively affected independent pharmacies, including such pharmacies’ reliance on third party payors, in 2016, we identified that payment periods for our retail pharmacy distributors were becoming longer than in prior years. As a result, during the third quarter of 2016, we centralized the distribution channel for both our retail pharmacy distributors and wholesale distributors, in order to facilitate sales to a broader population of retail pharmacies and minimize business risk exposure to any one retail pharmacy. During the third quarter of 2016,On May 1, 2018, we entered into new distribution agreementsa Credit Agreement, by and among us and our subsidiaries party thereto from time to time, each as a borrower, MidCap Financial Trust, as an agent and as lender, and the additional lenders party thereto from time to time, which provides a secured term loan facility in an aggregate principal amount of up to $200,000,000, or the Term Loan. Under the terms of the Credit Agreement, the Term Loan will be made in three separate tranches, each, a Tranche, with each Tranche to be made available to us, at our retail pharmacy distributorsoption, upon our achievement of certain milestones. The first Tranche of $75,000,000, or Tranche 1, was drawn by us on June 7, 2018, following approval by FDA of the NDA for IMVEXXY®. We intend to effectuate this centralization which were effective Septemberuse the proceeds from the first draw down to support the commercial launch of IMVEXXY®. The second Tranche of $75,000,000, or Tranche 2, may be drawn by us on or before May 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including (i) that Tranche 1 2016.has been drawn, (ii) the approval by the FDA of the NDA for BIJUVA™ and (iii) we have consummated our first commercial sale in the United States of BIJUVA™. The third Tranche of $50,000,000, or Tranche 3, may be drawn by us on or before December 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including that (i) Tranche 2 has been drawn and (ii) we have generated at least $75,000,000 of consolidated net revenue attributable to commercial sales of IMVEXXY® and BIJUVA™ during the twelve-month period ending immediately before the funding of Tranche 3.
During the third quarter of 2016, we wrote-off accounts receivable balances of $2,200,000 related to two retail pharmacy distributors. Both pharmacies are relatively small owner-managed pharmacies and share a similar amount of collection risk. Among the factors that contributed to our decision to write-off these balances were our inability to collect the outstanding balances and the lack of a continuing communication and business relationship with these parties following the centralization of the distribution channel for both our retail pharmacy distributors and wholesale distributors, effective September 1, 2016.
For the fiscal year ended December 31, 2016, ourOur net days sales outstanding, or net DSO, is calculated by dividing gross accounts receivable less the reserve for doubtful accounts, chargebacks and payment discounts divided by the average daily net revenues during the fourth quarter of 2018. We also disclose gross DSO, which includes the calculation of gross accounts receivable divided by the average daily gross revenues to distributors during the fourth quarter of 2018. For the quarter ended December 31, 2018, our gross DSO was 9277 days compared to 5068 days for the yearquarter ended December 31, 2015.2017 and our net DSO was 200 days for the quarter ended December 31, 2018 compared to 97 days for the quarter ended December 31, 2017. The increase in our gross DSO as of December 31, 20162018 was primarily as a resultrelated to extended terms given to our customers in connection with the launch of new distribution agreementsIMVEXXY®. Our net DSO was affected by extended terms and increased coupons and discounts given to our customers in connection with our retail pharmacy distributors which were effective September 1, 2016 and had longer payment terms.the launch of IMVEXXY®. We anticipate that our DSO will fluctuate in the future based upon a variety of factors, including longer payment terms associated with the centralizationlaunch of the distribution channel for both our retail pharmacy distributorsIMVEXXY®, BIJUVA™ and wholesale distributors, as compared to the terms previously provided to our retail pharmacy distributors,ANNOVERA™ and changes in the healthcare industry and specific terms that may be extended in connection with the launch of our hormone therapy drug candidates, if approved.
industry.
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We believe that our existing cash and availability under the Term Loan will allow us to fund our operating plan through at least the next 12 months from the date of this annual report.Annual Report. However, if the commercialization of our hormone therapy drug candidatesIMVEXXY®, BIJUVA™ or ANNOVERA™ is delayed, our existing cash and availability under the Term Loan, if we are able to access such funds, may be insufficient to satisfy our liquidity requirements until we are able to commercialize our hormone therapy drug candidates.IMVEXXY®, BIJUVA™ and ANNOVERA™ and we may not be able to access funds under the Term Loan. If our available cash is insufficient to satisfy our liquidity requirements, we may curtail our sales, marketing and other commercialization and pre-commercialization efforts and we may seek to sell additional equity or debt securities. Our ability to sell debt securities or obtain a credit facility. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt making capital expenditures, or declaring dividends.financing is restricted pursuant to the Credit Agreement. To the extent that we raise additional capital through the sale of equity or convertible debt securities, to the extent permitted under the Credit Agreement, the ownership interests of our existing shareholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, certain of which are restricted under the Credit Agreement, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or proposed products.products, if permitted under the Credit Agreement. Additionally, we may have to grant licenses on terms that may not be favorable to us.
We need substantial amounts of cash to complete the clinical development oflaunch and commercializecommercialization of our hormone therapy drug candidates.and contraceptive drugs. The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
Summary of (Uses) and Sources of Cash
| Year Ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | Year Ended December 31, | |||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Net cash flows used in operating activities | $ | (69,142,333 | ) | $ | (79,044,119 | ) | $ | (45,520,996 | ) | $ | (106,811,781 | ) | $ | (76,155,614 | ) | $ | (69,142,333 | ) | ||||||
| Net cash flows used in investing activities | $ | (1,255,456 | ) | $ | (584,361 | ) | $ | (606,756 | ) | $ | (21,497,857 | ) | $ | (827,108 | ) | $ | (1,255,456 | ) | ||||||
| Net cash flows provided by financing activities | $ | 137,225,535 | $ | 92,973,228 | $ | 43,298,099 | $ | 162,787,087 | $ | 72,584,249 | $ | 137,225,535 | ||||||||||||
Operating Activities
The principal use of cash in operating activities for the year ended December 31, 20162018 was to fund our current expenses primarily related to supporting commercialization activities for IMVEXXY®, BIJUVA™ and ANNOVERA™, sales, marketing, scale-up and manufacturing activities and clinical development, adjusted for non-cash items. The increase of approximately $30,656,000 in cash used in operating activities for the year ended December 31, 2018 in comparison to the year ended December 31, 2017 was due primarily to an increase in our net loss and non-cash compensation expense coupled with changes in the components of working capital.
The principal use of cash in operating activities for the year ended December 31, 2017 was to fund our current expenses primarily related to supporting clinical development, scale-up and manufacturing activities and future commercial activities, adjusted for non-cash items. The decreaseincrease of approximately $9,900,000$7,013,000 in cash used in operating activities for the year ended December 31, 20162017 in comparison to the year ended December 31, 20152016 was primarily due primarily to an increase in our net loss adjusted for non-cash compensation expense and changes in the components of working capital.capital and lower non-cash compensation expense, as well as a decrease in net loss.
The increase of approximately $33,500,000 in cash used in operating activities forInvesting Activities
During the year ended December 31, 2015 in comparison2018, we paid $20,000,000 to the year ended December 31, 2014 was due primarily to research and development, sales, general and administrative costs. These were partially offset byPopulation Council, upon FDA approval of ANNOVERA™, based on the Population Council License Agreement. In addition, an approximately $5,100,000 increase in sales.
Investing Activities
Thespending on patents and trademarks resulted in an increase of approximately $671,000 in cash used in investing activities for the year ended December 31, 20162018 compared with the year ended December 31, 2015 was primarily due to an increasesame period in patent costs and the increase in costs relating to purchase of fixed assets.2017.
The decrease of approximately $22,000$428,000 in cash used in investing activities for the year ended December 31, 20152017 compared with the year ended December 31, 20142016 was primarily due to a decrease in patent costs partially offset by the increase inand costs relating to the purchase of fixed assets.
Financing Activities
Financing activities represent the principal source of our cash flow. Our financing activities for the year ended December 31, 2018 provided net cash of approximately $162,787,000. The cash provided by financing activities during the year ended December 31, 2018 included approximately $89,908,000 in proceeds from the sale of our common stock, approximately $1,666,000 in proceeds from the exercise of options as well as funding from our Term Loan of approximately $75,000,000 offset by payment of financing fees of approximately $3,787,000.
On August 1, 2018, we entered into an underwriting agreement with Goldman Sachs & Co. LLC, as representative of the underwriters, relating to an underwritten public offering of 14,656,862 shares of our common stock at a price to the public of $5.10 per share. The net proceeds from the offering, including the exercise of the option to purchase additional shares, were approximately $69,908,000, after deducting the underwriting discount and offering expenses payable by us. The offering closed on August 6, 2018 and we issued 14,656,862 shares of our common stock. In connection with the Knight License Agreement, Knight entered into a subscription agreement with us, pursuant to which Knight purchased 3,921,568 shares of our common stock concurrently with the closing of the underwritten public offering of common stock at a price of $5.10, for proceeds of $20,000,000.
Our financing activities for the year ended December 31, 2017 provided net cash of approximately $72,584,000. The cash provided by financing activities during the year ended December 31, 2017 included approximately $68,573,000 in proceeds from sale of our common stock and approximately $4,011,000 in proceeds from the exercise of options and warrants.
On September 25, 2017, we entered into an underwriting agreement with J.P. Morgan Securities LLC relating to an underwritten public offering of 12,400,000 shares of our common stock at a price of $5.55 per share. The net proceeds to us from the offering were approximately $68,573,000, after deducting estimated offering expenses payable by us. The offering closed on September 28, 2017 and we issued 12,400,000 shares of our common stock.
Our financing activities for the year ended December 31, 2016 provided net cash of approximately $137,226,000. The cash provided by financing activities during the year ended December 31, 2016 included approximately $134,864,000 in proceeds from sale of our common stock and approximately $2,362,000 in proceeds from the exercise of options and warrants.
On January 6, 2016, we entered into an underwriting agreement with Goldman, Sachs & Co. and Cowen and Company, LLC, as the representatives of the several underwriters, or Underwriters, relating to an underwritten public offering of 15,151,515 shares of our common stock at a public offering price of $8.25 per share. Under the terms of the underwriting agreement, we granted the Underwriters a 30-day option to purchase up to an aggregate of 2,272,727 additional shares of common stock, which option was exercised in full. The net proceeds to us from the offering were approximately $134,864,000, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The offering closed on January 12, 2016 and we issued 17,424,242 shares of our common stock.
Our financing activities for the year ended December 31, 2015 provided net cash of approximately $92,973,000. The cash provided by financing activities included approximately $91,375,000 in proceeds from sale of our common stock and approximately $1,598,000 in proceeds from the exercise of options and warrants.
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On July 9, 2015, we entered into an underwriting agreement with Stifel, Nicolaus & Company, Incorporated and Guggenheim Securities, LLC, as the representatives of the several underwriters, or the Stifel Underwriters, relating to an underwritten public offering of 3,846,154 shares of our common stock at a public offering price of $7.80 per share. Under the terms of the underwriting agreement, we granted the Stifel Underwriters a 30-day option to purchase up to an aggregate of 576,923 additional shares of our common stock, which option was exercised in full. The net proceeds to us from the offering were approximately $32,257,000, after deducting underwriting discounts and commissions and other estimated offering expense payable by us. The offering closed on July 15, 2015 and we issued 4,423,077 shares of our common stock.
On February 10, 2015, we entered into an underwriting agreement, or the Cowen Agreement, with Cowen and Company, LLC, as the representative of the several underwriters, or the Cowen Underwriters, relating to an underwritten public offering of 13,580,246 shares of our common stock, at a public offering price of $4.05 per share. Under the terms of the Cowen Agreement, we granted the Cowen Underwriters a 30-day option to purchase up to an aggregate of 2,037,036 additional shares of our common stock, which option was exercised in full. The net proceeds to us from the offering were approximately $59,118,000, after deducting underwriting discounts and commissions and other estimated offering expense payable by us. The offering closed February 17, 2015 and we issued 15,617,282 shares of our common stock.
Our financing activities for the year ended December 31, 2014 provided net cash of approximately $43,298,000. The cash provided by financing activities included approximately $42,771,000 in proceeds from sale of our common stock and approximately $527,000 in proceeds from the exercise of options and warrants.
On July 29, 2014, we entered into an underwriting agreement relating to the issuance and sale by us of 8,565,310 shares of our common stock. Under the terms of the underwriting agreement, we granted the underwriters a 30-day option to purchase up to an additional 1,284,796 shares of our common stock, which was exercised in full on July 30, 2014. The offering closed on August 4, 2014. The net proceeds to us from this offering were approximately $42,771,000, after deducting underwriting discounts and commissions and other offering expenses payable by us.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. We consider an accounting estimate to be critical ifif:
| ● | it requires assumptions to be made that were uncertain at the time the estimate was made, and |
| ● | changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition. |
We base our estimates and judgments on our experience, our current knowledge, our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers, and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require our most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense and income taxes.
Revenue RecognitionRecognition. . We recognize revenue on arrangements in accordance with ASC 605,606, Revenue Recognition. WeIn accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue only when, or as, we satisfy the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability is reasonably assured.performance obligation.
Our OTC and prescription prenatal vitamin products are generally variationsconsist primarily of the same product with slight modifications in formulation and marketing. The primary difference between our OTC and prescription prenatal vitamin products is the source of payment. Purchasers of our OTC prenatal vitamin products pay for the product directly while purchasers of our prescription prenatal vitamin products pay for the product primarily via third-party payers. Both OTC and prescription prenatal vitamin products share the same marketing support team utilizing similar marketing techniques. As of January 1, 2017, we decided to focus on selling our prescription vitamins and ceased manufacturing and distributing our OTC product lines, except for Iron 21/7, which sales have declined steadily over time resulting in immaterial sales.
OTC Products
We generate OTC revenue from product sales primarily to retail consumers. We recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the consumer. We include outbound shipping and handling fees, if any, in revenues, net, and bill them upon shipment. We include shipping expenses in cost of goods sold. A majority of our OTC customers pay for our products with credit cards, and we usually receive the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to OTC sales. We provide an unconditional 30-day money-back return policy underIMVEXXY®, which we accept product returns from our retail and eCommerce OTC customers. We recognize revenue from OTC sales, netbegan selling during the third quarter of estimated returns and sales discounts. As of January 1, 2017, we decided to focus on selling our prescription vitamins and ceased manufacturing and distributing our OTC product lines, except for Iron 21/7, which sales have declined steadily over time resulting in immaterial sales.
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Prescription Products
2018. We sell our name brand and generic prescription products primarily through wholesale distributors, and retail pharmacy distributors. We recognize revenue from prescription product sales, net of sales discounts, chargebacks, wholesaler fees, customer rebates and estimated returns.
Revenuehave one performance obligation related to prescription products sold through wholesale distributors, which is recognized when the prescription products are shipped to the distributorstransfer promised goods to a customer, and the control of the products passes to each distributor. We accept returns of unsalable prescription products sold through wholesale distributors within a return period of six months prior to and up to 12 months following product expiration. Our prescription products currently have a shelf life of 24 months from the date of manufacture. Prior to January 1, 2015, we deferred the recognition of revenue on prescription products sold through wholesale distributors until the right of return no longer existed as, prior to that date, we could not reasonably estimate the amount of future returns. As of January 1, 2015, we began estimating and reserving for returns based on historical return rates, while recording actual product returns against this reserve as received.
Prior to September 1, 2016, we recognized revenuetwo performance obligations related to prescription products sold through retail pharmacy distributors, which are to: (1) transfer promised goods and (2) provide customer service for an immaterial fee. We treat shipping as a fulfillment activity rather than as a separate obligation. We recognize prescription revenue only when we satisfy performance obligations by transferring a promised good or service to a customer. A good or service is considered to be transferred when the product was dispensed bycustomer receives the retail pharmacy distributor,goods or service or obtains control. Control refers to the customer’s ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset. All of our performance obligations, and associated revenue, are transferred to customers at a point in time. Based on our contracts, we invoice customers once our performance obligations have been satisfied, at which point all revenuepayment is unconditional. We disclose receivables from contracts with customers separately in the statement of financial position. Payment for goods or services sold by us is typically due between 30 and discounts related60 days after an invoice is sent to such product were knownthe customer.
The transaction price of a contract is the amount of consideration which we expect to be entitled to in exchange for transferring promised goods or determinable and there was no right of return with respect to such product. On September 1, 2016, we centralized the distribution channel for both our retail pharmacy distributors and wholesale distributors, in order to facilitate salesservices to a broader population of retail pharmacies and mitigate exposure to any one retail pharmacy. Beginning on September 1, 2016, all of our prescriptioncustomer. Prescription products are distributed under thesold at fixed wholesale distributor model described above.
We offer various rebate programs in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The consumer rebate program is designed to enable the end user to submit a coupon to us. If the coupon qualifies, we send a rebate check to the end user. We estimate the allowance for consumer rebates that we have offeredacquisition cost determined based on our experiencelist price. However, the total transaction price is variable as it is calculated net of estimated product returns, chargebacks, rebates, coupons, discounts and industry averages, which is reviewed, and adjusted if necessary, on a quarterly basis. We record distributor fees based on amounts stated in contracts and estimate chargebackswholesaler fees. These estimates are based on the numberamounts earned or to be claimed on the related sales and are classified as reductions of units soldaccounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). To determine the transaction price, we estimate the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract or each period.variable consideration. The estimated amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In determining amounts of variable consideration to include in a contract’s transaction price, we rely on our historical experience and other evidence that supports our qualitative assessment of whether revenue would be subject to a significant reversal. We consider all the facts and circumstances associated with both the risk of a revenue reversal arising from an uncertain future event and the magnitude of the reversal if that uncertain event were to occur. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our original estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such changes in estimates become known.
Research and Development Expense.Expenses. Research and development, or R&D, expenses include internal R&D activities, services of external CROs, costs of their clinical research sites, manufacturing, scale-up and validation costs, and other activities. Internal R&D activity expenses include laboratory supplies, salaries, benefits, and non-cash share-based compensation expenses. CRO activity expenses include preclinical laboratory experiments and clinical trial studies. Other activity expenses include regulatory consulting and legal fees and costs. The activities undertaken by our regulatory consultants that were classified as R&D expenses include assisting, consulting with, and advising our in-house staff with respect to various FDA submission processes, clinical trial processes, and scientific writing matters, including preparing protocols and FDA submissions. Legal activities that were classified as R&D expenses related to designing experiments to generate data for patents and to further the formulation development process for our pipeline technologies. Outside legal counsel also providedinclude professional research and advice regarding R&D, patents and regulatory matters. These consulting and legal expenses were direct costs associated with preparing, reviewing, and undertaking work for our clinical trials and investigative drugs. We charge internal R&D activities and other activity expenses to operations as incurred. We make payments to CROs based on agreed-upon terms, which may include payments in advance of a study starting date. We expense nonrefundable advance payments for goods and services that will be used in future R&D activities when the activity has been performed or when the goods have been received rather than when the payment is made. We review and accrue CRO expenses and clinical trial study expenses based on services performed and rely on estimates of those costs applicable to the completion stage of a study as provided by CROs. Estimated accrued CRO costs are subject to revisions as such studies progress to completion. We charge revisions to expense in the period in which the facts that give rise to the revision become known.
Share-Based Compensation.We measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements may include options, restricted stock, restricted stock units, performance-based awards, and share appreciation rights, and employee share purchase plans. As such, compensation cost is measured on the date of grant at fair value.rights. We amortize such compensation amounts, if any, over the respective service periods of the award. We use the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, Compensation-Stock Compensation, to value options. Option valuation models require the input of assumptions, including the expected life of the stock-based awards, the estimated stock price volatility, the risk-free interest rate, and the expected dividend yield. The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the instrument. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the term of the award. Before January 1, 2017, the expected volatility of share options was estimated based on a historical volatility analysis of peer entities whose stock prices were publicly available that were similar to our company with respect to industry, stage of life cycle, market capitalization, and financial leverage. On January 1, 2017, we began using our own stock price in our volatility calculation along with two other peer entities whose stock prices were publicly available that were similar to our company. Our calculation of estimated volatility is based on historical stock prices over a period equal to the expected term of the awards. The average expected life of warrants is based on the contractual terms of the awards. The average expected life of options is based on the contractual terms of the stock option using the simplified method. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including forfeiture rates, estimates of expected life of the share-based award, stock price volatility and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.
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Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 505, Equity - Based Payments to Non-Employees, or ASC 505. ASC 505 defines the measurement date and recognition period for such instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The estimated expense is recognized each period based on the current fair value of the award. As a result, the amount of expense related to awards to non-employees can fluctuate significantly during the period from the date of the grant through the final measurement date. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.
We recognize the compensation expense for all share-based compensation granted net of estimated forfeitures, based on the grant date fair value estimated in accordance with ASC 718. We generally recognize the compensation expense on a straight-line basis over the employee’s requisite service period. We estimateadopted ASU 2016-09, effective January 1, 2017, electing to account for forfeitures when they occur. Before that, we estimated the forfeiture rate based on our historical experience of forfeitures. If our actual forfeiture rate is materially different from our estimate, share-based compensation expense could be significantly different from what we have recorded in the current period.
We believe that these assumptions are “critical accounting estimates” because significant changes in the assumptions used to develop the estimates materially affect key financial measures including net (loss)/income.
Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. We determine provisionaccount for income taxes usingunder the asset and liability approach to account for income taxes.method. We record current liability for the estimated taxes payable for the current year. We recordrecognize deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferredbasis. We measure deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in effect for the years in which the timingrelated temporary differences are expected to be recovered or settled. TheWe recognize the effect on deferred tax assets and liabilities of changesa change in tax rates or tax lawswhen the rate change is recognized in the provision for income taxes in the period that includes the enactment date.enacted. Valuation allowances are established, when necessary,recorded to reduce deferred tax assets to the amount more-likely-than-notthat will more likely than not be realized.
In accordance with ASC 740, Income Taxes, we recognize the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. We measure recognized uncertain income tax positions using the largest amount that has a likelihood of being realized that is greater than 50%. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. We recognize both interest and penalties related to uncertain tax positions as part of the income tax provision. At December 31, 2018 and 2017, we had no tax positions relating to open tax returns that were considered to be realized. Changes in valuation allowances will flow throughuncertain. Our tax returns are subject to review by the statement of operations unless relatedInternal Revenue Service three years after they are filed. Our U.S. federal and state tax returns since 2011, which was the first year we generated net operating losses, remain open to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted.examination.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. federal tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 34 percent to 21 percent, effective January 1, 2018. As the result of our initial analysis of the impact of the Tax Act, we recorded a provisional amount of net tax expense of $46.7 million in 2017 related to the remeasurement of our deferred tax balances and other effects. We completed our accounting for the income tax effects of the Tax Act in 2018, and no material adjustments were required to the provisional amounts initially recorded.
Segment Reporting. We are managed and operated as one business, which is focused on creating and commercializing products targeted exclusively for women. Our business operations are managed by a single management team that reports to the President of our president.Company. We do not operate separate lines of business with respect to any of our products and we do not prepare discrete financial information with respect to separate products. All product sales are derived from sales in the United States. Accordingly, we view our business as one reportable operating segment.
New Accounting Pronouncements
. In August 2016, Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.
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In March 2016,2018, the FASB issued Accounting Standards Update, or ASU, 2016-09, Compensation – Stock Compensation: Improvements2018-13, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to Employee Share-Based Payment Accounting. Thisdisclose certain new information and modifies some disclosure requirements. The FASB developed the amendments to Accounting Standards Codification, or ASC, 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. The new guidance simplifies several aspectsis effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. We are currently evaluating the effect of this guidance on our disclosures.
In June 2018, the FASB issued ASU 2018-07 to simplify the accounting for employee share-based payment transactions for both public and nonpublic entities, includingpayments to nonemployees by aligning it with the accounting for income taxes, forfeitures,share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and statutory tax withholding requirements, as well as classificationsupersedes the guidance in the statement of cash flows.ASC 505-50. The guidance is effective for public business entities for fiscal yearsin annual periods beginning after December 15, 2016,2018, and interim periods within those fiscal years.annual periods. Early adoption is permitted, including in any annual oran interim period for which financial statements have not been issued, or made available for issuance, but all of the guidance must be adopted in the same period. Ifnot before an entity early adopts the guidance in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. We will adopt the various amendments in ASU 2016-09 in our consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017.ASC 606. We do not expect that the adoption of these amendments tothis standard will have a material effect on our consolidated financial statements.statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. In July 2018, the FASB amended the new leases standard and issued ASU 2018-11, Leases, (Topic 842): Targeted Improvements to give entities another option for transition and to provide lessors with a practical expedient. We are inplan to adopt ASU 2016-02 on January 1, 2019 utilizing the process of analyzing the quantitative impact of this guidance on our results of operations and financial position.alternative transition method allowed for under ASU 2018-11. While we are continuing to assess all potential impacts ofstill finalizing the standard, we currently believe, thequantitative and qualitative impact of adopting this new standard willand the subsequent amendments, the most significant impact is expected to be primarilythe recognition of a right of use asset and lease liability on our statement of financial position related to the accountingoperating leases for our operating lease.
In July 2015,new and existing office space. We elected the FASB issued ASU 2015-11, Inventory (Topic 330), simplifyingoptional transition method of recognizing a cumulative-effect adjustment to the Measurementopening balance of Inventory. This guidance requires entities to measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market (LOCOM). The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (LIFO) or the retail inventory method (RIM). Entities that use LIFO or RIMretained earnings on January 1, 2019. Therefore, comparative financial information will not be adjusted and will continue to usebe reported under ASC 840. We also elected the transition relief package of practical expedients and as a result we will not assess 1) whether existing impairment models. The new guidance doesor expired contracts contain leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less. We will not changeseparate lease components from non-lease components for our specified asset classes. Based on our preliminary calculations, we currently expect to recognize right-of-use asset and corresponding lease liability between $4 million to $5 million on our Consolidated Balance Sheet based on the calculationpresent value of net realizable value that entities are required to calculate when applying existing LOCOM guidance. Net realizable value isfuture minimum lease payments under operating leases in effect on January 1, 2019. Additionally, the estimated selling price in the ordinary courseadoption of business, less reasonably predictable costs of completion, disposal and transportation. Under the new guidance, however, entitiesstandard will no longer need to calculate other measures of “market.” The guidance is effective for public business entities for fiscal years beginning after December 15, 2016,result in increased disclosure requirements in our quarterly and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2015-11 in the fourth quarter of 2016. The adoption of this ASU did not have a material effect on our consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We adopted ASU 2014-15 in the fourth quarter of 2016. The adoption of this ASU did not have a material effect on our consolidated financial statements and disclosures.filings.
In May 2014, the FASB and the International Accounting Standards Board (IASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. TheseThis may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligations.obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption is permitted after December 15, 2016, and the standard is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU 2016-10), narrow-scope improvements and practical expedients (ASU 2016-12) and technical corrections and improvements to topic 606 (ASU 2016-20) in its new revenue standard. We have performed a preliminary reviewadopted this standard under the modified retrospective method to all contracts not completed as of the requirements of the new revenue standard and are monitoring the activity of the FASBJanuary 1, 2018 and the transition resource group as it relates to specific interpretive guidance. We have reviewed customer contracts and applied the five-step model of the new standard to our contracts as well as compared the results to our current accounting practices. At this point of our analysis, we doadoption did not believe that the adoption of this standard will have a material effect on our financial statements but will potentially expandhowever we expanded our disclosures related to contracts with customers.
62Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, and are not expected to, have a material effect on our results of operations or financial position.
Off-Balance Sheet Arrangements
As of December 31, 2016, 2015,2018, 2017, and 2014,2016, we had no off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions, which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our drugs or drug candidates, use of such drugs or drug candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is sometimes unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2016, 2015,2018, 2017, and 2014.2016.
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by GAAP, an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements.
Effects of Inflation
For each of the fiscal years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, our business and operations have not been materially affected by inflation.
Contractual Obligations
A summary of contractual obligations as of December 31, 20162018 is as follows:
| Payments Due By Period | ||||||||||||
| Total | Less than 1 Year | 1-3 Years | 4-5 Years | |||||||||
| Operating Lease Obligations | $ | 4,928,002 | $ | 864,827 | $ | 3,128,862 | $ | 934,313 | ||||
| Payments Due By Period | ||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 4-5 Years | |||||||||||||
| Operating lease obligations(1) | $ | 9,609,015 | $ | 1,142,404 | $ | 4,820,336 | $ | 3,646,275 | ||||||||
| Debt payments(2) | 75,000,000 | — | 41,666,667 | 33,333,333 | ||||||||||||
| Interest payment(3) | 21,699,957 | 7,760,888 | 11,764,925 | 2,174,144 | ||||||||||||
| Purchase commitments(4) | 2,565,538 | 286,901 | 1,112,578 | 1,166,059 | ||||||||||||
| Total | $ | 108,874,510 | $ | 9,190,193 | $ | 59,364,506 | $ | 40,319,811 | ||||||||
| (1) | Operating lease obligations represent our current lease and the full premises relating to our new lease that we signed in the fourth quarter of 2018. |
| (2) | Principal on each tranche of our debt is payable in 36 equal monthly installments beginning May 1, 2020 until paid in full on May 1, 2023. However, if we generate at least $95,000,000 of consolidated net revenue attributable to commercial sales of BIJUVATM and IMVEXXY® by December 31, 2019, we may extend the interest-only period by an additional 12 months to May 1, 2021. |
| (3) | Interest calculation is based on interest rates in place on December 31, 2018. | |
| (4) | Includes Catalent purchase commitments described below. The amounts presented here represent our estimates of the minimum required payments under the agreement with Catalent. |
Intellectual Property Licenses
We have license agreements with third parties that provide for minimum royalty, license, and exclusivity payments to be paid by us for access to certain technologies. In addition, we pay royalties as a percent of revenue as described in Note 6, Intangible Assets, to these consolidated financial statements.
Purchase commitments
We have a manufacturing and supply agreement whereby we are required to purchase from Catalent a minimum of number of softgels during the first contract year and a higher number or softgels after the first contract year. If the minimum order quantities of specific products are not met, we are required to pay Catalent 50% of the difference between the total amount we would have paid to Catalent if the minimum requirement had been fulfilled and the sum of all purchases of our products from Catalent during the contract year.
Legal Proceedings
From time to time, we are involved in litigation and proceedings in the ordinary course of business. We are not currently involved in any legal proceeding that we believe would have a material effect on our consolidated financial condition, results of operations, or cash flows.
Employment Agreements
We have entered into employment agreements with certain of our executives that provide for compensation and certain other benefits. Under certain circumstances, including a change in control, some of these agreements provide for severance or other payments, if those circumstances occur during the term of the employment agreement.
Seasonality
The specialty pharmaceutical industry component of women’s health is not subject to seasonal sales fluctuation.
63
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We had a cash balance of $131,500,000approximately $161,613,000 as of December 31, 20162018 . We hold certain portions of our cash balances in overnight money market placements all of which are fully available to us to support our cash flow requirements. The primary objective of our investment policy is to preserve principal and maintain proper liquidity to meet operating needs. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. To minimize this risk, we intend to maintain a portfolio that may include cash, cash equivalents and investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Due to the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.
We are also subject to market risk in connection with borrowings under our Term Loan. Amounts borrowed under our Term Loan bear interest at a rate equal to the sum of (i) one-month LIBOR (subject to a LIBOR floor of 1.50%) plus (ii) 7.75% per annum. At December 31, 2018, the outstanding principal balance on our Term Loan, net of issuance costs, was approximately $73,381,000. Considering the total outstanding balance of approximately $75,000,000, as of December 31, 2018, a 1.0% change in interest rates would result in an impact to income before income taxes of approximately $750,000 per year.
| Item 8. | Financial Statements and Supplementary Data |
Reference is made to the financial statements, the notes thereto, and the reports thereon, commencing on page F-1 of this Annual Report, which financial statements, notes, and reports are incorporated herein by reference.
| 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
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016,2018, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) is 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 was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. Further, internal controls may become inadequate as a resultbecause of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
64
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on management’s assessment, we believe that our internal controls over financial reporting were effective as of December 31, 2016.2018.
The effectiveness of our internal control over financial reporting as of December 31, 20162018 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their Report of Independent Registered Certified Public Accounting Firm on Internal Control Over Financial Reporting as of December 31, 2016,2018, which appears below.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TherapeuticsMD, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of TherapeuticsMD, Inc. (a Nevada Corporation)corporation) and subsidiaries (the “Company”) as of December 31, 2016,2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 27, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual reportReport on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016, and our report dated February 28, 2017 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTONGrant Thornton LLP
Fort Lauderdale, Florida
February 28, 2017
27, 2019
66
| Item 9B. | Other Information |
None.
| Item 10. | Directors, Executive Officers, and Corporate Governance |
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 20172019 Annual Meeting of Stockholders.
| Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 20172019 Annual Meeting of Stockholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 20172019 Annual Meeting of Stockholders.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statements to be filed pursuant to Regulation 14A of the Exchange Act for our 20172019 Annual Meeting of Stockholders.
| Item 14. | Principal Accounting Fees and Services |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 20172019 Annual Meeting of Stockholders.
67
| Item | Exhibits, Financial Statement Schedules |
| (a) | Financial Statements and Financial Statements Schedules |
| (1) | Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this Annual Report. | |
| (2) | No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the consolidated financial statements or notes thereto. | |
| (b) | Exhibits |
| 10.23* | December 17, 2015 | Employment Agreement between the Company and Brian Bernick(8) | |||
| December 17, 2015 | Employment Agreement between the Company and Michael Donegan(8) | ||||
| December 17, 2015 | Employment Agreement between the Company and Mitchel Krassan(8) | ||||
| 21.1† | February | Subsidiaries of the Company | |||
| 23.1† | February | Consent of Grant Thornton, LLP | |||
| February |
68
| * | Indicates a contract with management or compensatory plan or arrangement. |
| ** | Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange Commission. |
| *** | Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to this omitted information. |
| † | Filed herewith. |
| (1) | Filed as an exhibit to Form 8-K filed with the Commission on July 10, 2009 and incorporated herein by reference (SEC File No. 000-16731). |
| (2) | Filed as an exhibit to Form 8-K filed with the Commission on June 14, 2010 and incorporated herein by reference (SEC File No. 000-16731). |
| (3) | Filed as an exhibit to Form 10-K for the year ended December 31, 2007 filed with the Commission on May 1, 2008 and incorporated herein by reference (SEC File No. 000-16731). |
| (4) | Filed as an exhibit to Form 8-K filed with the Commission on July 21, 2011 and incorporated herein by reference (SEC File No. 000-16731). |
| (5) | Filed as an exhibit to Form 10-Q for quarter ended June 30, 2010 filed with the Commission on August 3, 2010 and incorporated herein by reference (SEC File No. 000-16731). |
| (6) | Filed as an exhibit to Form 10-Q for quarter ended June 30, 2015 filed with the Commission on August 7, 2015 and incorporated herein by reference (SEC File No. 001-00100). |
| (7) | Filed as an exhibit to Definitive 14C Information Statement filed with the Commission on June 29, 2010 and incorporated herein by reference (SEC File No. 000-16731). |
| (8) | Filed as an exhibit to Form 8-K filed with the Commission on December 22, 2015 and incorporated herein by reference (SEC File No. 001-00100). |
| (9) | Filed as an exhibit to Form S-3 filed with the Commission on January 25, 2013 and incorporated hereby by reference (SEC File No. 333-186189). |
| (10) | Filed as an exhibit to Form 8-K filed with the Commission on October 11, 2011 and incorporated herein by reference (SEC File No. 000-16731). |
| (11) | Filed as an exhibit to Form 8-K filed with the Commission on August 22, 2013 and incorporated herein by reference (SEC File No. 001-00100). |
| (12) | Filed as an exhibit to Registration Statement on Form S-8 filed with the Commission on October 15, 2013 and incorporated herein by reference (SEC File No. 333-191730). |
| (13) | Filed as an exhibit to Form 8-K filed with the Commission on October 24, 2011 and incorporated herein by reference (SEC File No. 000-16731). |
| (14) | Filed as an exhibit to Form |
| Filed as an exhibit to Form 10-Q for quarter ended June 30, 2012 filed with the Commission on August 9, 2012 and incorporated herein by reference (SEC File No. 000-16731). | |
| Filed as an exhibit to Form 10-K for the year ended December 31, 2015, filed with the Commission on February 26, 2016 and incorporated herein by reference (SEC File No. 001-00100). | |
| Filed as an exhibit to Form |
| Filed as an exhibit to Form 10-Q for quarter ended September 30, 2012 filed with the Commission on November 13, 2012 and incorporated herein by reference (SEC File No. 000-16731). | |
| Filed as an exhibit to Form 8-K filed with the Commission on February 6, 2013 and incorporated herein by reference (SEC File No. 000-16731). |
| Filed as an exhibit to Form 10-Q for quarter ended March 31, 2013 filed with the Commission on May 10, 2013 and incorporated herein by reference (SEC File No. 001-00100). |
69
| Filed as an exhibit to Form 10-Q for quarter ended June 30, 2013 filed with the Commission on August 7, 2013 and incorporated herein by reference (SEC File No. 001-00100). | |
| Filed as an exhibit to Form 10-K for the year ended December 31, 2014 filed with the Commission on March 12, 2015 and incorporated herein by reference (SEC File No. 001-00100). | |
| Filed as an exhibit to Form 10-Q for quarter ended March 31, 2016 filed with the Commission on May 5, 2016 and incorporated herein by reference (SEC File No. 001-00100). | |
| Filed as an exhibit to Form 10-Q for quarter ended September 30, 2016 filed with the Commission on November 5, 2016 and incorporated herein by reference (SEC File No. 001-00100). |
70 77
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: February | THERAPEUTICSMD, INC. |
| /s/ Robert G. Finizio | |
| Robert G. Finizio | |
| Chief Executive Officer |
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 | Capacity | Date | ||||||||
| /s/ Robert G. Finizio | Chief Executive Officer, Director (Principal Executive Officer) | February | ||||||||
| Robert G. Finizio | ||||||||||
| /s/ John C.K. Milligan, IV | President, Secretary, Director | February | ||||||||
| John C.K. Milligan, IV | ||||||||||
| /s/ Daniel A. Cartwright | Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer) | February | ||||||||
| Daniel A. Cartwright | ||||||||||
| /s/ Tommy G. Thompson | Chairman | February | ||||||||
| Tommy G. Thompson | ||||||||||
| /s/ Brian Bernick | Director | February | ||||||||
| Brian Bernick | ||||||||||
| /s/ Jane F. Barlow | Director | February 27, 2019 | ||||||||
| Jane F. Barlow | ||||||||||
| /s/ J. Martin Carroll | Director | February | ||||||||
| J. Martin Carroll | ||||||||||
| /s/ Cooper C. Collins | Director | February | ||||||||
| Cooper C. Collins | ||||||||||
| /s/ Robert V. LaPenta, Jr. | Director | February | ||||||||
| Robert V. LaPenta, Jr | ||||||||||
| /s/ Jules Musing | Director | February | ||||||||
| Jules Musing | ||||||||||
| /s/ Angus C. Russell | Director | February | ||||||||
| Angus C. Russell | ||||||||||
| /s/ Nicholas Segal | Director | February | ||||||||
| Nicholas Segal | ||||||||||
71
INDEX TO FINANCIAL STATEMENTS
F-1
| F- 1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Shareholders
TherapeuticsMD, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of TherapeuticsMD, Inc. (a Nevada Corporation)corporation) and subsidiaries (the “Company”) as of December 31, 20162018 and 2015, and2017, the related consolidated statements of operations, stockholdersstockholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 20162018, and 2015. the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audit.
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the 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 Public Company Accounting Oversight Board (United States).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. An audit includesmisstatement, whether due to error or fraud. 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 supporting the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TherapeuticsMD, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),served as the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2017 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
auditor since 2015.
Fort Lauderdale, Florida
February 28, 2017 27, 2019
F-2
| F- 2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of TherapeuticsMD, Inc.
We have audited the consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations of TherapeuticsMD, Inc. and its cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/Rosenberg Rich Baker Berman & Company
Somerset, New Jersey
March 12, 2015
F-3
THERAPEUTICSMD, INC. AND SUBSIDIARIES
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 131,534,101 | $ | 64,706,355 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $376,374 and $81,910, respectively | 4,500,699 | 3,049,715 | ||||||
| Inventory | 1,076,321 | 690,153 | ||||||
| Other current assets | 2,299,052 | 2,233,897 | ||||||
| Total current assets | 139,410,173 | 70,680,120 | ||||||
| Fixed assets, net | 516,839 | 198,592 | ||||||
| Other Assets: | ||||||||
| Intangible assets, net | 2,405,972 | 1,615,251 | ||||||
| Security deposit | 139,036 | 125,000 | ||||||
| Prepaid expense | — | 1,109,883 | ||||||
| Total other assets | 2,545,008 | 2,850,134 | ||||||
| Total assets | $ | 142,472,020 | $ | 73,728,846 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 7,358,514 | $ | 3,126,174 | ||||
| Other current liabilities | 7,624,085 | 7,539,526 | ||||||
| Total current liabilities | 14,982,599 | 10,665,700 | ||||||
| Commitments and Contingencies - See Note 13 | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock - par value $0.001; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
| Common stock - par value $0.001; 350,000,000 shares authorized: 196,688,222 and 177,928,041 issued and outstanding, respectively | 196,688 | 177,928 | ||||||
| Additional paid-in capital | 436,995,052 | 282,712,078 | ||||||
| Accumulated deficit | (309,702,319 | ) | (219,826,860 | ) | ||||
| Total stockholders’ equity | 127,489,421 | 63,063,146 | ||||||
| Total liabilities and stockholders’ equity | $ | 142,472,020 | $ | 73,728,846 | ||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 161,613,077 | $ | 127,135,628 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $596,602 and $380,580, respectively | 11,063,821 | 4,328,802 | ||||||
| Inventory | 3,267,670 | 1,485,358 | ||||||
| Other current assets | 10,834,693 | 6,604,284 | ||||||
| Total current assets | 186,779,261 | 139,554,072 | ||||||
| Fixed assets, net | 472,683 | 437,055 | ||||||
| Other Assets: | ||||||||
| License rights | 20,000,000 | — | ||||||
| Intangible assets, net | 4,092,679 | 3,099,747 | ||||||
| Other assets | 324,855 | — | ||||||
| Security deposit | 314,446 | 139,036 | ||||||
| Total other assets | 24,731,980 | 3,238,783 | ||||||
| Total assets | $ | 211,983,924 | $ | 143,229,910 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 22,743,841 | $ | 4,097,600 | ||||
| Accrued expenses and other current liabilities | 18,334,948 | 9,223,595 | ||||||
| Total current liabilities | 41,078,789 | 13,321,195 | ||||||
| Long-Term Liabilities: | ||||||||
| Long-term debt | 73,381,014 | — | ||||||
| Total liabilities | 114,459,803 | 13,321,195 | ||||||
| Commitments and Contingencies - See Note 13 | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock - par value $0.001; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
| Common stock - par value $0.001; 350,000,000 shares authorized: 240,462,439 and 216,429,642 issued and outstanding, respectively | 240,463 | 216,430 | ||||||
| Additional paid-in capital | 616,559,938 | 516,351,405 | ||||||
| Accumulated deficit | (519,276,280 | ) | (386,659,120 | ) | ||||
| Total stockholders’ equity | 97,524,121 | 129,908,715 | ||||||
| Total liabilities and stockholders’ equity | $ | 211,983,924 | $ | 143,229,910 | ||||
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
| F- 3 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | Year Ended December 31, | |||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Revenues, net | $ | 19,356,450 | $ | 20,142,898 | $ | 15,026,219 | $ | 16,099,460 | $ | 16,777,713 | $ | 19,356,450 | ||||||||||||
| Cost of goods sold | 4,185,708 | 4,506,673 | 3,671,803 | 2,737,652 | 2,636,943 | 4,185,708 | ||||||||||||||||||
| Gross profit | 15,170,742 | 15,636,225 | 11,354,416 | 13,361,808 | 14,140,770 | 15,170,742 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Sales, general, and administrative | 51,348,414 | 28,721,236 | 22,124,072 | 115,988,954 | 57,703,370 | 51,348,414 | ||||||||||||||||||
| Research and development | 53,943,477 | 72,042,774 | 43,218,938 | 27,299,138 | 33,852,993 | 53,943,477 | ||||||||||||||||||
| Depreciation and amortization | 132,451 | 62,400 | 52,467 | 293,886 | 213,117 | 132,451 | ||||||||||||||||||
| Total operating expenses | 105,424,342 | 100,826,410 | 65,395,477 | 143,581,978 | 91,769,480 | 105,424,342 | ||||||||||||||||||
| Operating loss | (90,253,600 | ) | (85,190,185 | ) | (54,041,061 | ) | (130,220,170 | ) | (77,628,710 | ) | (90,253,600 | ) | ||||||||||||
| Other income and (expense) | ||||||||||||||||||||||||
| Other (expense) income | ||||||||||||||||||||||||
| Miscellaneous income | 367,317 | 95,719 | 46,569 | 2,280,844 | 695,631 | 367,317 | ||||||||||||||||||
| Interest expense | (4,677,834 | ) | — | — | ||||||||||||||||||||
| Accreted interest | 10,824 | 17,442 | 37,309 | — | 7,699 | 10,824 | ||||||||||||||||||
| Financing costs | — | — | (260,027 | ) | ||||||||||||||||||||
| Total other income (expense) | 378,141 | 113,161 | (176,149 | ) | ||||||||||||||||||||
| Total other (expense) income | (2,396,990 | ) | 703,330 | 378,141 | ||||||||||||||||||||
| Loss before income taxes | (89,875,459 | ) | (85,077,024 | ) | (54,217,210 | ) | (132,617,160 | ) | (76,925,380 | ) | (89,875,459 | ) | ||||||||||||
| Provision for income taxes | — | — | — | — | — | — | ||||||||||||||||||
| Net loss | $ | (89,875,459 | ) | $ | (85,077,024 | ) | $ | (54,217,210 | ) | $ | (132,617,160 | ) | $ | (76,925,380 | ) | $ | (89,875,459 | ) | ||||||
| Loss per share, basic and diluted: | ||||||||||||||||||||||||
| Net loss per share, basic and diluted | $ | (0.46 | ) | $ | (0.49 | ) | $ | (0.36 | ) | $ | (0.59 | ) | $ | (0.37 | ) | $ | (0.46 | ) | ||||||
| Weighted average number of common shares outstanding, basic and diluted | 196,088,196 | 173,174,229 | 149,727,228 | 225,026,300 | 205,523,288 | 196,088,196 | ||||||||||||||||||
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
| F- 4 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 20152018, 2017 AND 20142016
| Common Stock | Additional Paid in | Accumulated | Common Stock | Additional Paid in | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | Shares | Amount | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance, January 1, 2014 | 144,976,757 | 144,977 | 135,086,056 | (80,532,626 | ) | 54,698,407 | ||||||||||||||||||||||||||||||||||
| Shares issued in offerings, net of cost | 9,850,106 | 9,850 | 42,761,503 | — | 42,771,353 | |||||||||||||||||||||||||||||||||||
| Shares issued for exercise of options, net | 854,573 | 855 | 344,891 | — | 345,746 | |||||||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants, net | 365,583 | 365 | 180,635 | — | 181,000 | |||||||||||||||||||||||||||||||||||
| Shares issued for exercise of restricted stock units | 50,000 | 50 | (50 | ) | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 4,609,811 | — | 4,609,811 | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (54,217,210 | ) | (54,217,210 | ) | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | 156,097,019 | 156,097 | 182,982,846 | (134,749,836 | ) | 48,389,107 | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2016 | 177,928,041 | $ | 177,928 | $ | 282,712,078 | $ | (219,826,860 | ) | $ | 63,063,146 | ||||||||||||||||||||||||||||||
| Shares issued in offerings, net of cost | 20,040,359 | 20,040 | 91,354,609 | — | 91,374,649 | 17,424,242 | 17,424 | 134,846,051 | — | 134,863,475 | ||||||||||||||||||||||||||||||
| Shares issued for exercise of options, net | 612,981 | 613 | 1,231,966 | — | 1,232,579 | 722,744 | 723 | 1,372,277 | — | 1,373,000 | ||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants, net | 1,177,682 | 1,178 | 364,822 | — | 366,000 | 613,195 | 613 | 988,447 | — | 989,060 | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 6,777,835 | — | 6,777,835 | — | — | 17,076,199 | — | 17,076,199 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | (85,077,024 | ) | (85,077,024 | ) | — | — | — | (89,875,459 | ) | (89,875,459 | ) | ||||||||||||||||||||||||||
| Balance, December 31, 2015 | 177,928,041 | 177,928 | 282,712,078 | (219,826,860 | ) | 63,063,146 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | 196,688,222 | 196,688 | 436,995,052 | (309,702,319 | ) | 127,489,421 | ||||||||||||||||||||||||||||||||||
| Shares issued in offerings, net of cost | 17,424,242 | 17,424 | 134,846,051 | — | 134,863,475 | 12,400,000 | 12,400 | 68,560,235 | — | 68,572,635 | ||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants, net | 722,744 | 723 | 1,372,277 | — | 1,373,000 | 7,238,874 | 7,239 | 3,791,760 | — | 3,798,999 | ||||||||||||||||||||||||||||||
| Shares issued for exercise of options, net | 613,195 | 613 | 988,447 | — | 989,060 | 102,546 | 103 | 212,512 | — | 212,615 | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 17,076,199 | — | 17,076,199 | — | — | 6,760,425 | — | 6,760,425 | ||||||||||||||||||||||||||||||
| Adoption of ASU 2016-09 | — | — | 31,421 | (31,421 | ) | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (76,925,380 | ) | (76,925,380 | ) | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 216,429,642 | 216,430 | 516,351,405 | (386,659,120 | ) | 129,908,715 | ||||||||||||||||||||||||||||||||||
| Shares issued in offerings, net of cost | 18,578,430 | 18,578 | 89,889,219 | 89,907,797 | ||||||||||||||||||||||||||||||||||||
| Shares issued for exercise of options, net | 5,454,367 | 5,455 | 1,660,753 | 1,666,208 | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | 8,658,561 | 8,658,561 | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (89,875,459 | ) | (89,875,459 | ) | — | — | — | (132,617,160 | ) | (132,617,160 | ) | ||||||||||||||||||||||||||
| Balance, December 31, 2016 | 196,688,222 | $ | 196,688 | $ | 436,995,052 | $ | (309,702,319 | ) | $ | 127,489,421 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 240,462,439 | $ | 240,463 | $ | 616,559,938 | $ | (519,276,280 | ) | $ | 97,524,121 | ||||||||||||||||||||||||||||||
The accompanying footnotes are an integral part of these consolidated financial statements.
F-6
| F- 5 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December, 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (89,875,459 | ) | $ | (85,077,024 | ) | $ | (54,217,210 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation | 77,906 | 29,959 | 28,987 | |||||||||
| Amortization of intangible assets | 54,545 | 32,441 | 23,480 | |||||||||
| Provision for (recovery of) doubtful accounts | 2,524,909 | 22,157 | (5,436 | ) | ||||||||
| Share-based compensation | 17,411,021 | 7,189,699 | 4,970,312 | |||||||||
| Amortization of deferred financing costs | — | — | 260,027 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (3,975,893 | ) | (917,656 | ) | (458,028 | ) | ||||||
| Inventory | (386,168 | ) | 491,960 | (138,495 | ) | |||||||
| Other current assets | 709,907 | (773,532 | ) | 680,281 | ||||||||
| Other assets | — | (17,442 | ) | (37,309 | ) | |||||||
| Accounts payable | 4,232,340 | (3,200,955 | ) | 4,212,912 | ||||||||
| Deferred revenue | — | (522,613 | ) | (1,079,967 | ) | |||||||
| Other current liabilities | 84,559 | 3,698,887 | 239,450 | |||||||||
| Net cash used in operating activities | (69,142,333 | ) | (79,044,119 | ) | (45,520,996 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Patent costs | (845,266 | ) | (419,104 | ) | (586,480 | ) | ||||||
| Purchase of fixed assets | (396,154 | ) | (165,257 | ) | (30,962 | ) | ||||||
| (Payment) refund of security deposit | (14,036 | ) | — | 10,686 | ||||||||
| Net cash used in investing activities | (1,255,456 | ) | (584,361 | ) | (606,756 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from sale of common stock, net of costs | 134,863,475 | 91,374,649 | 42,771,353 | |||||||||
| Proceeds from exercise of options | 989,060 | 1,232,579 | 345,746 | |||||||||
| Proceeds from exercise of warrants | 1,373,000 | 366,000 | 181,000 | |||||||||
| Net cash provided by financing activities | 137,225,535 | 92,973,228 | 43,298,099 | |||||||||
| Increase (decrease) in cash | 66,827,746 | 13,344,748 | (2,829,653 | ) | ||||||||
| Cash, beginning of period | 64,706,355 | 51,361,607 | 54,191,260 | |||||||||
| Cash, end of period | $ | 131,534,101 | $ | 64,706,355 | $ | 51,361,607 | ||||||
| Year Ended December, 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (132,617,160 | ) | $ | (76,925,380 | ) | $ | (89,875,459 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation of fixed assets | 181,412 | 141,601 | 77,906 | |||||||||
| Amortization of intangible assets | 112,474 | 71,516 | 54,545 | |||||||||
| Provision for doubtful accounts | 216,022 | 4,206 | 2,524,909 | |||||||||
| Share-based compensation | 8,661,967 | 6,889,323 | 17,411,021 | |||||||||
| Amortization of deferred financing costs | 269,859 | — | — | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (6,951,041 | ) | 167,691 | (3,975,893 | ) | |||||||
| Inventory | (1,782,312 | ) | (409,037 | ) | (386,168 | ) | ||||||
| Other current assets | (2,332,335 | ) | (4,434,130 | ) | 709,907 | |||||||
| Other assets | (324,855 | ) | — | — | ||||||||
| Accounts payable | 18,646,241 | (3,260,914 | ) | 4,232,340 | ||||||||
| Accrued expenses and other current liabilities | 9,107,947 | 1,599,510 | 84,559 | |||||||||
| Net cash used in operating activities | (106,811,781 | ) | (76,155,614 | ) | (69,142,333 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Payment for intellectual property license | (20,000,000 | ) | — | — | ||||||||
| Patent costs | (1,105,407 | ) | (765,291 | ) | (845,266 | ) | ||||||
| Purchase of fixed assets | (217,040 | ) | (61,817 | ) | (396,154 | ) | ||||||
| Payment of security deposit | (175,410 | ) | — | (14,036 | ) | |||||||
| Net cash used in investing activities | (21,497,857 | ) | (827,108 | ) | (1,255,456 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from sale of common stock, net of costs | 89,907,797 | 68,572,635 | 134,863,475 | |||||||||
| Proceeds from term loan | 75,000,000 | — | — | |||||||||
| Payment of deferred financing fees | (3,786,918 | ) | — | — | ||||||||
| Proceeds from exercise of options | 1,666,208 | 212,615 | 989,060 | |||||||||
| Proceeds from exercise of warrants | — | 3,798,999 | 1,373,000 | |||||||||
| Net cash provided by financing activities | 162,787,087 | 72,584,249 | 137,225,535 | |||||||||
| Increase (decrease) in cash | 34,477,449 | (4,398,473 | ) | 66,827,746 | ||||||||
| Cash, beginning of period | 127,135,628 | 131,534,101 | 64,706,355 | |||||||||
| Cash, end of period | $ | 161,613,077 | $ | 127,135,628 | $ | 131,534,101 | ||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Interest paid | $ | 1,890,166 | $ | — | $ | — | ||||||
The accompanying footnotes are an integral part of these consolidated financial statements.
F-7
| F- 6 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY
TherapeuticsMD, Inc., a Nevada corporation, or TherapeuticsMD or the Company, has three wholly owned subsidiaries, vitaMedMD, LLC, a Delaware limited liability company, or VitaMed; BocaGreenMD, Inc., a Nevada corporation, or BocaGreen; and VitaCare Prescription Services, Inc., a Florida corporation, or VitaCare. Unless the context otherwise requires, TherapeuticsMD, VitaMed, BocaGreen, and VitaCare collectively are sometimes referred to as “our company,” “we,” “our,” or “us.”
Nature of Business
We are a women’s health carehealthcare company focused on creating and commercializing innovative products targeted exclusivelyto support the lifespan of women and championing awareness of women’s healthcare issues, specifically, for pregnancy prevention, pregnancy, childbirth, nursing, pre-menopause, and menopause. At TherapeuticsMD, we combine entrepreneurial spirit, clinical expertise, and business leadership to develop and commercialize health solutions that enable new standards of care for women. Currently, we are focused on pursuing the regulatory approvals and pre-commercialization activities necessary for commercialization of ourOur solutions range from advanced hormone therapy pharmaceutical products. Our drug candidates that have completed clinical trials are designedproducts to alleviatepatient-controlled, long-acting contraceptive. We also manufacture and distribute branded and generic prescription prenatal vitamins under the symptoms ofvitaMedMD® and reduce the health risks resulting from menopause-related hormone deficiencies, including hot flashes, osteoporosis and vaginal discomfort. We are developing these hormone therapy drug candidates, which contain estradiol and progesterone alone or in combination, with the aim of demonstrating clinical efficacy at lower doses, thereby enabling an enhanced side effect profile compared with competing products. BocaGreenMD® brands.
With our SYMBODA™ technology, we are developing and commercializing advanced hormone therapy pharmaceutical products to enable delivery of bio-identical hormones through a variety of dosage forms and administration routes. Our track record of commercialization allows us to efficiently leverage and grow our marketing and sales organization to commercialize our recently approved products.
During 2018, U.S. Food and Drug Administration, or FDA, approval of our drugs has transitioned our company from predominately focused on conducting research and development to one focused on commercializing our drugs. In July 2018, we launched our recently FDA approved product, IMVEXXY® (estradiol vaginal inserts) for the treatment of moderate-to-severe dyspareunia (vaginal pain associated with sexual activity), a symptom of vulvar and vaginal atrophy, or VVA, due to menopause. We are also focused on commercialization activities necessary for launch of BIJUVA™ and ANNOVERA™. BIJUVA™ is our hormone therapy combination of bio-identical 17ß-estradiol and bio-identical progesterone in a single, oral softgel capsule, for the treatment of moderate-to-severe vasomotor symptoms, or VMS, due to menopause in women with a uterus, which was approved by the FDA on October 28, 2018. ANNOVERA™ (segesterone acetate/ethinyl estradiol vaginal system), is the first and only patient-controlled, procedure-free, reversible prescription contraceptive that can prevent unintended pregnancy for up to a full year, which was approved by the FDA on August 10, 2018. On July 30, 2018, we entered into a license and supply agreement with Knight Therapeutics Inc., or Knight, pursuant to which we granted Knight an exclusive license to commercialize IMVEXXY® and BIJUVA™ in Canada and Israel. In addition, on July 30, 2018, we manufacture and distribute branded and generic prescription prenatal vitamins, as well as over-the-counter,entered into an exclusive license agreement, or OTC, iron supplements.the Council License Agreement, with the Population Council, Inc., or the Population Council, to commercialize ANNOVERA™ in the U.S.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of our company and our wholly owned subsidiaries, VitaMed, BocaGreen and VitaCare. All intercompany balances and transactions have been eliminated in consolidation.
Cash
We maintain cash at financial institutions that at times may exceed the Federal Deposit Insurance Corporation, (the “FDIC”)or the FDIC, insured limits of $250,000 per bank. We have never experienced any losses related to these funds.
| F- 7 |
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are customer obligations due under normal trade terms. We review accounts receivable for uncollectible accounts and credit card charge-backs and provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. We consider trade accounts receivable past due for more than 90 days to be delinquent. We write off delinquent receivables against our allowance for doubtful accounts based on individual credit evaluations, the results of collection efforts, and specific circumstances of customers. We record recoveries of accounts previously written off when received as an increase in the allowance for doubtful accounts. To the extent data we use to calculate these estimates does not accurately reflect bad debts, adjustments to these reserves may be required. At December 31, 2016, two2018, three different customers represented 28%42%, 24% and 20%, respectively,13% of our gross accounts receivable. At December 31, 2015, three2017, four different customers represented 27%, 30%23%, 22% and 14%, respectively,11% of our gross accounts receivable.
F-8
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 2016, we wrote-off accounts receivable balances of $2.2 million related to two retail pharmacy distributors. Both pharmacies are relatively small owner-managed pharmacies and share a similar amount of collection risk. Among the factors that contributed to our decision to write-off these balances were our inability to collect the outstanding balances and the lack of a continuing communication and business relationship with these parties following the centralization of the distribution channel for both our retail pharmacy distributors and wholesale distributors, effective September 1, 2016.
Inventories
Inventories represent hormone therapy drugs, packaged vitamins, nutritional products and supplements and raw materials, which are valued at the lower of cost or net realizable value using the average-cost method. Any costs of manufacturing the prescription products associated with the deferred revenue (as discussed in Revenue Recognition) prior to January 1, 2015, were recorded as deferred costs and included in inventory, until such time as the related deferred revenue was recognized. We review our inventory for excess or obsolete inventory and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Obsolescence may occur due to product expiring or product improvements rendering previous versions obsolete.
Pre-Launch Inventory
Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then pre-launch inventory costs associated with such product candidates are expensed as research and development expenses during the period the costs are incurred. We have not capitalized any pre-launch inventory to date.
Fixed Assets
We state fixed assets at cost, net of accumulated depreciation. We charge maintenance costs, which do not significantly extend the useful lives of the respective assets, and repair costs to operating expenses as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over the shorter of their useful life or the term of the lease.
We capitalize software and software development costs incurred to create and acquire computer software for internal use, principally related to software coding and application development. We begin to capitalize software development costs when both the preliminary project stage is completed and it is probable that the software will be used as intended. Capitalized software costs include only external direct costs and services utilized in developing or obtaining computer software. Capitalized software costs are amortized on a straight-line basis when placed into service over the estimated useful life, generally five to seven years.
Intangible Assets
Patents and Trademarks
We have adopted the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 350, Intangibles - Goodwill and Other, or ASC 350. Capitalized patent costs, net of accumulated amortization, include outside legal costs incurred for patent applications. In accordance with ASC 350, once a patent is granted, we amortize the capitalized patent costs over the remaining life of the patent using the straight-line method. If the patent is not granted, we write-off any capitalized patent costs at that time. As of December 31, 2016,2018, we had 1721 issued domestic, or U.S., patents and 24 issued foreign patents (See Note 7)6). We capitalize external costs, consisting primarily of legal costs, related to securing our trademarks. Trademarks are perpetual and are not amortized. We review intangible assets for impairment annually or when events or circumstances indicate that their carrying amount may not be recoverable.
F-9
| F- 8 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-Lived Assets
We review the carrying values of fixed assets and long-lived intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Such events or circumstances may include, among others, the following:
| ● | significant declines in an asset’s market price; |
| ● | significant deterioration in an asset’s physical condition; |
| ● | significant changes in the nature or extent of an asset’s use or operation; |
| ● | significant adverse changes in the business climate that could impact an asset’s value, including adverse actions or assessments by regulators; |
| ● | accumulation of costs significantly in excess of original expectations related to the acquisition or construction of an asset; |
| ● | current-period operating or cash flow losses combined with a history of such losses or a forecast that demonstrates continuing losses associated with an asset’s use; and |
| ● | expectations that it is more likely than not that an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. |
If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset group’s carrying value for recoverability. This test requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, the determination of which requires judgment. We estimate the undiscounted future cash flows expected to be generated from the use and eventual disposal of the assets and compare that estimate to the respective carrying values in order to determine if such carrying values are recoverable. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. In our assessments, we also consider changes in asset utilization, including, if applicable, the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets is not recoverable, then we record a loss for the difference between the assets’ fair value and respective carrying values. We determine the fair value of the assets using an “income approach” based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include market size and growth, market share, projected selling prices, manufacturing cost, and discount rate. We base estimates upon historical experience, our commercial relationships, market conditions, and available external information about future trends. We believe our current assumptions and estimates are reasonable and appropriate. Unanticipated events and changes in market conditions, however, could affect such estimates, resulting in the need for an impairment charge in future periods. There was no impairment of long-lived assets to be held and used during the years ended December 31, 2016, 2015,2018, 2017, and 2014.2016.
We perform impairment tests for intangible assets with indefinite useful lives annually, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of an intangible asset below its carrying value. The impairment test for assets with indefinite lives consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. There was no impairment of indefinite lived intangible assets during the years ended December 31, 2016, 2015,2018, 2017, and 2014.
F-10
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2016.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued expenses and accrued expenses.long term debt. The carrying amount of cash, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments, which are considered Level 1 assets under the fair value hierarchy.
| F- 9 |
We categorize our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by ASC 820, Fair Value Measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). Assets and liabilities recorded in the consolidated balance sheet at fair value are categorized based on a hierarchy of inputs, as follows:
| Level 1 | unadjusted quoted prices in active markets for identical assets or liabilities; |
| Level 2 | quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and |
| Level 3 | unobservable inputs for the asset or liability. |
At December 31, 20162018 and 2015,2017, we had no assets or liabilities that were valued at fair value on a recurring basis.
The fair value of indefinite-lived assets is measured on a non-recurring basis using significant unobservable inputs (Level 3) in connection with any required impairment test. There was no impairment of intangible assets during the years ended December 31, 2016, 2015,2018, 2017, and 2014.2016.
The carrying amount for the long term debt as of December 31, 2018 (as discussed in Note 8) approximates fair value based on market activity for other debt instruments with similar characteristics and comparable risk (Level 2).
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
In accordance with ASC 740, Income Taxes, we recognize the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. We measure recognized uncertain income tax positions using the largest amount that has a likelihood of being realized that is greater than 50%. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur.
F-11
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize both interest and penalties related to uncertain tax positions as part of the income tax provision. At December 31, 20162018 and 2015,2017, we had no tax positions relating to open tax returns that were considered to be uncertain.
Our U.S. federal and state tax returns are subjectsince 2011, which was the first year we generated net operating losses, remain open to review by the Internal Revenue Service three years after they are filed. Currently, years filed after 2013 are subject to review.examination.
Share-Based Compensation
We measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include options, restricted stock, restricted stock units, performance-based awards, share appreciation rights, and employee share purchase plans. We amortize such compensation amounts, if any, over the respective service periods of the award. We use the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, Compensation-Stock Compensation, to value options. Option valuation models require the input of assumptions, including the expected life of the stock-based awards, the estimated stock price volatility, the risk-free interest rate, and the expected dividend yield. The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term.term of the instrument. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the term of the award. ThePrior to January 1, 2017, the expected volatility of share options was estimated based on a historical volatility analysis of peer entities whose stock prices were publicly available that were similar to the Company with respect to industry, stage of life cycle, market capitalization, and financial leverage. On January 1, 2017, we began using our own stock price in our volatility calculation along with the other peer entities whose stock prices were publicly available that were similar to our company. Our calculation of estimated volatility is based on historical stock prices over a period equal to the expected term of the awards as we have insufficient historical information regarding our stock options to provide a basis for estimate.awards. The average expected life is based on the contractual terms of the stock option using the simplified method. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including forfeiture rates,assumptions: estimates of expected life of the share-based award, stock price volatility and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.
| F- 10 |
Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 505, Equity - Based Payments to Non-Employees, or ASC 505. ASC 505 defines the measurement date and recognition period for such instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The estimated expense is recognized each period based on the current fair value of the award. As a result, the amount of expense related to awards to non-employees can fluctuate significantly during the period from the date of the grant through the final measurement date. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.
We recognize the compensation expense for all share-based compensation granted net of estimated forfeitures,to employees based on the grant date fair value estimated in accordance with ASC 718. We generally recognize the compensation expense on a straight-line basis over the employee’s requisite service period. We estimate the forfeiture rate based on our historical experience of forfeitures. If our actual forfeiture rate is materially different from our estimate, share-based compensation expense could be significantly different from what we have recorded in the current period.
F-12
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
We recognizeadopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. ASC 606 states that a contract is considered “completed” if all (or substantially all) of the revenue on arrangementswas recognized in accordance with revenue guidance that was in effect before the date of initial application. Because all (or substantially all) of the revenue related to sales of our products has been recognized under ASC 605 Revenue Recognition. Weprior to the date of initial application of the new standard, the contracts are considered completed under ASC 606. Based on our evaluation of ASC 606, we concluded that a cumulative adjustment was not necessary upon implementation of ASC 606 on January 1, 2018.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue only when, or as, we satisfy the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability is reasonably assured.performance obligation.
Prescription Products
Our OTCproducts consist primarily of prescription vitamins and prescription prenatal vitamin products are generally variations of the sameour recently approved product with slight modifications in formulation and marketing. The primary difference between our OTC and prescription prenatal vitamin products is the source of payment. Purchasers of our OTC prenatal vitamin products pay for the product directly while purchasers of our prescription prenatal vitamin products pay for the product primarily via third-party payers. Both OTC and prescription prenatal vitamin products share the same marketing support team utilizing similar marketing techniques. As of January 1, 2017, we ceased manufacturing and distributing our OTC product lines, except for Iron 21/7, which have declined steadily over time resulting in immaterial sales. The revenue that is generated by us from major customers is all generated from sales of our prescription prenatal vitamin products which is disclosed in Note 13. There are no major customers for our OTC prenatal vitamin or other products.
Over-the-Counter Products
We generate OTC revenue from product sales primarily to retail consumers. We recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the consumer. We include outbound shipping and handling fees, if any, in revenues, net, and bill them upon shipment. We include shipping expenses in cost of goods sold. A majority of our OTC customers pay for our products with credit cards, and we usually receive the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to OTC sales. We provide an unconditional 30-day money-back return policy underIMVEXXY®, which we accept product returns from our retail and eCommerce OTC customers. We recognize revenue from OTC sales, netbegan selling during the third quarter of estimated returns and sales discounts. As of January 1, 2017, we ceased manufacturing and distributing our OTC product lines, except for Iron 21/7, which have declined steadily over time resulting in immaterial sales.
Prescription Products
2018. We sell our name brand and generic prescription products primarily through wholesale distributors and retail pharmacy distributors. We recognize revenue from prescription product sales, net of sales discounts, chargebacks, wholesaler fees, customer rebates and estimated returns.
Revenuehave one performance obligation related to prescription products sold through wholesale distributors, which is recognizedto transfer promised goods to a customer and two performance obligations related to products sold through retail pharmacy distributors, which are to: (1) transfer promised goods and (2) provide customer service for an immaterial fee. We treat shipping as a fulfillment activity rather than as a separate obligation. We recognize prescription revenue only when we satisfy performance obligations by transferring a promised good or service to a customer. A good or service is considered to be transferred when the prescriptioncustomer receives the goods or service or obtains control. Control refers to the customer’s ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset. All of our performance obligations, and associated revenue, are transferred to customers at a point in time. Based on our contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. We disclose receivables from contracts with customers separately in the statement of financial position. Payment for goods or services sold by us is typically due between 30 and 60 days after an invoice is sent to the customer.
| F- 11 |
The transaction price of a contract is the amount of consideration which we expect to be entitled to in exchange for transferring promised goods or services to a customer. Prescription products are shippedsold at fixed wholesale acquisition cost, or WAC, determined based on our list price. However, the total transaction price is variable as it is calculated net of estimated product returns, chargebacks, rebates, coupons, discounts and wholesaler fees. These estimates are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the distributorscustomer) or a current liability (if the amount is payable to a party other than a customer). In order to determine the transaction price, we estimate the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract or each variable consideration. The estimated amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In determining amounts of variable consideration to include in a contract’s transaction price, we rely on our historical experience and other evidence that supports our qualitative assessment of whether revenue would be subject to a significant reversal. We consider all the facts and circumstances associated with both the risk of a revenue reversal arising from an uncertain future event and the controlmagnitude of the products passesreversal if that uncertain event were to each distributor. occur. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our original estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such changes in estimates become known.
We accept returns of unsalable prescription products sold through wholesale distributors within a return period of six months prior to and up to 12 months following product expiration. Our prescription products currently have a shelf life of 24 months from the date of manufacture. PriorWe do not allow product returns for prescription products that have been dispensed to January 1, 2015, we deferreda patient. We estimate the recognitionamount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue on prescriptionin the period the related product revenue is recognized. Where historical rates of return exist, we use history as a basis to establish a returns reserve for products sold through wholesale distributors untilshipped to wholesalers. For our newly launched products, for which the right of return no longer existed as, priorexists but for which we currently do not have history of product returns, we estimate returns based on available industry data, our own sales information and our visibility into the inventory remaining in the distribution channel. At the end of each reporting period, we may decide to that date, we could not reasonably estimateconstrain revenue for product returns based on information from various sources, including channel inventory levels and dating and sell-through data, the expiration dates of products currently being shipped, price changes of competitive products and any introductions of generic products. We recognize the amount of future returns. Asexpected returns as a refund liability, representing the obligation to return the customer’s consideration. Since our returns primarily consist of January 1, 2015,expired and short dated products that will not be resold, we began estimating and reservingdo not record a return asset for returns based on historical return rates, while recording actual product returns against this reserve as received.
F-13
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Priorthe right to September 1, 2016, we recognized revenue related to prescription products sold through retail pharmacy distributors whenrecover the product was dispensedgoods returned by the retail pharmacy distributor,customer at which point allthe time of the initial sale (when recognition of revenue is deferred due to the anticipated return). Return estimates are recorded in the accrued expenses and discounts related to such product were known or determinable and there was no right of return with respect to such product. On September 1, 2016, we centralizedother current liabilities on the distribution channel for both our retail pharmacy distributors and wholesale distributors, in order to facilitate sales to a broader population of retail pharmacies and mitigate exposure to any one retail pharmacy. Beginning on September 1, 2016, all of our prescription products are distributed under the wholesale distributor model described above.consolidated balance sheet.
We offer various rebate and discount programs in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The consumer rebate program is designed to enable the end user to submit a coupon to us. If the coupon qualifies, we send a rebate check to the end user. We estimate the allowance for consumer rebates and coupons that we have offered based on our experience and industry averages, which is reviewed, and adjusted if necessary, on a quarterly basis. Estimates relating to these rebates and coupons are deducted from gross product revenues at the time the revenues are recognized. We record distributor fees based on amounts stated in contractscontracts. Rebate and coupon estimates and distributor fees are recorded in accrued expenses and other current liabilities on the consolidated balance sheet. We estimate chargebacks based on the number of units sold during the period taking into account prices stated in contracts and our historical experience. Estimates related to distributors fees, rebates, coupons and returns are disclosed in Note 7. We provide invoice discounts to our customers for prompt payment. Estimates relating to invoice discounts and chargebacks are deducted from gross product revenues at the time the revenues are recognized.
As part of the commercial launch for IMVEXXY® during the third quarter of 2018, we introduced a co-pay assistance program where enrolled patients do not pay more than $35 for up to 12 IMVEXXY® prescription fills. This allows patients to access the product at a reasonable cost regardless of insurance coverage. We reimburse pharmacies for this discount through third-party vendors. We consider these payments as consideration paid to the customer and reflect such payments as a reduction of the transaction price as we do not receive a distinct good or service related to these payments. The variable consideration is estimated based on contract prices, the estimated percentage of patients that will utilize the copay assistance, the average assistance paid, the estimated levels of inventory in the distribution channel and the current level of prescriptions covered by patients’ insurance. Payers may change coverage levels for IMVEXXY® positively or negatively, at any time up to the time that we have formally contracted coverage with the payer. As such, the net transaction price of IMVEXXY® is susceptible to such changes in coverage levels, which are outside the influence of the Company. As a result, we constrain revenue recognized for IMVEXXY® to an amount that will not result in a significant revenue reversal in future periods. Our ability to estimate the net transaction price for IMVEXXY® is constrained by our estimates of the amount to be paid for the co-pay assistance program for IMVEXXY® which is directly related to the level of prescriptions paid for by insurance. As such, we record an accrual to reduce gross sales for the estimated co-pay and other patient assistance based on currently available third-party data and our internal analyses. We re-evaluate any constraint each reporting period.
| F- 12 |
OTC Products
Our over the counter, or OTC, and prescription prenatal vitamin products are generally variations of the same product with slight modifications in formulation and marketing. As of January 1, 2017, we decided to focus on selling our prescription vitamins and ceased manufacturing and distributing our OTC product lines, except for Iron 21/7 which we ceased manufacturing in October 2017. We generated OTC revenue from product sales primarily to retail consumers. We recognized revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the consumer. We included outbound shipping and handling fees, if any, in revenues, net, and bill them upon shipment. We included shipping expenses in cost of goods sold. A majority of our OTC customers paid for our products with credit cards, and we usually received the cash settlement in two to three banking days. Credit card sales minimized accounts receivable balances relative to OTC sales. We provided an unconditional 30-day money-back return policy under which we accept product returns from our retail and eCommerce OTC customers. We recognized revenue from OTC sales, net of estimated returns and sales discounts.
Disaggregation of revenue
The following table provides information about disaggregated revenue by product mix for the years ended December 31, 2018, 2017, and 2016:
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Prescription vitamins | $ | 15,041,259 | $ | 16,744,831 | $ | 18,854,984 | ||||||
| IMVEXXY® | 1,058,201 | — | — | |||||||||
| OTC products | — | 32,882 | 501,466 | |||||||||
| Net revenue | $ | 16,099,460 | $ | 16,777,713 | $ | 19,356,450 | ||||||
Segment Reporting
We are managed and operated as one business, which is focused on creating and commercializing products targeted exclusively for women. Our business operations are managed by a single management team that reports to the President of our Company.company. We do not operate separate lines of business with respect to any of our products and we do not prepare discrete financial information with respect to separate products. All product sales are derived from sales in the United States. Accordingly, we view our business as one reportable operating segment.
Shipping and Handling Costs
We expense all shipping and handling costs as incurred. We include these costs in cost of goods sold on the accompanying consolidated financial statements.
| F- 13 |
Advertising Costs
We expense advertising costs when incurred. Advertising costs were $752,611, $792,574,$1,682,746, $448,288, and $698,871$752,611 during the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.
Research and Development Expenses
Research and development, or R&D, expenses include internal R&D activities, services of external contract research organizations, or CROs, costs of their clinical research sites, manufacturing, scale-up and validation costs, and other activities. Internal R&D activity expenses include laboratory supplies, salaries, benefits, and non-cash share-based compensation expenses. Advance payments to be expensed in future research and development activities are capitalized, and were $228,933 at December 31, 2016, all of which was included in other current assets on the accompanying consolidated balance sheets. Advance payments to be expensed in future R&D activities were $1,138,073 at December 31, 2015, of which $1,009,175 was included in other current assets and $128,898 was included in long term prepaid expense on the accompanying consolidated balance sheets. CRO activity expenses include preclinical laboratory experiments and clinical trial studies. Other activity expenses include regulatory consulting and legal fees and costs. The activities undertaken by our regulatory consultants that were classified as R&D expenses include assisting, consulting with, and advising our in-house staff with respect to various FDA submission processes, clinical trial processes, and scientific writing matters, including preparing protocols and FDA submissions. Legal activities that were classified as R&D expenses related to designing experiments to generate data for patents and to further the formulation development process for our pipeline technologies. Outside legal counsel also providedinclude professional research and advice regarding R&D, patents and regulatory matters. These consulting and legal expenses were direct costs associated with preparing, reviewing, and undertaking work for our clinical trials and investigative drugs. We charge internal R&D activities and other activity expenses to operations as incurred. We make payments to CROs based on agreed-upon terms, which may include payments in advance of a study starting date. We expense nonrefundable advance payments for goods and services that will be used in future R&D activities when the activity has been performed or when the goods have been received rather than when the payment is made. We review and accrue CRO expenses and clinical trial study expenses based on services performed and rely on estimates of those costs applicable to the completion stage of a study as provided by CROs. Estimated accrued CRO costs are subject to revisions as such studies progress to completion. We charge revisions to expense in the period in which the facts that give rise to the revision become known.
F-14
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
We calculate earnings per share, or EPS, in accordance with ASC 260, Earnings Per Share, which requires the computation and disclosure of two EPS amounts: basic and diluted. We compute basic EPS based on the weighted-average number of shares of common stock, par value $0.001 per share, or Common Stock, outstanding during the period. We compute diluted EPS based on the weighted-average number of shares of our Common Stock outstanding plus all potentially dilutive shares of our Common Stock outstanding during the period. Such potentially dilutive shares of our Common Stock consist of options, warrants and warrantsrestricted stock awards and were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive due to the net loss reported by us. The table below presents potentially dilutive securities that could affect our calculation of diluted net loss per share allocable to common stockholders for the periods presented.
| As of December 31, | As of December 31, | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||||||
| Stock options | 21,767,854 | 20,725,325 | 16,792,443 | 20,872,824 | 23,365,225 | 21,767,854 | ||||||||||||||||||
| Warrants | 12,060,071 | 12,722,431 | 13,927,916 | 3,007,571 | 3,115,905 | 12,060,071 | ||||||||||||||||||
| Restricted stock awards | 1,040,000 | — | — | |||||||||||||||||||||
| 33,827,925 | 33,447,756 | 30,720,359 | 24,920,395 | 26,481,130 | 33,827,925 | |||||||||||||||||||
Subsequent to December 31, 2016, certain individuals exercised warrants to purchase 1,800,000 shares of our Common Stock for approximately $2,436,000 in cash. See Note 15 - Subsequent Events for more details.
Concentration of Credit Risk and other Risks and Uncertainties
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and trade accounts receivable. Cash is on deposit with financial institutions in the United States and these deposits generally exceed the amount of insurance provided by the FDIC. The Company hasWe have not experienced any historical losses on its deposits of cash.
Concentration of credit risk with respect to our trade accounts receivable from our customers is primarily limited to drug wholesalers and retail pharmacy distributors. Credit is extended to our customers based on an evaluation of a customer’s financial condition, and collateral is not required.
F-15
| F- 14 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ, at times in material amounts, from these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements
In August 2016,2018, the FASB issued Accounting Standards Update, or ASU, 2016-15, Statement2018-13 which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The FASB developed the amendments to ASC 820 as part of Cash Flows (Topic 230). ASU 2016-15 is intendedits broader disclosure framework project, which aims to reduceimprove the diversityeffectiveness of disclosures in practice regarding how certain transactions are classified within the statementnotes to financial statements by focusing on requirements that clearly communicate the most important information to users of cash flows. ASU 2016-15the financial statements. The new guidance is effective for public businessall entities for annual periodsfiscal years beginning after December 15, 2017, including2019 and for interim periods within those fiscal years. Early adoptionAn entity is permitted with retrospective application.to early adopt either the entire standard or only the provisions that eliminate or modify requirements. We are currently evaluating the impacteffect of this guidance on our consolidated financial statements and disclosures.
In March 2016,June 2018, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements2018-07 to Employee Share-Based Payment Accounting. This guidance simplifies several aspects ofsimplify the accounting for employee share-based payment transactions for both public and nonpublic entities, includingpayments to nonemployees by aligning it with the accounting for income taxes, forfeitures,share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and statutory tax withholding requirements, as well as classificationsupersedes the guidance in the statement of cash flows.ASC 505-50. The guidance is effective for public business entities for fiscal yearsin annual periods beginning after December 15, 2016,2018, and interim periods within those fiscal years.annual periods. Early adoption is permitted, including in any annual oran interim period for which financial statements have not been issued, or made available for issuance, but all of the guidance must be adopted in the same period. Ifnot before an entity early adopts the guidance in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. We will adopt the various amendments in ASU 2016-09 in our consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017.ASC 606. We do not expect that the adoption of these amendments tothis standard will have a material effect on our consolidated financial statements.statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. In July 2018, the FASB amended the new leases standard and issued ASU 2018-11, Leases, (Topic 842): Targeted Improvements to give entities another option for transition and to provide lessors with a practical expedient. We are inplan to adopt ASU 2016-02 on January 1, 2019 utilizing the process of analyzing the quantitative impact of this guidance on our results of operations and financial position.alternative transition method allowed for under ASU 2018-11. While we are continuing to assess all potential impacts ofstill finalizing the standard, we currently believe, thequantitative and qualitative impact of adopting this new standard willand the subsequent amendments, the most significant impact is expected to be primarilythe recognition of a right of use asset and lease liability on our statement of financial position related to the accountingoperating leases for our operating lease.
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THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2015,new and existing office space. We elected the FASB issued ASU 2015-11, Inventory (Topic 330), simplifyingoptional transition method of recognizing a cumulative-effect adjustment to the Measurementopening balance of Inventory. This guidance requires entities to measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market (LOCOM). The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (LIFO) or the retail inventory method (RIM). Entities that use LIFO or RIMretained earnings on January 1, 2019. Therefore, comparative financial information will not be adjusted and will continue to usebe reported under ASC 840. We also elected the transition relief package of practical expedients and as a result we will not assess 1) whether existing impairment models. The new guidance doesor expired contracts contain leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less. We will not changeseparate lease components from non-lease components for our specified asset classes. Based on our preliminary calculations, we currently expect to recognize right-of-use asset and corresponding lease liability between $4 million to $5 million on our Consolidated Balance Sheet based on the calculationpresent value of net realizable value that entities are required to calculate when applying existing LOCOM guidance. Net realizable value isfuture minimum lease payments under operating leases in effect on January 1, 2019. Additionally, the estimated selling price in the ordinary courseadoption of business, less reasonably predictable costs of completion, disposal and transportation. Under the new guidance, however, entitiesstandard will no longer need to calculate other measures of “market.” The guidance is effective for public business entities for fiscal years beginning after December 15, 2016,result in increased disclosure requirements in our quarterly and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2015-11 in the fourth quarter of 2016. The adoption of this ASU did not have a material effect on our consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We adopted ASU 2014-15 in the fourth quarter of 2016. The adoption of this ASU did not have a material effect on our consolidated financial statements and disclosures.filings.
In May 2014, the FASB and the International Accounting Standards Board (IASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. TheseThis may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligations.obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption is permitted after December 15, 2016, and the standard is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU 2016-10), narrow-scope improvements and practical expedients (ASU 2016-12) and technical corrections and improvements to topic 606 (ASU 2016-20) in its new revenue standard. We have performed a preliminary reviewadopted this standard under the modified retrospective method to all contracts not completed as of the requirements of the new revenue standard and are monitoring the activity of the FASBJanuary 1, 2018 and the transition resource group as it relates to specific interpretive guidance. We have reviewed customer contracts and applied the five-step model of the new standard to our contracts as well as compared the results to our current accounting practices. At this point of our analysis, we doadoption did not believe that the adoption of this standard will have a material effect on our financial statements but will potentially expandwe expanded our disclosures related to contracts with customers.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, and are not expected to, have a material effect on our results of operations or financial position.
F-17
| F- 15 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVENTORY
Inventory consists of the following:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Finished product | $ | 1,062,285 | $ | 661,167 | ||||
| Raw material | 14,036 | 28,986 | ||||||
| TOTAL INVENTORY | $ | 1,076,321 | $ | 690,153 | ||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Finished products | $ | 2,908,958 | $ | 1,485,358 | ||||
| Work in process | 339,312 | — | ||||||
| Raw materials | 19,400 | — | ||||||
| TOTAL INVENTORY | $ | 3,267,670 | $ | 1,485,358 | ||||
NOTE 4 – OTHER CURRENT ASSETS
Other current assets consist of the following:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Prepaid insurance | $ | 628,039 | $ | 695,421 | ||||
| Prepaid manufacturing costs | 991,809 | — | ||||||
| Prepaid consulting | 128,898 | 334,822 | ||||||
| Other prepaid costs | 405,960 | 369,812 | ||||||
| Prepaid vendor deposits | 44,311 | 159,489 | ||||||
| Prepaid research and development costs | 100,035 | 674,353 | ||||||
| TOTAL OTHER CURRENT ASSETS | $ | 2,299,052 | $ | 2,233,897 | ||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Prepaid sales and marketing costs | $ | 5,148,789 | $ | 5,335,936 | ||||
| Debt financing fees (Note 8) | 1,898,074 | — | ||||||
| Prepaid insurance | 790,465 | 680,243 | ||||||
| Other prepaid costs | 2,997,365 | 588,105 | ||||||
| TOTAL OTHER CURRENT ASSETS | 10,834,693 | $ | 6,604,284 | |||||
NOTE 5 – FIXED ASSETS, NET
Fixed assets, net consist of the following:
| December 31, | December 31, | |||||||||||||||
| 2016 | 2015 | 2018 | 2017 | |||||||||||||
| Accounting system | $ | 301,096 | $ | 149,699 | $ | 301,096 | $ | 301,096 | ||||||||
| Equipment | 215,182 | 132,150 | 490,576 | 273,536 | ||||||||||||
| Furniture and fixtures | 116,542 | 116,542 | ||||||||||||||
| Computer hardware | 80,211 | — | 80,211 | 80,211 | ||||||||||||
| Furniture and fixtures | 113,079 | 69,454 | ||||||||||||||
| Leasehold improvements | 37,888 | — | 37,888 | 37,888 | ||||||||||||
| 747,456 | 351,303 | |||||||||||||||
| TOTAL FIXED ASSETS | 1,026,313 | 809,273 | ||||||||||||||
| Accumulated depreciation | (230,617 | ) | (152,711 | ) | (553,630 | ) | (372,218 | ) | ||||||||
| TOTAL FIXED ASSETS, NET | $ | 516,839 | $ | 198,592 | $ | 472,683 | $ | 437,055 | ||||||||
Depreciation expense for the years ended December 31, 2018, 2017, and 2016 2015,was $181,412, $141,601, and 2014 was $77,906, $29,959, and $28,987, respectively.
NOTE 6 –PREPAID EXPENSE
Prepaid expense consists of the following:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Prepaid manufacturing costs | $ | — | $ | 980,985 | ||||
| Prepaid research and development costs | 128,898 | |||||||
| TOTAL PREPAID EXPENSE | $ | — | $ | 1,109,883 | ||||
F-18
| F- 16 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 76 – INTANGIBLE ASSETS, NET
The following table sets forth the gross carrying amount, accumulated amortization and net carrying amount of our intangible assets as of December 31, 20162018 and 2015:2017:
| December 31, 2016 | December 31, 2018 | |||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted- Average Remaining Amortization Period (yrs.) | Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted- Average Remaining Amortization Period (yrs.) | |||||||||||||||||||||||||
| Amortizing intangible assets: | ||||||||||||||||||||||||||||||||
| Amortizable intangible assets: | ||||||||||||||||||||||||||||||||
| OPERA® software patent | $ | 31,951 | $ | (6,490 | ) | $ | 25,461 | 12.75 | $ | 31,951 | $ | (10,484 | ) | $ | 21,467 | 10.75 | ||||||||||||||||
| Development costs of corporate website | 91,743 | (91,743 | ) | — | n/a | 91,743 | (91,743 | ) | — | n/a | ||||||||||||||||||||||
| Approved hormone therapy drug candidate patents | 1,093,452 | (102,393 | ) | 991,059 | 16 | 2,234,129 | (282,485 | ) | 1,951,644 | 14 | ||||||||||||||||||||||
| Hormone therapy drug candidate patents (pending) | 1,203,987 | — | 1,203,987 | n/a | 1,855,279 | — | 1,855,279 | n/a | ||||||||||||||||||||||||
| Non-amortizing intangible assets: | ||||||||||||||||||||||||||||||||
| Non-amortizable intangible assets: | ||||||||||||||||||||||||||||||||
| Multiple trademarks | 185,465 | — | 185,465 | indefinite | 264,289 | — | 264,289 | indefinite | ||||||||||||||||||||||||
| TOTAL | $ | 2,606,598 | $ | (200,626 | ) | $ | 2,405,972 | $ | 4,477,391 | $ | (384,712 | ) | $ | 4,092,679 | ||||||||||||||||||
| December 31, 2017 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted- Average Remaining Amortization Period (yrs.) | |||||||||||||
| Amortizable intangible assets: | ||||||||||||||||
| OPERA® software patent | $ | 31,951 | $ | (8,487 | ) | $ | 23,464 | 11.75 | ||||||||
| Development costs of corporate website | 91,743 | (91,743 | ) | — | n/a | |||||||||||
| Approved hormone therapy drug candidate patents | 1,293,614 | (171,911 | ) | 1,121,703 | 15 | |||||||||||
| Hormone therapy drug candidate patents (pending) | 1,721,305 | — | 1,721,305 | n/a | ||||||||||||
| Non-amortizable intangible assets: | ||||||||||||||||
| Multiple trademarks | 233,275 | — | 233,275 | indefinite | ||||||||||||
| TOTAL | $ | 3,371,888 | $ | (272,141 | ) | $ | 3,099,747 | |||||||||
| December 31, 2015 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted- Average Remaining Amortization Period (yrs.) | |||||||||||||
| Amortizing intangible assets: | ||||||||||||||||
| OPERA® software patent | $ | 31,951 | $ | (4,493 | ) | $ | 27,458 | 13.75 | ||||||||
| Development costs of corporate website | 91,743 | (91,743 | ) | — | n/a | |||||||||||
| Approved hormone therapy drug candidate patents | 705,752 | (49,845 | ) | 655,907 | 17 | |||||||||||
| Hormone therapy drug candidate patents (pending) | 774,165 | — | 774,165 | n/a | ||||||||||||
| Non-amortizable intangible assets: | ||||||||||||||||
| Multiple trademarks for vitamins/supplements | 157,721 | — | 157,721 | indefinite | ||||||||||||
| Total | $ | 1,761,332 | $ | (146,081 | ) | $ | 1,615,251 | |||||||||
F-19
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We capitalize external costs, consisting primarily of legal costs, related to securing our patents and trademarks. Once a patent is granted, we amortize the approved hormone therapy drug candidate patents using the straight-line method over the estimated useful life of approximately 20 years, which is the life of intellectual property patents. If the patent is not granted, we write-off any capitalized patent costs at that time. Trademarks are perpetual and are not amortized. During the years ended December 31, 20162018 and 2015,2017, there was no impairment recognized related to intangible assets.
| F- 17 |
In addition to numerous pending patent applications, as
As of December 31, 2016,2018, we had 1721 issued domestic or U.S. patents and 24 issued foreign patents, including:
| ● | 11 domestic patents and five foreign patents that relate to |
| ● | Three foreign patents that relate to |
| ● | Three domestic patents (two utility and one design) and 12 foreign patents (three utility and nine design) that relate to IMVEXXY®. These patents establish an important intellectual property foundation for IMVEXXY® and are owned by us. These domestic patents will expire in 2032 or 2033. The foreign utility patents will expire no earlier than 2033. The foreign design patents provide protection expiring no earlier than 2025. In certain jurisdictions, the foreign design patents provide protection through at least 2037. In addition, we have pending patent applications related to IMVEXXY® in the U.S., Argentina, Australia, Brazil, Canada, Europe, Israel, Japan, Mexico, New Zealand, Russia, South Africa, and South Korea; | |
| ● | One domestic utility patent that relates to | |
| ● | One domestic utility patent and four foreign patents that relate to our transdermal-patch candidates, which are owned by us. The domestic utility patent will expire in 2032. The foreign patents will expire no earlier than 2033. We have pending patent applications with respect to our transdermal-patch candidates in the U.S., Australia, Brazil, Canada, Europe, Mexico, Japan, and South Africa; |
| ● | ||
| ● | One domestic utility patent that relates to TX-009HR, a progesterone and estradiol product candidate, which is |
Amortization expense was $54,545, $32,441$112,474, $71,516, and $23,480$54,545 for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively. Estimated amortization expense, based on current patent cost being amortized, for the next five years is as follows:
| Year Ending December 31, | Estimated Amortization | |||||
| 2017 | $ | 63,938 | ||||
| 2018 | $ | 63,938 | ||||
| 2019 | $ | 63,938 | ||||
| 2020 | $ | 63,938 | ||||
| 2021 | $ | 63,938 | ||||
| Thereafter | $ | 696,830 | ||||
| Year Ending December 31, | Estimated Amortization | |||||
| 2019 | $ | 139,410 | ||||
| 2020 | $ | 139,410 | ||||
| 2021 | $ | 139,410 | ||||
| 2022 | $ | 139,410 | ||||
| 2023 | $ | 139,410 | ||||
| Thereafter | $ | 1,276,061 | ||||
License Agreement with the Population Council
F-20
On July 30, 2018, we entered into the Council License Agreement to commercialize in the U.S. ANNOVERA™. We currently estimate that ANNOVERA™ will be commercially available as early as the third quarter of 2019 with a planned full commercial launch by the first quarter of 2020.
| F- 18 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnder the terms of the Council License Agreement, we paid the Population Council a milestone payment of $20,000,000 within 30 days following approval by the FDA of the NDA for ANNOVERA™ and will be required to pay the Population Council $20,000,000 within 30 days following the release of the first commercial batch of ANNOVERA™. The Population Council is also eligible to receive milestone payments and royalties from commercial sales of ANNOVERA™. We will assume responsibility for marketing expenses related to the commercialization of ANNOVERA™. The milestone payment of $20,000,000 upon the FDA’s approval of ANNOVERA™ in the third quarter of 2018 was recorded as a finite-lived intangible asset in the consolidated balance sheet and will be amortized on a straight-line basis once it becomes available for use which is expected to be upon release of first commercial batch of ANNOVERATM. In addition, we are required to pay the Population Council, on a quarterly basis, step-based royalty payments based on annual net sales of ANNOVERA™ in the U.S. by the Company and its affiliates and permitted licensees as follows: (i) if annual net sales are less than or equal to $50,000,000, a royalty of 5% of net sales; (ii) for annual net sales greater than $50,000,000 and less than or equal to $150,000,000, a royalty of 10% of such net sales; and (iii) for net sales greater than $150,000,000, a royalty of 15% of such net sales. The annual royalty rate will be reduced to 50% of the initial rate during the six-month period beginning on the date of the first arms-length commercial sale of a generic equivalent of the one-year vaginal contraceptive system that is launched by a third party in the U.S., and thereafter will be reduced to 20% of the initial rate. The Population Council has agreed to perform and pay the costs and expenses associated with four post-approval studies required by the FDA for ANNOVERA™ and we have agreed to perform and pay the costs and expenses associated with a post approval study required by the FDA to measure risk for venous thromboembolism, provided that if the costs and expenses associated with such post-approval study exceed $20,000,000, half of such excess will be offset against royalties or other payments owed by us to the Population Council under the Council License Agreement. We and the Population Council have agreed to form a joint product committee responsible for overseeing activities under the Council License Agreement. We will be responsible for all aspects of promotion, product positioning, pricing, education programs, publications, sales messages and any additional desired clinical studies for the one-year vaginal contraceptive system, subject to oversight and decisions made by the joint product committee. The Council License Agreement includes exclusive rights for us to negotiate co-development of two other investigational vaginal contraceptive systems in development by the Population Council.
We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value. We also evaluate the remaining useful life of intangible assets subject to amortization on a periodic basis to determine whether events and circumstances would indicate impairment or warrant a revision to the remaining useful life. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
License Agreement with Knight Therapeutics Inc.
On July 30, 2018, we entered into a license and supply agreement, or the Knight License Agreement, with Knight pursuant to which we granted Knight an exclusive license to commercialize IMVEXXY® and BIJUVATM in Canada and Israel. Pursuant to the terms of the Knight License Agreement, Knight will pay us a milestone fee upon first regulatory approval in Canada of each of IMVEXXY® and BIJUVATM, sales milestone fees based upon certain aggregate annual sales in Canada and Israel of each of IMVEXXY® and BIJUVATM and royalties based on aggregate annual sales of each of IMVEXXY® and BIJUVATM in Canada and Israel. Knight will be responsible for all regulatory and commercial activities in Canada and Israel related to IMVEXXY® and BIJUVATM. We may terminate the Knight License Agreement if Knight does not submit all regulatory applications, submissions and/or registrations required for regulatory approval to use and commercialize IMVEXXY® and BIJUVATM in Canada and Israel within certain specified time periods. We also may terminate the Knight License Agreement if Knight challenges our patents. Either party may terminate the Knight License Agreement for any material breach by the other party that is not cured within certain specified time periods or if the other party files for bankruptcy or other related matters. In connection with the Knight License Agreement, Knight entered into a subscription agreement with us, pursuant to which Knight purchased 3,921,568 of shares of our Common Stock concurrently with the closing of the underwritten public offering of Common Stock at a price of $5.10, for proceeds of $20,000,000, on August 6, 2018.
| F- 19 |
NOTE 8 –7– ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
OtherAccrued expenses and other current liabilities consist of the following:
| December 31, | December 31, | |||||||||||||||
| 2016 | 2015 | 2018 | 2017 | |||||||||||||
| Accrued clinical trial costs | $ | 1,281,080 | $ | 3,725,377 | ||||||||||||
| Accrued payroll, bonuses and commission costs | 3,531,440 | 2,108,143 | $ | 6,854,002 | $ | 4,240,379 | ||||||||||
| Allowance for coupons and returns | 5,294,120 | 1,432,846 | ||||||||||||||
| Accrued sales and marketing costs | 2,288,028 | 420,162 | ||||||||||||||
| Accrued compensated absences | 665,561 | 562,096 | 1,178,110 | 945,457 | ||||||||||||
| Allowance for wholesale distributor fees | 792,891 | 172,973 | ||||||||||||||
| Accrued legal and accounting expense | 176,518 | 210,309 | 385,824 | 600,350 | ||||||||||||
| Accrued sales and marketing costs | 665,773 | — | ||||||||||||||
| Accrued research and development | 388,675 | 366,933 | ||||||||||||||
| Accrued rent | 365,155 | 327,099 | ||||||||||||||
| Accrued rebates | 412,570 | 76,917 | ||||||||||||||
| Accrued royalties | — | 114,480 | ||||||||||||||
| Other accrued expenses | 224,865 | 546,264 | 375,573 | 525,999 | ||||||||||||
| Allowance for wholesale distributor fees | 76,510 | 32,659 | ||||||||||||||
| Accrued royalties | 26,507 | 46,851 | ||||||||||||||
| Allowance for coupons and returns | 794,816 | 224,300 | ||||||||||||||
| Accrued rent | 181,015 | 83,527 | ||||||||||||||
| TOTAL OTHER CURRENT LIABILITIES | $ | 7,624,085 | $ | 7,539,526 | ||||||||||||
| TOTAL | $ | 18,334,948 | $ | 9,223,595 | ||||||||||||
NOTE 8 – DEBT
On May 1, 2018, we entered into a Credit and Security Agreement, or the Credit Agreement, with MidCap Financial Trust, or MidCap, as agent, or Agent, and as lender, and the additional lenders party thereto from time to time (together with MidCap as a lender, the Lenders).
On July 30, 2018, we entered into Amendment No. 1 to the Credit Agreement in order to permit our entry into the Council License Agreement. Pursuant to the amendment, we were required to receive aggregate net cash proceeds of at least $75,000,000 from the issuance of our equity securities within thirty days of entering into the Council License Agreement, which we did in connection with the August 2018 underwritten public offering.
The Credit Agreement provides a secured term loan facility in an aggregate principal amount of up to $200,000,000, or the Term Loan. Under the terms of the Credit Agreement, the Term Loan will be made in three separate tranches, with each tranche to be made available to us, at our option, upon our achievement of certain milestones. The first tranche of $75,000,000, or Tranche 1, was drawn by us on June 7, 2018, following approval by the FDA of the NDA for IMVEXXY®. The second tranche of $75,000,000, or Tranche 2, may be drawn by us on or before May 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including (i) that Tranche 1 has been drawn, (ii) the approval by the FDA of the NDA for BIJUVATM and (iii) we have consummated our first commercial sale in the United States of BIJUVATM. The third tranche of $50,000,000, or Tranche 3, may be drawn by us on or before December 31, 2019, provided that we satisfy certain conditions described in the Credit Agreement, including that (i) Tranche 2 has been drawn and (ii) we have generated at least $75,000,000 of consolidated net revenue attributable to commercial sales of BIJUVATM and IMVEXXY® during the twelve-month period ending immediately prior to the funding of Tranche 3.
Amounts borrowed under the Term Loan bear interest at a rate equal to the sum of (i) one-month LIBOR (subject to a LIBOR floor of 1.50%) plus (ii) 7.75% per annum. Interest on amounts borrowed under the Term Loan is due and payable monthly in arrears. Principal on each Tranche is payable in 36 equal monthly installments beginning May 1, 2020 until paid in full on May 1, 2023, or the Maturity Date. However, if we generate at least $95,000,000 of consolidated net revenue attributable to commercial sales of BIJUVATM and IMVEXXY® by December 31, 2019, we may extend the interest-only period by an additional 12 months to May 1, 2021. Interest expense related to this Term Loan for the year ended December 31, 2018 was $4,407,975.
| F- 20 |
The Term Loan may be prepaid, in whole or in part, subject to a prepayment fee on the amount being prepaid (or required to be prepaid, if such amount is greater) of (i) 4.0% for the first year following the Tranche 1 funding date, (ii) 3.0% for the second year following the Tranche 1 funding date and (iii) 2.0% thereafter. Upon repayment of the Term Loan at the Maturity Date or prepayment on any earlier date, we will be required to pay a termination payment based on the principal amount paid or prepaid. In connection with the execution of the Credit Agreement, we paid the Agent, for the benefit of all Lenders, an origination fee equal to 1.00% of the maximum potential amount of the Term Loan. We are also required to pay the Agent an annual administration fee of 0.25% based on the amounts borrowed under the Term Loan, in addition to other fees and expenses.
Our obligations under the Credit Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a first priority perfected security interest in all of our existing and after-acquired assets. Our obligations under the Credit Agreement are guaranteed by each of our future direct and indirect subsidiaries (other than certain non-U.S. subsidiaries of ours and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, subject to certain exceptions). The Credit Agreement contains customary restrictions and covenants. Among other requirements, we must (i) maintain a minimum cash balance of $50,000,000 and (ii) achieve certain minimum consolidated net revenue amounts attributable to commercial sales of our products. As of December 31, 2018, we were in compliance with the covenants under the Credit Agreement.
The Credit Agreement also contains customary covenants that limit, among other things, our ability to (i) incur indebtedness, (ii) incur liens on our property, (iii) pay dividends or make other distributions, (iv) sell our assets, (v) make certain loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain permitted indebtedness and (viii) enter into transactions with affiliates, in each case subject to certain exceptions. The Credit Agreement contains customary representations and warranties and events of default relating to, among other things, payment defaults, breaches of covenants, the occurrence of any fact, event or circumstance that could reasonably be expected to result in a Material Adverse Effect (as defined in the Credit Agreement), delisting of our common stock, par value $0.001 per share, or Common Stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments and inaccuracies of representations and warranties. Upon or after an event of default, the agent and the Lenders may declare all or a portion of our obligations under the Credit Agreement to be immediately due and payable and exercise other rights and remedies provided for under the Credit Agreement.
As of December 31, 2018, we had $75,000,000 in borrowings outstanding under the Term Loan, which are classified as long-term debt in the accompanying consolidated financial statements. We incurred $3,786,918 in debt issuance costs related to the Term Loan. Debt financing fees related to the entire Term Loan have been allocated pro rata between the funded and unfunded portions of each tranche. Allocated debt financing fees related to Tranche 1 of $1,888,844 have been reclassified to debt discount and are accreted to interest expense using the effective interest method. Debt financing fees associated with unfunded tranches are deferred as assets until Tranche 2 and Tranche 3 milestones have been met. As of December 31, 2018, deferred financing fees related to Tranche 2 and Tranche 3 are included in other current assets in the accompanying consolidated financial statements. During the year ended December 31, 2018, we amortized $269,859, of debt issuance costs related to Tranche 1 as interest expense in our accompanying consolidated financial statements. The overall effective interest rate was approximately 11% as of December 31, 2018. As of December 31, 2018, the carrying value of debt consists of the following:
| December 31, 2018 | ||||
| Term Loan | $ | 75,000,000 | ||
| Debt discount and financing fees | (1,618,986 | ) | ||
| TOTAL LONG-TERM DEBT | $ | 73,381,014 | ||
NOTE 9 – STOCKHOLDERS’ EQUITY
Preferred Stock
At December 31, 2016,2018, we had 10,000,000 shares of preferred stock, par value $0.001, authorized for issuance, of which no shares of preferred stock were issued or outstanding.
| F- 21 |
Common Stock
At December 31, 2016,2018, we had 350,000,000 shares of Common Stock authorized for issuance, of which 196,688,222240,462,439 shares of our Common Stock were issued and outstanding.
On August 1, 2018, we entered into an underwriting agreement with Goldman Sachs & Co. LLC, as representative of the underwriters, relating to an underwritten public offering of 12,745,098 shares of our Common Stock at a price of $5.10 per share. We granted the underwriters an option, exercisable for a period of 30 days, to purchase up to 1,911,764 additional shares of Common Stock. On August 2, 2018, the underwriters exercised the option in full. The net proceeds from the offering, including the exercise of the option to purchase additional shares, were approximately $69,908,000, after deducting the underwriting discount and offering expenses payable by us. The offering closed on August 6, 2018.
In connection with the Knight License Agreement, on August 6, 2018, Knight entered into a subscription agreement with us, pursuant to which Knight purchased 3,921,568 of shares of our Common Stock concurrently with the closing of the underwritten public offering of Common Stock at a price of $5.10, for proceeds of $20,000,000.
Issuances During 2018
During the year ended December 31, 2018, certain individuals exercised stock options to purchase 5,444,526 shares of Common Stock for $1,666,208 in cash. Also, during the year ended December 31, 2018, stock options to purchase 10,000 shares of Common Stock were exercised pursuant to the options’ cashless exercise provisions, wherein 9,841 shares of Common Stock were issued.
Issuances During 2017
On September 25, 2017, we entered into an underwriting agreement with J.P. Morgan Securities LLC relating to an underwritten public offering of 12,400,000 shares of our Common Stock at a price of $5.55 per share. The net proceeds to us from the offering were approximately $68,573,000, after deducting estimated offering expenses payable by us. The offering closed on September 28, 2017 and we issued 12,400,000 shares of Common Stock.
During the year ended December 31, 2017, certain individuals exercised stock options to purchase 102,546 shares of Common Stock for $212,615 in cash.
Issuances During 2016
On January 6, 2016, we entered into an underwriting agreement with Goldman Sachs & Co. and Cowen and Company, LLC, as the representatives of the several underwriters or the Underwriters, relating to an underwritten public offering of 15,151,515 shares of our Common Stock at a public offering price of $8.25 per share. Under the terms of the underwriting agreement, we granted the Underwriters a 30-day option to purchase up to an aggregate of 2,272,727 additional shares of Common Stock, which the option was exercised in full. The net proceeds to us from the offering were approximately $134.9 million,$134,864,000, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The offering closed on January 12, 2016 and we issued 17,424,242 shares of our Common Stock.
During the year ended December 31, 2016, certain individuals exercised stock options to purchase 525,362 shares of Common Stock for $989,060 in cash. Also, during the same period, stock options to purchase 127,109 shares of Common Stock were exercised pursuant to the options’ cashless exercise provisions, wherein 87,833 shares of Common Stock were issued.
F-21
| F- 22 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issuances During 2015
On July 9, 2015, we entered into an underwriting agreement with Stifel, Nicolaus & Company, Incorporated and Guggenheim Securities, LLC, as the representatives of the several underwriters, or the Stifel Underwriters, relating to an underwritten public offering of 3,846,154 shares of Common Stock at a public offering price of $7.80 per share. Under the terms of the underwriting agreement, we granted the Stifel Underwriters a 30-day option to purchase up to an aggregate of 576,923 additional shares of Common Stock, which option was exercised in full. The net proceeds to us from the offering were approximately $32.2 million, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The offering closed on July 15, 2015 and we issued 4,423,077 shares of our Common Stock.
On February 10, 2015, we entered into an underwriting agreement, or the Cowen Agreement, with Cowen and Company, LLC, as the representative of the several underwriters, or the Cowen Underwriters, relating to an underwritten public offering of 13,580,246 shares of Common Stock, at a public offering price of $4.05 per share. Under the terms of the Cowen Agreement, we granted the Cowen Underwriters a 30-day option to purchase up to an aggregate of 2,037,036 additional shares of Common Stock, which option was exercised in full. The net proceeds from the offering were approximately $59.1 million, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The offering closed on February 17, 2015 and we issued 15,617,282 shares of our Common Stock.
During the year ended December 31, 2015, certain individuals exercised stock options to purchase 612,867 shares of Common Stock for $1,232,579 in cash. Also during the same period, stock options to purchase 417 shares of Common Stock were exercised pursuant to the options’ cashless exercise provisions, wherein 114 shares of Common Stock were issued.
Issuances During 2014
On July 29, 2014, we entered into an underwriting agreement with Goldman Sachs & Co, or Goldman Sachs, as the representative of the underwriters named therein, or the Goldman Sachs Underwriters, relating to an underwritten public offering of 8,565,310 shares of Common Stock. The price to the public in the offering was $4.67 per share. Under the terms of the underwriting agreement, we granted the Goldman Sachs Underwriters a 30-day option to purchase up to an additional 1,284,796 shares of Common Stock. On July 30, 2014, the Goldman Sachs Underwriters exercised their option to purchase the additional 1,284,796 shares of Common Stock. Net proceeds from this offering were approximately $42.8 million, after deducting underwriting discounts and commissions and other offering expenses. The offering closed on August 4, 2014 and we issued 9,850,106 shares of our Common Stock.
During the year ended December 31, 2014, certain individuals exercised stock options to purchase 860,800 shares of our Common Stock. Stock options to purchase shares of our Common Stock were exercised as follows: (i) 724,193 options for $345,746 in cash and (ii) 136,607 options, pursuant to the stock options’ cashless provision, wherein 130,380 shares of Common Stock were issued. In addition, during 2014, we issued 50,000 shares of Common Stock to an employee upon the vesting of restricted stock units that were granted in December 2013.
F-22
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to Purchase Common Stock
As of December 31, 2016,2018, we had warrants outstanding to purchase an aggregate of 12,060,0713,007,571 shares of our Common Stock with a weighted-average contractual remaining life of 1.0approximately 1.6 years, and exercise prices ranging from $0.24 to $8.20 per share, resulting in a weighted average exercise price of $2.08$2.78 per share.
The valuation methodology used to determine the fair value of our warrants is the Black-Scholes Model. The Black-Scholes Model requires the use of a number of assumptions, including volatility of the stock price, the risk-free interest rate, dividend yield and the term of the warrant.
During the year ended December 31, 2018, we granted warrants to purchase 175,000 shares of Common Stock to outside consultants at an exercise price of $5.16 per share. The fair value for these warrants was determined by using the Black-Scholes Model on the date of the grant using a term of five years; volatility of 62.1%; risk free rate of 2.36%; and dividend yield of 0%. The grant date fair value of the warrants was $2.79 per share. The warrants vest ratably over a 12-month period and have an expiration date of March 15, 2023.
During the year ended December 31, 2017, we granted warrants to purchase 125,000 shares of Common Stock to outside consultants at an exercise price of $6.83 per share. The fair value for these warrants was determined by using the Black-Scholes Model on the date of the grant using a term of five years; volatility of 63.24%; risk free rate of 1.47%; and dividend yield of 0%. The grant date fair value of the warrants was $3.67 per share. The warrants vest ratably over a 12-month period and have an expiration date of March 15, 2022.
During the year ended December 31, 2016, we granted warrants to purchase 245,000 shares of Common Stock to outside consultants at the weighted average price of $7.90 per share. These warrants vest and have expiration dates as follows: warrants to purchase 75,000 shares of Common Stock vested on April 21, 2016 and have an expiration date of April 21, 2021, warrants to purchase 50,000 shares of Common Stock vest ratably over a 24-month period and have an expiration date of April 21, 2021, and warrants to purchase 120,000 shares of Common Stock vest ratable over a 12-month period and have an expiration date of January 21, 2021. During the year ended December 31, 2015, we granted warrants to purchase 50,000 shares of Common Stock to an outside consultant at an exercise price of $6.35 vesting ratably over a 12 month period, with an expiration date of April 6, 2020. We recorded share-based compensation expense related to warrants previously issued of $936,974, $139,142$494,136, $313,271 and $36,284$936,974 for the years ended December 31, 2016, 2015,2018, 2017 and 2014,2016, respectively, in the accompanying consolidated financial statements. At December 31, 2018, total unrecognized estimated compensation expense related to unvested warrants was approximately $106,000 which is expected to be recognized over weighted-average period of 0.2 years.
Summary of our Warrant activity during the year ended December 31, 2016:2018:
| Number of Shares Under Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | Number of Shares Under Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||||||||||||||
| Balance at December 31, 2015 | 12,722,431 | $ | 1.93 | 1.7 | $ | 107,344,752 | ||||||||||||||||||||||||||
| Balance at December 31, 2017 | 3,115,905 | $ | 2.58 | 1.8 | $ | 11,348,273 | ||||||||||||||||||||||||||
| Granted | 245,000 | $ | 7.90 | 175,000 | $ | 5.16 | ||||||||||||||||||||||||||
| Exercised | (722,744 | ) | $ | 1.90 | $ | 3,988,343 | — | |||||||||||||||||||||||||
| Expired | (184,616 | ) | $ | 0.41 | (283,334 | ) | $ | 2.01 | ||||||||||||||||||||||||
| Cancelled/Forfeited | — | — | ||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 12,060,071 | $ | 2.08 | 1.0 | $ | 45,063,867 | ||||||||||||||||||||||||||
| Vested and Exercisable at December 31, 2016 | 11,733,410 | $ | 2.06 | 1.0 | $ | 43,998,535 | ||||||||||||||||||||||||||
| Unvested at December 31, 2016 | 326,661 | $ | 2.81 | 1.7 | $ | 1,065,332 | ||||||||||||||||||||||||||
| Balance at December 31, 2018 | 3,007,571 | $ | 2.78 | 1.58 | $ | 4,826,403 | ||||||||||||||||||||||||||
| Vested and Exercisable at December 31, 2018 | 2,963,818 | $ | 2.75 | 1.54 | $ | 4,826,403 | ||||||||||||||||||||||||||
| Unvested at December 31, 2018 | 43,753 | $ | 5.16 | 4.21 | $ | 0 | ||||||||||||||||||||||||||
F-23
| F- 23 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value per share of warrants issued and the assumptions used in the Black-Scholes Model during the years ended December 31, 2016, 20152018, 2017, and 20142016 are set forth in the table below.
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||
| Weighted average price | $7.90 | $6.35 | n/a | ||||||||||||||
| Weighted average exercise price | $ | 5.16 | $ | 6.83 | $ | 7.90 | |||||||||||
| Weighted average grant date fair value | $4.78 | $3.27 | n/a | $ | 2.79 | $ | 3.67 | $ | 4.78 | ||||||||
| Risk-free interest rate | 1.04-1.28% | 1.02% | n/a | 2.36 | % | 1.47 | % | �� | 1.04-1.28 | % | |||||||
| Volatility | 74.10-74.15% | 60.59% | n/a | 62.12 | % | 63.24 | % | 74.10-74.15 | % | ||||||||
| Term (in years) | 5 | 5 | n/a | 5 | 5 | 5 | |||||||||||
| Dividend yield | 0.00% | 0.00% | n/a | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term.term of the instrument. Estimated volatility is a measure of the amount by which ourthe stock price is expected to fluctuate each year during the term of the instrument. The estimated volatility is an average of the historical volatility of the stock prices of our peer entities whose stock prices were publicly available. Our calculation of estimated volatility is based on historical stock prices over a period equal to the term of the instrument as we have insufficient historical information regarding our stock options to provide a basis for estimate.instrument. The expected volatility of warrants was estimated based on a historical volatility analysis of our Company as well as peers that were similar to the Company with respect to industry, stage of life cycle, market capitalization, and financial leverage.
In January 2013, we issued warrants to purchase 1,250,000 shares of our Common Stock in connection with the issuance of a Multiple Advance Revolving Credit Note to Plato and Associates, LLC, or the Plato Warrant. The Plato Warrant has an exercise price of $3.20 per share. The Plato Warrant vested on October 31, 2013 and may be exercised prior to its expiration on January 31, 2019. The Plato Warrant, with a fair value of approximately $1,711,956, was valued on the date of the grant using a term of six years; a volatility of 44.29%; risk free rate of 0.88%; and a dividend yield of 0%. During the years ended December 31, 2016, 2015, 2014, and 2013, $0, $0, and $260,027, respectively, was recorded as financing costs in connection with the issuance of the Plato Warrant on the accompanying consolidated financial statements.
In May 2013, we entered into a consulting agreement with Sancilio and Company, Inc., or SCI, to develop drug platforms to be used in our hormone replacement drug candidates. These services include support of our efforts to successfully obtain U.S. Food and Drug Administration, or the FDA approval for our drug candidates, including a vaginal capsule for the treatment of vulvar and vaginal atrophy, or VVA. In connection with the agreement, SCI agreed to forfeit its rights to receive warrants to purchase 833,000 shares of our Common Stock that were to be granted pursuant to the terms of a prior consulting agreement dated May 17, 2012. As consideration under the agreement, we agreed to issue to SCI a warrant to purchase 850,000 shares of our Common Stock at $2.01 per share that has vested or will vest, as applicable, as follows:
| 1. | 283,333 shares were earned on May 11, 2013 upon acceptance of an Investigational New Drug application by the FDA for an estradiol-based drug candidate in a softgel vaginal capsule for the treatment of VVA; however, pursuant to the terms of the consulting agreement, the shares did not vest until June 30, 2013. The fair value of $405,066 for the shares vested on June 30, 2013 was determined by using the Black-Scholes Model on the date of vesting using a term of |
| 2. | 283,333 shares vested on June 30, 2013. The fair value of $462,196 for these shares was determined by using the Black-Scholes Model on the date of vesting using a term of |
F-24
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 3. | 283,334 shares |
| F- 24 |
In May 2012, we issued warrants to purchase an aggregate of 1,300,000 shares of Common Stock to an unaffiliated entitySCI for services to be rendered over approximately five years beginning in May 2012. The warrants vested upon issuance. Services provided are to include (a) services in support of our drug development efforts, including services in support our ongoing and future drug development and commercialization efforts, regulatory approval efforts, third-party investment and financing efforts, marketing efforts, chemistry, manufacturing and controls efforts, drug launch and post-approval activities, and other intellectual property and know-how transfer associated therewith; (b) services in support of our efforts to successfully obtain New Drug Approval;new drug approval; and (c) other consulting services as mutually agreed upon from time to time in relation to new drug development opportunities. The warrants were valued at $1,532,228 on the date of the issuance using an exercise price of $2.57; a term of five years; a volatility of 44.71%; risk free rate of 0.74%; and a dividend yield of 0%. At December 31, 2016, we had $128,898 reported as prepaid expense-short term associated with these warrants. During the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, we recorded $257,796, $257,796,$0, $128,898, and $309,165,$257,796, respectively as non-cash compensation with respect to these warrants in the accompanying consolidated financial statements. The contract will expire upon the commercial manufacture of a drug product. We have determined that the process will take approximately five years.
As of December 31, 2016, unamortized costs associated with2017, the SCI warrants issued in 2013 and 2012 totaled approximately $128,898were fully amortized. This warrant was fully exercised, of which 800,000 shares were exercised in 2017 and will be recognized over a period of six months.500,000 shares were exercised in 2016.
Warrant exercises
During the year ended December 31, 2018, no warrants were exercised.
During the year ended December 31, 2017, certain individuals exercised warrants to purchase 2,476,666 shares of Common Stock for $3,798,999 in cash, which included SCI warrants issued in 2012 and 2013. In addition, during the year ended December 31, 2017, certain individuals exercised warrants to purchase 6,590,000 shares of Common Stock pursuant to the warrants’ cashless exercise provisions, wherein 4,762,208 shares of Common Stock were issued.
During the year ended December 31, 2016, certain individuals exercised warrants to purchase 722,744 shares of Common Stock for $1,373,000 in cash.cash, of which 500,000 shares related to SCI warrant issued in 2012.
During the year ended December 31, 2015, certain individuals and an entity exercised warrants to purchase 1,255,485 shares of Common Stock as follows: (i) 945,485 shares of Common Stock were issued for $366,000 in cash and (ii) warrants to purchase 310,000 shares of Common Stock were exercised pursuant to the warrants’ cashless exercise provisions, wherein 232,197 shares of Common Stock were issued.
During the year ended December 31, 2014, certain individuals exercised warrants to purchase 365,583 shares of Common Stock for $181,000 in cash.
Subsequent to December 31, 2016, certain individuals exercised warrants to purchase 1,800,000 shares of our Common Stock for approximately $2,436,000 in cash.
Options to Purchase Common Stock of the Company
In 2009, we adopted the 2009 Long Term Incentive Compensation Plan, or the 2009 Plan, to provide financial incentives to employees, directors, advisers, and consultants of our company who are able to contribute towards the creation of or who have created stockholder value by providing them stock options and other stock and cash incentives, or the Awards. The Awards available under the 2009 Plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock or cash awards as described in the 2009 Plan. There are 25,000,000 shares authorized for issuance thereunder. Generally, the options vest annually over four years or as determined by our board of directors, upon each option grant. Options may be exercised by paying the price for shares or on a cashless exercise basis after they have vested and prior to the specified expiration date provided and applicable exercise conditions are met, if any. The expiration date is generally ten years from the date the option is issued. As of December 31, 2016,2018, there were non-qualified stock options to purchase 17,899,38014,594,350 shares of Common Stock outstanding under the 2009 Plan. As of December 31, 2016,2018, there were 2,952,128866,912 shares available to be issued under 2009 Plan.
F-25
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2012, we adopted the 2012 Stock Incentive Plan, or the 2012 Plan, a non-qualified plan that was amended in August 2013. The 2012 Plan was designed to serve as an incentive for retaining qualified and competent key employees, officers, directors, and certain consultants and advisors of our company. The Awards available under the 2012 Plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock or cash awards as described in the 2012 Plan. Generally, the options vest annually over four years or as determined by our board of directors, upon each option grant. Options may be exercised by paying the price for shares or on a cashless exercise basis after they have vested and prior to the specified expiration date provided and applicable exercise conditions are met, if any. The expiration date is generally ten years from the date the option is issued. There are 10,000,000 shares of Common Stock authorized for issuance thereunder. As of December 31, 2016,2018, there were non-qualified stock options to purchase 3,868,4746,278,474 shares of Common Stock outstanding and 1,040,000 restricted stock units outstanding under the 20122009 Plan. As of December 31, 2016,2018, there were 6,050,0002,433,333 shares available to be issued under 2012 Plan.
| F- 25 |
The valuation methodology used to determine the fair value of stock options is the Black-Scholes Model. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the risk-free interest rate, and the expected life of the stock options. The ranges of assumptions used in the Black-Scholes Model during the years ended December 31, 2016, 2015,2018, 2017, and 20142016 are set forth in the table below.
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||
| Weighted average exercise price | $ | 5.45 | $ | 6.60 | $ | 6.22 | |||||||||||
| Weighted average grant date fair value | $ | 3.24 | $ | 3.82 | $ | 3.94 | |||||||||||
| Risk-free interest rate | 1.13-1.90% | 1.47-1.67% | 0.07-1.77% | 2.38-2.89 | % | 1.84-2.05 | % | 1.13-1.90 | % | ||||||||
| Volatility | 70.26-73.34% | 58.78-62.94% | 68.05-82.29% | 59.45-64.04 | % | 61.56-64.25 | % | 70.26-73.34 | % | ||||||||
| Term (in years) | 5.5-6.25 | 5.27-6.25 | 5-6.25 | 5.1-6.25 | 5.5-6.25 | 5.5-6.25 | |||||||||||
| Dividend yield | 0.00% | 0.00% | 0.00% | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the expected term. Estimated volatility is a measure of the amount by which the stock price of our Common Stock is expected to fluctuate each year during the term of an award. Our estimated volatility is an average of the historical volatility of the stock prices of our peer entities whose stock prices were publicly available. Our calculation of estimated volatility is based on historical stock prices over a period equal to the term of the awards as we have insufficient historical information regarding our stock options to provide a basis for estimate.awards. The expected volatility of share options was estimated based on a historical volatility analysis of our Company as well as peers that were similar to us with respect to industry, stage of life cycle, market capitalization, and financial leverage. The average expected life is based on the contractual terms of the stock option using the simplified method. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. Future stock-based compensation may significantly differ based on changes in the fair value of our common stockCommon Stock and our estimates of expected volatility and the other relevant assumptions.
F-26
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity under the 2009 and 2012 Plans and related information during the year ended December 31, 20162018 is as follows:
| Number of Shares Under Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | Number of Shares Under Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||||||||||||||
| Balance at December 31, 2015 | 20,725,325 | $ | 3.28 | 6.5 | $ | 146,864,184 | ||||||||||||||||||||||||||
| Balance at December 31, 2017 | 23,365,225 | $ | 3.78 | 5.13 | $ | 64,664,821 | ||||||||||||||||||||||||||
| Granted | 1,732,500 | $ | 6.22 | 3,264,500 | $ | 5.45 | ||||||||||||||||||||||||||
| Exercised | (652,471 | ) | $ | 1.91 | $ | 3,828,358 | (5,454,526 | ) | $ | 0.31 | $ | 27,534,623 | ||||||||||||||||||||
| Expired | (5,750 | ) | $ | 4.76 | (25,000 | ) | $ | 7.76 | ||||||||||||||||||||||||
| Cancelled/Forfeited | (31,750 | ) | $ | 6.38 | (277,375 | ) | $ | 5.47 | ||||||||||||||||||||||||
| Balance at December 31, 2016 | 21,767,854 | $ | 3.56 | 5.8 | $ | 60,495,730 | ||||||||||||||||||||||||||
| Vested and Exercisable at December 31, 2016 | 18,633,479 | $ | 3.09 | 5.3 | $ | 59,382,849 | ||||||||||||||||||||||||||
| Unvested at December 31, 2016 | 3,134,375 | $ | 6.29 | 9.0 | $ | 1,112,881 | ||||||||||||||||||||||||||
| Balance at December 31, 2018 | 20,872,824 | $ | 4.93 | 5.94 | $ | 12,239,876 | ||||||||||||||||||||||||||
| Vested and Exercisable at December 31, 2018 | 16,068,991 | $ | 4.61 | 5.09 | $ | 12,239,876 | ||||||||||||||||||||||||||
| Unvested at December 31, 2018 | 4,803,833 | $ | 5.99 | 8.8 | $ | 0 | ||||||||||||||||||||||||||
At December 31, 2016,2018, our outstanding options had exercise prices ranging from $0.10 to $8.92 per share. The weighted average grant date fair value of options granted during the year ended December 31, 2016 was $3.94 per share.
Share-based compensation expense related to options recognized in our results of operations for the years ended December 31, 2016, 2015,2018, 2017, and 20142016 was approximately $16,139,225, $6,621,658,$8,091,294, $6,447,154, and $4,393,455,$16,139,225, respectively, and it is based on awards vested. We estimate forfeitures at the time of grant and revise the forfeiture rate in subsequent periods if actual forfeitures differ from the estimates. At December 31, 2016,2018, total unrecognized estimated compensation expense related to unvested options was approximately $10,669,000,$12,175,000, which may be adjusted for future changes in forfeitures. This cost is expected to be recognized over a weighted-average period of 2.62.01 years. No tax benefit was realized due to a continued pattern of operating losses.
In December 2013, weRestricted Stock
Restricted stock awards granted a restricted stock unit, or the RSU, under our 2009 and 2012 PlanPlans entitle the holder to an employee for 50,000receive, at the end of vesting period, a specified number of shares of our Common Stock. Share-based compensation expense is measured by the market value of our Common Stock having aon the day of the grant. The shares vest ratably over the period specified in the grant. There is no partial vesting and any unvested portion is forfeited.
| F- 26 |
On December 13, 2018, we granted 1,040,000 restricted stock units to certain executive employees which will vest at the end of the third year. The grant date fair value of $233,500.was $4.06 per unit. During the year ended December 31, 20142018, we recorded $180,072 of non-cash$73,132 in share-based compensation expense related to restricted stock units. At December 31, 2018, total unrecognized estimated compensation expense related to unvested restricted stock units was approximately $4,149,000, which may be adjusted for future changes in forfeitures. This cost is expected to be recognized over a weighted-average period of 2.95 years. At December 31, 2018, 1,040,000 restricted stock awards remained outstanding.
Cash-Settled Stock Appreciation Rights (SARs)
On July 1, 2018, we issued cash-settled SARs to certain consultants and employees. The SARs plan year begins on July 1 and ends on or immediately following June 30, 2019. SARs are granted with a grant price equal to the RSUmarket value of a share of our Common Stock on the accompanying consolidated financial statements. The RSU was issueddate of grant. Cash-settled SARs provide for the cash payment of the excess of the fair market value of our Common Stock on June 30, 2019 over the grant price. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of our Common Stock over the grant price is paid in June 2014.cash and not in Common Stock.
Cash settled SARs are recorded in our consolidated balance sheets as a liability until the date of exercise. The fair value of each SAR award is estimated using the Black-Scholes valuation model. In accordance with ASC Topic 718, “Stock Compensation,” the fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense adjusted based on the new fair value and the percent vested. At December 31, 2018, we had 103,000 SARs outstanding and the liability related to SAR calculation was $3,406. The assumptions used to determine the fair value of the cash settled SAR awards at December 31, 2018 were life of 6 months, 49.7% volatility, 2.7% risk-free rate, and zero annual dividends. As of December 31, 2018, the fair value of SARs outstanding was $0.07 per award.
NOTE 10 – INCOME TAXES
For financial reporting purposes, income before taxes includes the following components:
| 2018 | 2017 | 2016 | ||||||||||
| United States | (132,617,160 | ) | (76,925,380 | ) | (89,875,459 | ) | ||||||
| Total | (132,617,160 | ) | (76,925,380 | ) | (89,875,459 | ) | ||||||
For the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, there was no provision for income taxes, current or deferred.
At December 31, 2016,2018, we had a federal net operating loss carry forward of $268,199,351 available to offset future taxable income through 2036. Theapproximately $481,365,550. Approximately $338,668,076 of the federal carryforwardsnet operating loss carry forward can be carried forward for 20 years and will begin to expire in 2031.
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THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The remaining $142,697,474 can be carried forward indefinitely.
A reconciliation between taxes computed at the federal statutory rate and the consolidated effective tax rate is as follows:
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||||||
| Federal statutory tax rate | 34.0 | % | 34.0 | % | 34.0 | % | 21.0 | % | 34.0 | % | 34.0 | % | ||||||||||||
| State tax rate, net of federal tax benefit | 5.4 | % | 4.73 | % | 5.8 | % | 5.2 | % | 5.0 | % | 5.4 | % | ||||||||||||
| Adjustment in valuation allowances | (40.3 | )% | (38.97 | )% | (50.9 | )% | (31.2 | )% | 22.6 | % | (40.3 | )% | ||||||||||||
| Excess stock benefit | 5.3 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
| Federal income tax rate change | 0.0 | % | (60.8 | )% | — | % | ||||||||||||||||||
| Permanent and other differences | 0.9 | % | 0.24 | % | 11.1 | % | (0.3 | )% | (0.8 | )% | 0.9 | % | ||||||||||||
| Provision (benefit) for income taxes | — | % | — | % | — | % | — | — | — | |||||||||||||||
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Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax asset as of December 31, 2016, 2015,2018, 2017, and 20142016 are as follows:
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||||||
| Deferred Income Tax Assets: | ||||||||||||||||||||||||
| Net operating losses | $ | 111,730,450 | $ | 79,499,633 | $ | 43,091,437 | $ | 140,891,764 | $ | 99,596,321 | $ | 111,730,450 | ||||||||||||
| R&D Credit | 186,347 | 186,347 | — | 186,347 | 186,347 | 186,347 | ||||||||||||||||||
| Total deferred income tax asset | 111,916,797 | 79,685,980 | 43,091,437 | 141,078,111 | 99,782,668 | 111,916,797 | ||||||||||||||||||
| Valuation allowance | (111,916,797 | ) | (79,685,980 | ) | (43,091,437 | ) | (141,078,111 | ) | (99,782,668 | ) | (111,916,797 | ) | ||||||||||||
| Deferred income tax assets, net | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
We believe that it is more likely than not that we will not generate sufficient future taxable income to realize the tax benefits related to the deferred tax assets on our balance sheet and as such, a valuation allowance has been established against the deferred tax assets for the period ended December 31, 2016.2018.
Unrecognized Tax Benefits
As of the period ended December 31, 2016,2018, we have no unrecognized tax benefits.
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. federal tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 34 percent to 21 percent, effective January 1, 2018. As the result of our initial analysis of the impact of the Tax Act, we recorded a provisional amount of net tax expense of $46.7 million in 2017 related to the remeasurement of our deferred tax balances and other effects. We completed our accounting for the income tax effects of the Tax Act in 2018, and no material adjustments were required to the provisional amounts initially recorded.
NOTE 11 – RELATED PARTIES
In July 2015, J. Martin Carroll, a director of our Company,company, was appointed to the board of directors of Catalent, Inc. From time to time, we have entered into agreements with Catalent, Inc. and its affiliates, or Catalent, in the normal course of business. Agreements with Catalent have been reviewed by independent directors of our Companycompany or a committee consisting of independent directors of our Companycompany since July 2015. During the years ended December 31, 2018, 2017 and 2016 and 2015, the amountswe were billed by Catalent were approximately $3,647,000$4,111,000, $3,646,000 and $1,266,000,$3,647,000, respectively, for inventory related to our products, manufacturing activities related to our clinical trials, scale-up, registration batches, stability and validation testing. As of December 31, 20162018 and 20152017, there were amounts due to Catalent of approximately $57,000$88,000 and $4,600,$523,000, respectively. In addition, we have minimum purchase requirements in place with Catalent as disclosed in Note 13, Commitments and Contingencies.
On February 29, 2012, Cooper C. Collins, who was then president and largest shareholder of Pernix Therapeutics, LLC, or Pernix, was elected to serve on our board of directors. From time to time, we have entered into agreements with Pernix in the normal course of business. All such agreements are reviewed by independent directors of our company or a committee consisting of independent directors of our company. During the year ended December 31, 2015, we entered into a settlement agreement with Pernix according to which Pernix paid us $175,000 in cash for legal fee reimbursement relating to a litigation matter stemming from a license and supply agreement, resulting in the elimination of an approximately $46,000 outstanding payable and $250,000 outstanding receivable and the recording of approximately $29,000 in settlement fees on the accompanying consolidated financial statements.
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THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - BUSINESS CONCENTRATIONS
We purchase our prescription products from several suppliers with approximately 98%43%, 60%33% and 82%24% of our purchases were supplied by three vendors each, respectively, during the year ended December 31, 2018, and 100% and 98% of our purchases were supplied by one vendor each for the years ended December 31, 2016, 20152017 and 2014,2016, respectively.
We sell our prescription prenatal vitamin products to wholesale distributors, specialty pharmacies, specialty distributors, and chain drug stores that generally sell products to retail pharmacies, hospitals, and other institutional customers. During the years ended December 31, 2018, 2017 and 2016, 2015four, four and 2014; three two and four customers each, respectively, generatedaccounted for more than 10% of our total net revenues. Revenue generatedNet revenue from the four customers combined accounted for approximately 76% of our net recognized revenue for the year ended December 31, 2018 and approximately 59% of our recognized revenue for the year ended December 31, 2017. Net revenue from three major customers combined accounted for approximately 41% of our net revenue during the year ended December 31, 2016. Revenue generated from two major customers combined accounted for approximately 67% of our revenue during
During the year ended December 31, 2015. Revenue generated from four major customers combined2018, McKesson Corporation accounted for approximately 75%$1,610,000 of our recognized revenue, duringPillpack, Inc. accounted for approximately $5,075,000 of our revenue, AmerisourceBergen accounted for approximately $3,246,000 of our revenue and Cardinal Health accounted for approximately $2,308,000 of our revenue. During the year ended December 31, 2014.
2017, AmerisourceBergen accounted for approximately $2,667,000 of our revenue; McKesson Corporation accounted for approximately $1,959,000 of our revenue; Cardinal Health accounted for approximately $2,559,000 of our revenue and Pharmacy Innovations PA accounted for approximately $2,715,000 of our revenue. During the year ended December 31, 2016, Woodstock Pharmaceutical and Compounding generatedaccounted for approximately $2,247,000 of our revenue; Medical Center Pharmacy generatedaccounted for approximately $3,700,000 of our revenue and Pharmacy Innovations PA generatedaccounted for approximately $2,040,000 of our revenue. During the year ended December 31, 2015, Woodstock Pharmaceutical and Compounding generated approximately $8,848,000 of our revenue and Due West Pharmacy generated approximately $4,843,000 of our revenue. During the year ended December 31, 2014, AmerisourceBergen generated approximately $1,610,000, McKesson generated approximately $1,587,000, Cardinal generated approximately $1,804,000 and Woodstock Pharmaceutical and Compounding generated approximately $4,054,000 in sales, respectively.
As a result of developments in the pharmaceutical industry that negatively affected independent pharmacies, including such pharmacies’ reliance on third party payors, in 2016, we identified that payment periods for our retail pharmacy distributors were becoming longer than in prior years. As a result, during the third quarter of 2016, we centralized the distribution channel for both our retail pharmacy distributors and wholesale distributors, in order to facilitate sales to a broader population of retail pharmacies and minimize business risk exposure to any one retail pharmacy. During the third quarter of 2016, we entered into new distribution agreements with our retail pharmacy distributors to effectuate this centralization which were effective September 1, 2016.
Prior to January 1, 2015, we deferred the recognition of revenue on prescription products until the right of return no longer existed as prior to that date, we could not reasonably estimate the amount of future returns. Revenue generated by major customers accounted for approximately 97% of deferred revenue for the year ended December 31, 2014. As of January 1, 2015, we started estimating returns based on historical return rates and recorded actual product returns against this reserve as received. As a result, no deferred revenue was recorded for the years ended December 31, 2016 and 2015.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Operating LeaseLeases
We lease administrative office space in Boca Raton, Florida pursuant to a non-cancelable operating lease that commenced on July 1, 2013 and originally provided for a 63-month term. On February 18, 2015, we entered into an agreement with the same lessors to lease additional administrative office space in the same location, pursuant to an addendum to such lease. In addition, on April 26, 2016, we entered into an agreement with the same lessors to lease additional administrative office space in the same location. This agreement was effective beginning May 1, 2016 and extended the original expiration of the lease term to October 31, 2021. On October 4, 2016, we entered into an agreement with the same lessors to lease additional administrative office space in the same location, pursuant to an addendum to such lease. This addendum is effective beginning November 1, 2016.
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THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The rental expense related to our current lease during the years ended December 31, 2016, 2015 and 2014 was $709,483, $446,099 and $361,793, respectively. The rental expense during the year ended December 31, 2014 was partially offset by rent income of $41,613. We did not sublet any space during the years ended December 31, 2016 and 2015.
As of December 31, 2016,2018, future minimum rental payments on non-cancelable operating leases are as follows:
| Years Ending December 31, | ||||||
| 2017 | $ | 864,827 | ||||
| 2018 | 942,305 | |||||
| 2019 | 1,083,890 | |||||
| 2020 | 1,102,667 | |||||
| 2021 | 934,313 | |||||
| Total minimum lease payments | $ | 4,928,002 | ||||
| Years Ending December 31, | |||||
| 2019 | $ | 1,094,116 | |||
| 2020 | 1,113,069 | ||||
| 2021 | 943,127 | ||||
| Thereafter | — | ||||
| Total minimum lease payments | $ | 3,150,312 | |||
| F- 29 |
In October 2018, we entered into a lease for new corporate offices in Boca Raton, Florida. The lease includes 56,212 rentable square feet, or full premises, of which lease on 7,561 square feet has commenced in 2018 and the lease on the remaining 48,651 square feet will commence no earlier than June 1, 2019, or full premises commencement date. The lease will expire 11 years after full premises commencement date, unless terminated earlier in accordance with the terms of the lease. We have the option to extend the term of the lease for two additional consecutive periods of five years. The term of the lease includes escalating rent and free rent periods. We are also responsible for certain other operating costs under the lease, including electricity and utility expenses. In addition, we will be entitled to reimbursement from the landlord of up to $1,800,000 for tenant improvements. As of December 31, 2018, future minimum rental payments on full premises related to the new operating leases are as follows, of which approximately $2.7 million relates to the lease on the suite that has commenced in 2018:
| Years Ending December 31, | |||||
| 2019 | $ | 48,288 | |||
| 2020 | 984,756 | ||||
| 2021 | 1,779,384 | ||||
| 2022 | 1,808,312 | ||||
| 2023 | 1,837,963 | ||||
| Thereafter | 12,390,298 | ||||
| Total minimum lease payments | $ | 18,849,001 | |||
The rental expense during the years ended December 31, 2018, 2017 and 2016 was approximately $1,068,275, $1,029,205 and $709,483, respectively.
Intellectual Property Licenses
We have license agreements with third parties that provide for minimum royalty, license, and exclusivity payments to be paid by us for access to certain technologies. In addition, we pay royalties as a percent of revenue as described in Note 6, Intangible Assets, to these consolidated financial statements.
Purchase Commitments
We have a manufacturing and supply agreement whereby we are required to purchase from Catalent a minimum of number of softgels during the first contract year and a higher number or softgels after the first contract year. If the minimum order quantities of specific products are not met, we are required to pay Catalent 50% of the difference between the total amount we would have paid to Catalent if the minimum requirement had been fulfilled and the sum of all purchases of our products from Catalent during the contract year. At December 31, 2018, we had minimum purchase obligations related to this agreement of approximately $2,600,000 over the next five years. This amount represents our estimate of the minimum required payments under the agreement.
Legal Proceedings
From time to time, we are involved in litigation and proceedings in the ordinary course of business. We are not currently involved in any legal proceeding that we believe would have a material effect on our consolidated financial condition, results of operations, or cash flows.
Off-Balance Sheet Arrangements
As of December 31, 2016, 2015,2018, 2017, and 2014,2016, we had no off-balance sheet arrangements that have had or are reasonably likely to have current or future effecteffects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Employment Agreements
We have entered into employment agreements with certain of our executives that provide for compensation and certain other benefits. Under certain circumstances, including a change in control, some of these agreements provide for severance or other payments, if those circumstances occur during the term of the employment agreement.
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| F- 30 |
THERAPEUTICSMD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal years 20162018 and 20152017 is as follows:
| 2016 Quarters | 2018 Quarter | |||||||||||||||||||||||||||||||
| (In thousands, except per share) | 1st | 2nd | 3rd | 4th | 1st | 2nd | 3rd | 4th | ||||||||||||||||||||||||
| Revenues | $ | 4,930 | $ | 4,403 | $ | 5,536 | $ | 4,487 | $ | 3,773 | $ | 3,763 | $ | 3,474 | $ | 5,089 | ||||||||||||||||
| Gross profit | $ | 3,822 | $ | 3,273 | $ | 4,298 | $ | 3,778 | $ | 3,139 | $ | 3,309 | $ | 2,775 | $ | 4,139 | ||||||||||||||||
| Net loss | $ | (20,929 | ) | $ | (21,094 | ) | $ | (25,016 | ) | $ | (22,836 | ) | $ | (24,402 | ) | $ | (33,219 | ) | $ | (35,605 | ) | $ | (39,391 | ) | ||||||||
| Loss per common share, basic and diluted | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.17 | ) | ||||||||
| 2015 Quarters | 2017 Quarter | |||||||||||||||||||||||||||||||
| (In thousands, except per share) | 1st | 2nd | 3rd | 4th | 1st | 2nd | 3rd | 4th | ||||||||||||||||||||||||
| Revenues | $ | 4,475 | $ | 4,848 | $ | 5,190 | $ | 5,630 | $ | 3,985 | $ | 4,250 | $ | 4,418 | $ | 4,125 | ||||||||||||||||
| Gross profit | $ | 3,431 | $ | 3,815 | $ | 3,996 | $ | 4,395 | $ | 3,326 | $ | 3,568 | $ | 3,717 | $ | 3,530 | ||||||||||||||||
| Net loss | $ | (20,895 | ) | $ | (27,227 | ) | $ | (19,472 | ) | $ | (17,483 | ) | $ | (21,156 | ) | $ | (19,677 | ) | $ | (14,665 | ) | $ | (21,427 | ) | ||||||||
| Loss per common share, basic and diluted | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.07 | ) | $ | (0.10 | ) | ||||||||
| F- 31 |
NOTE 15 – SUBSEQUENT EVENTS
Subsequent to December 31, 2016, certain individuals exercised warrants to purchase 1,800,000 shares of Common Stock for approximately $2,436,000 in cash.