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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

 

For the quarterly period ended September 30, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

 

For the transition period from________ to ___________

 

Commission File No. 001-00100

 

THERAPEUTICSMD, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

  Nevada     87-0233535  
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

 

951 Yamato Road, Suite 220, Boca Raton, FL   33431  
(Address of Principal Executive Offices) (Zip Code)

 

561-961-1900

(Registrant’s telephone number, including area code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share TXMD The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   Accelerated filer ☐
Non-accelerated filer ☐   Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of November 4, 2019 was 271,177,076.

 

 

 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES 

INDEX

 

    Page
PART I - FINANCIAL INFORMATION 3
     
Item. 1 Financial Statements 3
     
  Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 3
     
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 (Unaudited) and 2018 (Unaudited) 4
     
  Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 (Unaudited) and 2018 (Unaudited) 5
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 (Unaudited) and 2018 (Unaudited) 6
     
  Notes to Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
     
Item 4. Controls and Procedures 44
     
Part II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 45
     
Item 1A. Risk Factors 45
     
Item 6. Exhibits 46

 

2

 

 

PART I - FINANCIAL INFORMATION  
     
Item. 1 Financial Statements  
     

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    September 30, 2019     December 31, 2018  
    (Unaudited)        
             
ASSETS  
Current Assets:                
Cash   $ 155,330,050     $ 161,613,077  
Accounts receivable, net of allowance for doubtful accounts of $691,699 and $596,602, respectively     15,323,614       11,063,821  
Inventory     10,532,844       3,267,670  
Other current assets     10,578,260       10,834,693  
Total current assets     191,764,768       186,779,261  
                 
Fixed assets, net     2,338,346       472,683  
                 
Other Assets:                
License rights, net     39,984,002       20,000,000  
Intangible assets, net     4,942,151       4,092,679  
Right of use asset     10,459,635        
Other assets     473,009       639,301  
Total other assets     55,858,797       24,731,980  
Total assets   $ 249,961,911     $ 211,983,924  
                 
 LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current Liabilities:                
Accounts payable   $ 24,133,506     $ 22,743,841  
Other current liabilities     43,196,032       18,334,948  
Total current liabilities     67,329,538       41,078,789  
                 
Long-Term Liabilities:                
Long-term debt     194,361,169       73,381,014  
Operating lease liability     9,500,133        
Total liabilities     271,190,840       114,459,803  
                 
Commitments and Contingencies - See Note 15                
                 
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:
241,277,076 and 240,462,439 issued and outstanding, respectively
 
 
 
 
 
241,277
 
 
 
 
 
 
 
240,463
 
 
Additional paid-in capital     624,515,559       616,559,938  
Accumulated deficit     (645,985,765 )     (519,276,280 )
Total stockholders’ (deficit) equity     (21,228,929 )     97,524,121  
Total liabilities and stockholders’ equity   $ 249,961,911     $ 211,983,924  

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

3

 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

             
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
             
Product revenue, net  $8,213,341   $3,473,535   $18,238,857   $11,009,937 
License revenue   15,506,400          15,506,400       
    Total revenue, net   23,719,741    3,473,535    33,745,257    11,009,937 
                     
Cost of goods sold   1,444,308    699,118    3,455,995    1,786,902 
                     
Gross profit   22,275,433    2,774,417    30,289,262    9,223,035 
                     
Operating expenses:                    
Sales, general, and administrative   45,126,986    30,354,072    121,378,519    80,578,079 
Research and development   4,077,738    6,708,271    15,359,988    20,545,948 
Depreciation and amortization   141,959    73,321    363,956    198,545 
     Total operating expenses   49,346,683    37,135,664    137,102,463    101,322,572 
                     
Operating loss   (27,071,250)   (34,361,247)   (106,813,201)   (92,099,537)
                     
Other expense                    
Loss on extinguishment of debt               (10,057,632)      
Miscellaneous income   703,662    809,022    1,878,980    1,457,817 
Interest expense   (5,599,005)   (2,053,077)   (11,717,632)   (2,584,459)
     Total other expense   (4,895,343)   (1,244,055)   (19,896,284)   (1,126,642)
                     
Loss before income taxes   (31,966,593)   (35,605,302)   (126,709,485)   (93,226,179)
                     
Provision for income taxes                        
                     
Net loss  $(31,966,593)  $(35,605,302)  $(126,709,485)  $(93,226,179)
                     
Loss per share, basic and diluted:                    
                     
Net loss per share, basic and diluted  $(0.13)  $(0.16)  $(0.53)  $(0.42)
                     
Weighted average number of common shares outstanding, basic and diluted   241,261,299    228,107,240    241,163,994    220,466,673 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

4

 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2019 and 2018

 

                Additional              
    Common Stock     Paid in     Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance, December 31, 2017     216,429,642     $ 216,430     $ 516,351,405     $ (386,659,120 )   $ 129,908,715  
                                         
Shares issued for exercise of options, net     154,632       154       43,902             44,056  
Share-based compensation                 1,751,358             1,751,358  
Net loss                       (24,401,829 )     (24,401,829 )
                                         
Balance, March 31, 2018     216,584,274       216,584       518,146,665       (411,060,949 )     107,302,300  
                                         
Shares issued for exercise of options, net     249,785       250       1,084,689             1,084,939  
Share-based compensation                 2,377,082             2,377,082  
Net loss                       (33,219,048 )     (33,219,048 )
                                         
Balance, June 30, 2018     216,834,059     216,834     521,608,436       (444,279,997 )   77,545,273  
                                         
Shares issued for exercise of options, net   1,052,300    1,053    106,265          107,318 
Shares issued in offering, net   18,578,430    18,578    89,889,219          89,907,797 
Share-based compensation   —            2,260,195          2,260,195 
Net loss   —                  (35,605,302)   (35,605,302)
                          
Balance, September 30, 2018   236,464,789   $236,465   $613,864,115   $(479,885,299)  $134,215,281 
                                         
                                         
Balance, December 31, 2018     240,462,439     $ 240,463     $ 616,559,938     $ (519,276,280 )   $ 97,524,121  
                                         
Shares issued for exercise of options and warrants, net     759,401       759       99,348             100,107  
Share-based compensation                 2,575,369             2,575,369  
Net loss                       (39,506,375 )     (39,506,375 )
                                         
Balance, March 31, 2019     241,221,840       241,222       619,234,655       (558,782,655 )     60,693,222  
                                         
Share-based compensation                 2,637,264             2,637,264  
Net loss                       (55,236,517 )     (55,236,517 )
                                         
Balance, June 30, 2019     241,221,840     $ 241,222     $ 621,871,919     $ (614,019,172 )   $ 8,093,969  
                                         
Shares issued for exercise of options, net   55,236    55    8,494          8,549 
Share-based compensation             2,635,146          2,635,146 
Net loss   —                  (31,966,593)   (31,966,593)
                          
Balance, September 30, 2019   241,277,076   $241,277   $624,515,559   $(645,985,765)  $(21,228,929)

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

5

 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

              
  Nine Months Ended
  September 30,
  2019  2018
      
CASH FLOWS FROM OPERATING ACTIVITIES     
Net loss $(126,709,485)  $(93,226,179)
              
Adjustments to reconcile net loss to net cash used in operating activities:         
Depreciation of fixed assets  223,750    121,423 
Amortization of intangible assets  140,206    77,123 
Write off of patent and trademark cost  78,864       
Non-cash operating lease expense  711,836       
Provision for doubtful accounts  95,097    231,475 
Loss on extinguishment of debt  10,057,632       
Share-based compensation  7,859,357    6,388,635 
Amortization of intellectual property license fee  15,998      
Amortization of deferred financing fees  582,829    149,909 
Changes in operating assets and liabilities:         
Accounts receivable  (4,354,890)   (8,705,325)
Inventory  (7,265,174)   (892,863)
Other current assets  (1,128,515)   1,233,482 
Accounts payable  1,389,665    7,284,493 
Accrued expenses and other liabilities  3,402,511    8,670,986 
          
Net cash used in operating activities  (114,900,319)   (78,666,841)
          
CASH FLOWS FROM INVESTING ACTIVITIES         
Payment for intellectual property license        (20,000,000)
Patent costs  (1,068,542)   (748,906)
Purchase of fixed assets  (2,089,413)   (66,295)
Payment of security deposit  (20,420)   (11,485)
          
Net cash used in investing activities  (3,178,375)   (20,826,686)
          
CASH FLOWS FROM FINANCING ACTIVITIES         
Proceeds from Financing Agreement  200,000,000       
Proceeds from exercise of options and warrants  108,656    1,236,313 
Proceeds from sale of common stock, net of costs        89,907,797 
Proceeds from Credit Agreement        75,000,000 
Payment of deferred financing fees  (6,652,270)   (3,786,918)
Repayment of Credit Agreement  (81,660,719)      
          
Net cash provided by financing activities  111,795,667    162,357,192 
          
(Decrease) increase in cash  (6,283,027)   62,863,665 
Cash, beginning of period  161,613,077    127,135,628 
Cash, end of period $155,330,050   $189,999,293 
          
Supplemental disclosure of cash flow information         
          
Interest paid $12,446,792   $1,759,316 
          
Non-cash investing activity         
          
Amount accrued for intellectual property license $20,000,000   $  

 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

6

 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED 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.” TherapeuticsMD®, vitaMedMD®, BocaGreenMD®, IMVEXXY® and BIJUVA® are registered trademarks of our company and ANNOVERA is a licensed trademark of our company.

 

Nature of Business

 

We are a women’s healthcare company focused on creating and commercializing innovative products to 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. Our solutions range from advanced hormone therapy pharmaceutical products to patient-controlled, long-acting contraceptive. We also manufacture and distribute branded and generic prescription prenatal vitamins under the vitaMedMD® and 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 commercialization plan allows us to efficiently leverage and grow our marketing and sales organization to commercialize our recently approved products. During 2018, the 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 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. In April 2019, we launched our FDA-approved product BIJUVA, 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. In October 2019, we began a test and learn market introduction for our FDA-approved product ANNOVERA (segesterone acetate and ethinyl estradiol vaginal system), the first and only patient-controlled, procedure-free, reversible prescription contraceptive option for women, which was approved by the FDA on August 10, 2018. We expect the full commercial launch of ANNOVERA in the first quarter of 2020. On July 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. On June 6, 2019, we entered into an exclusive license and supply agreement, or the License Agreement, with Theramex HQ UK Limited, or Theramex, to commercialize BIJUVA and IMVEXXY outside of the U.S., excluding Canada and Israel, or the Territory.

 

 7 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Interim Financial Statements

 

The accompanying unaudited interim consolidated financial statements of TherapeuticsMD, Inc., which include our wholly owned subsidiaries, should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission, or the SEC, from which we derived the accompanying consolidated balance sheet as of December 31, 2018. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying unaudited interim consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of our management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year or any other interim period in the future.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2018-13 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 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 is 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 share-based payments to nonemployees by aligning it with the accounting for 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 supersedes the guidance in ASC 505-50. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASC 606. We adopted this standard on January 1, 2019 and the adoption of this standard did not have a material effect on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires lessees to record most leases on their balance sheets while recognizing 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 was effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those years. 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 adopted ASU 2016-02 on January 1, 2019 utilizing the alternative transition method allowed for under ASU 2018-11 and we recorded a $3.8 million right of use asset and a $4.1 million liability related to adoption of this standard. In addition, upon commencement of additional lease space in the third quarter of 2019 (as disclosed in Note 15) we recorded an additional $7.4 million right of use asset and an additional $7.2 million liability related to our new lease space. Comparative financial information was not adjusted and will continue to be reported under ASC 840. We also elected the transition relief package of practical expedients and as a result we did not assess (1) whether existing or 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 elected not to separate lease components from non-lease components for our specified asset classes. Additionally, the adoption of the new standard resulted in increased disclosure requirements in our quarterly and annual filings.

 

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.

 

 8 
 

  

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued expenses and 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. The carrying amount for long-term debt as of September 30, 2019 (as disclosed in Note 9), approximates fair value based on market activity for other debt instruments with similar characteristics and comparable risk (Level 2).

 

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 Accounting Standards Codification, or 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 September 30, 2019 and 2018, we had no assets or liabilities that were valued at fair value on a recurring basis.

 

The fair value of indefinite-lived assets or long-lived assets is measured on a non-recurring basis using significant unobservable inputs (Level 3) in connection with the company’s impairment test on an annual basis.

 

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 chargebacks and provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. We evaluate trade accounts receivable aged more than 90 days for delinquency. 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.

 

 9 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue Recognition

 

We adopted 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 was 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 prior 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 when, or as, we satisfy the performance obligation.

 

Prescription Products

 

As of September 30, 2019, our products consisted primarily of prescription vitamins and our FDA-approved products: IMVEXXY, which we began selling during the third quarter of 2018, BIJUVA, which we began selling in the second quarter of 2019, and ANNOVERA, which we began selling in the third quarter of 2019. We sell our name brand and generic prescription products primarily through wholesale distributors and retail pharmacies. We have one performance obligation related to prescription products sold through wholesale distributors, which is to transfer promised goods to a customer, and two performance obligations related to products sold through retail pharmacies, 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 customer 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. 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.

 

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 sold 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 customer) 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 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.

 

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. We do not allow product returns for prescription products that have been dispensed to a patient. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in 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 shipped to wholesalers. For our newly launched products, for which the right of return exists 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 constrain 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 expected returns as a refund liability, representing the obligation to return the customer’s consideration. Since our returns primarily consist of expired and short dated products that will not be resold, we do not record a return asset for the right to recover the goods returned by the customer at the 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 other current liabilities on the consolidated balance sheet.

 

 10 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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. 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 contracts. 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 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 8. 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 commercial launches for our FDA-approved prescription products, we introduce a co-pay assistance program where eligible enrolled patients, out of pocket cost is reduced to a more affordable price. This allows patients to access the product at a reasonable cost and is in line with our responsible pricing approach. We reimburse pharmacies for this discount through third-party vendors. We consider certain 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 our prescription products 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 our prescription products is susceptible to such changes in coverage levels, which are outside the influence of the Company. As a result, we constrain revenue recognized for our prescription products to an amount that will not result in a significant revenue reversal in future periods. Our ability to estimate the net transaction price for our prescription products is constrained by our estimates of the amount to be paid for the co-pay assistance program 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.

 

License Revenue

 

License arrangements may consist of non-refundable upfront license fees, exclusive licensed rights to patented or patent pending technology, and various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements. Non-refundable up-front fees that are not contingent on any future performance by us, and do not require continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data or technology is delivered.

 

Disaggregation of revenue

 

The following table provides information about disaggregated revenue by product mix for the three and nine months ended September 30, 2019 and 2018:

 

   Three Months
Ended September 30,
  Nine Months
Ended September 30,
   2019  2018  2019  2018
Prescription vitamins  $2,550,330   $3,261,459   $7,309,174   $10,797,861 
IMVEXXY   4,772,354    212,076    9,904,744    212,076 
BIJUVA   490,705    —      624,987    —   
ANNOVERA   399,952    —      399,952    —   
License revenue   15,506,400    —      15,506,400    —   
Net revenue  $23,719,741   $3,473,535   $33,745,257   $11,009,937 

 

 

Cost of Sales 

Cost of sales includes the cost of inventory, manufacturing, manufacturing overhead and supply chain costs, and product shipping and handling costs. Certain license agreements require the payment of royalties based on the sale of future products. Such royalties are recorded as a component of cost of sales. Additionally, the amortization of license fees or milestone payments related to licensed products are classified as components of cost of sales to the extent such payments become due in the future.

 

 

 11 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 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. 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 and in 2019 we started using only our own stock price in the volatility calculation. 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 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, 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. We recognize the compensation expense for share-based compensation granted 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. Effective January 1, 2017, we account for forfeitures when they occur.

 

On January 1, 2019, we adopted ASU 2018-07 which simplified the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expanded 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 superseded the guidance in ASC 505-50. Prior to January 1, 2019, equity instruments issued to non-employees were recorded on a fair value basis, as required by ASC 505, Equity - Based Payments to Non-Employees.

 

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. CRO activity expenses include preclinical laboratory experiments and clinical trial studies. Other activity expenses include regulatory consulting and other 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. These consulting 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 expense in the period in which the facts that give rise to the revision become known.

 

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. 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.

 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – INVENTORY

 

Inventory consists of the following:

 

    September 30,
2019
    December 31,
2018
 
Finished product   $ 5,011,192     $ 2,908,958  
Work in process     1,005,575       339,312  
Raw material     4,516,077       19,400  
TOTAL INVENTORY   $ 10,532,844     $ 3,267,670  

 

 

NOTE 5 – OTHER CURRENT ASSETS

 

Other current assets consist of the following:

 

    September 30,
2019
    December 31,
2018
 
Prepaid sales and marketing costs   $ 1,313,192     $ 5,148,789  
Deferred financing fees (Note 9)     550,757       1,898,074  
Prepaid insurance     2,542,008       790,465  
Other prepaid costs     6,172,303       2,997,365  
TOTAL OTHER CURRENT ASSETS   $ 10,578,260     $ 10,834,693  

 

 

NOTE 6 – FIXED ASSETS, NET

 

Fixed assets, net consist of the following:

 

    September 30,
2019
    December 31,
2018
 
Accounting system   $ 301,096     $ 301,096  
Equipment     1,371,390       490,576  
Furniture and fixtures     1,294,241       116,542  
Computer hardware     80,211       80,211  
Leasehold improvements     68,788       37,888  
      3,115,726       1,026,313  
Accumulated depreciation     (777,380 )     (553,630 )
TOTAL FIXED ASSETS, NET   $ 2,338,346     $ 472,683  

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $90,700 and $42,221, respectively, and $223,750 and $121,423 for the nine months ended September 30, 2019 and 2018, respectively.

 

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – INTANGIBLE ASSETS

 

The following table sets forth the gross carrying amount, accumulated amortization and net carrying amount of our intangible assets as of September 30, 2019 and December 31, 2018:

 

    September 30, 2019  
    Gross Carrying Amount     Accumulated Amortization     Net
Amount
    Weighted-Average
Remaining Amortization Period (yrs.)
 
Amortizable intangible assets:                                
Approved hormone therapy drug candidate patents     3,138,308       (421,694 )     2,716,614       13.25 years  
Hormone therapy drug candidate patent (pending)     1,937,691             1,937,691       n/a  
Non-amortizable intangible assets:                                
Multiple trademarks     287,846             287,846       indefinite  
TOTAL   $ 5,363,845     $ (421,694 )   $ 4,942,151          
       
    December 31, 2018  
    Gross Carrying Amount     Accumulated Amortization     Net
Amount
    Weighted-Average
Remaining Amortization Period (yrs.)
 
Amortizable intangible assets:                                
OPERA® software patent   $ 31,951     $ (10,484 )   $ 21,467       10.75 years  
Development costs of corporate website     91,743       (91,743 )           n/a  
Approved hormone therapy drug candidate patents     2,234,129       (282,485 )     1,951,644       14 years  
Hormone therapy drug candidate patents (pending)     1,855,279             1,855,279       n/a  
Non-amortizable intangible assets:                                
Multiple trademarks     264,289             264,289       indefinite  
TOTAL   $ 4,477,391     $ (384,712 )   $ 4,092,679          

 

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 nine months ended September 30, 2019, we wrote off $78,864 in costs related to trademarks and patents, including the net carrying amount of the OPERA patent.

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2019, we had 26 issued domestic, or U.S., patents and 28 issued foreign patents, including:

 

12 domestic patents and six foreign patents that relate to BIJUVA as well as three domestic patents that relate to estradiol and progesterone product candidates. These patents establish an important intellectual property foundation for BIJUVA and are owned by us. The domestic patents will expire in 2032. The foreign patents will expire no earlier than 2032. In addition, we have pending patent applications relating to BIJUVA in the U.S., Argentina, Australia, Brazil, Canada, China, Europe, Israel, Japan, Mexico, New Zealand, Russia, South Africa, and South Korea;

Five domestic patents (four utility and one design) and 13 foreign patents (three utility and ten design) that relate to IMVEXXY. These patents establish an important intellectual property foundation for IMVEXXY and are owned by us. The 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 our topical-cream candidates, which is owned by us. The domestic patent will expire in 2035. We have pending patent applications with respect to our topical-cream candidates in the U.S., Argentina, Australia, Brazil, Canada, Europe, Israel, Japan, Mexico, Russia, South Africa, and South Korea;

One domestic utility patent and five 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., Brazil, Canada, Europe, Mexico, and South Africa;

One domestic utility patent that relates to our OPERA information-technology platform, which is owned by us and will expire in 2031;

One domestic utility patent that relates to a product candidate containing d-limonene, which is owned by us and will expire in 2036; and

Two domestic utility patents that relate to TX-009HR, a progesterone and estradiol product candidate, which are owned by us and will expire in 2037. We have pending patent applications with respect to TX-009HR in the U.S., Argentina, Australia, Brazil, Canada, Europe, Israel, Japan, Mexico, New Zealand, Russia, South Africa, and South Korea.

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Amortization expense was $51,259 and $31,100 for the three months ended September 30, 2019 and 2018, respectively, and $140,206 and $77,123 for the nine months ended September 30, 2019 and 2018, respectively.

 

Estimated amortization expense for the next five years for the patent costs currently being amortized is as follows:

 

Year Ending December 31,     Estimated Amortization  
  2019 (3 months)     $ 51,259  
  2020     $ 205,035  
  2021     $ 205,035  
  2022     $ 205,035  
  2023     $ 205,035  

 

License Agreement with the Population Council

 

On July 30, 2018, we entered into the Council License Agreement to commercialize ANNOVERA in the U.S. ANNOVERA became commercially available in the third quarter of 2019 and we expect the full commercial launch in the first quarter of 2020.

 

Under 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 new drug application, or NDA, for ANNOVERA. The first commercial batch of ANNOVERA was released during the third quarter of 2019 and we are required to pay the Population Council $20,000,000 as a result of the commercial batch release. Both milestone payments of $20,000,000 were recorded as finite-lived intangible asset in the consolidated balance sheet as of September 30, 2019. We started amortizing the intangible asset in the third quarter of 2019 once ANNOVERA became commercially available for use. The cost is amortized over the remaining useful life over which an intangible asset will contribute directly or indirectly to our cash flows. During both the three and nine months ended September 30, 2019, we recorded $15,998 in amortization expense related to the license fee which was recorded as a component of cost of sales.

 

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. 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.

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 BIJUVA 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 BIJUVA, sales milestone fees based upon certain aggregate annual sales in Canada and Israel of each of IMVEXXY and BIJUVA and royalties based on aggregate annual sales of each of IMVEXXY and BIJUVA in Canada and Israel. Knight will be responsible for all regulatory and commercial activities in Canada and Israel related to IMVEXXY and BIJUVA. 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 BIJUVA 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 shares of our Common Stock concurrent 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.

 

License Agreement with Theramex

 

On June 6, 2019, we entered into an exclusive license and supply agreement, or the License Agreement, with Theramex, a leading, global specialty pharmaceutical company dedicated to women’s health, to commercialize BIJUVA and IMVEXXY outside of the U.S., excluding Canada and Israel, or the Territory. Under the terms of the License Agreement, Theramex paid us EUR 14 million in cash as an upfront fee on August 5, 2019. Within thirty days of signing the License Agreement, we provided Theramex the regulatory materials and clinical data that were necessary for Theramex to obtain marketing authorizations and other applicable regulatory approvals for commercializing BIJUVA and IMVEXXY. We recognized the revenue related to the upfront fee, which was a non-refundable payment, during the third quarter of 2019, at a point in time when Theramex was able to use and benefit from the license which was when the knowledge transfer of regulatory documents occurred. We are eligible to receive additional milestone payments comprised of (i) up to an aggregate of EUR 2 million in regulatory milestone payments based on regulatory approvals for BIJUVA and IMVEXXY in certain specified markets and (ii) up to an aggregate of EUR 27.5 million in sales milestone payments to be paid in escalating tranches based on Theramex first attaining certain aggregate annual net sales milestones of BIJUVA and IMVEXXY in the Territory ranging from EUR 25 million to EUR 100 million. We are also entitled to receive quarterly royalty payments on net sales of BIJUVA and IMVEXXY in the Territory. Theramex will be responsible for all regulatory and commercial activities for BIJUVA and IMVEXXY in the Territory. Theramex may sublicense its rights to commercialize BIJUVA and IMVEXXY in the Territory, except for certain specified markets. We may terminate the License Agreement if Theramex does not submit all regulatory applications, submissions and/or registrations required for regulatory approval to use and commercialize BIJUVA and IMVEXXY within certain specified time periods. We also may terminate the License Agreement if Theramex challenges our patents. Either party may terminate the 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.

 

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

    September 30,
2019
    December 31,
2018
 
Accrued payroll, bonuses and commission costs   $ 4,536,358     $ 6,854,002  
Accrued intellectual license fee   20,000,000       
Allowance for coupons and returns     7,079,005       5,294,120  
Accrued sales and marketing costs     1,560,257       2,288,028  
Accrued compensated absences     1,551,042       1,178,110  
Allowance for wholesale distributor fees     2,375,894       792,891  
Accrued legal and accounting expense     469,446       385,824  
Accrued research and development     1,226,160       388,675  
Operating lease liability     1,242,290        
Accrued rent           365,155  
Accrued rebates     2,543,456       412,570  
Other accrued expenses     612,124       375,573  
TOTAL OTHER CURRENT LIABILITIES   $ 43,196,032     $ 18,334,948  

 

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – DEBT

 

On April 24, 2019, we entered into a Financing Agreement, or the Financing Agreement, with TPG Specialty Lending, Inc., as administrative agent, or the Administrative Agent, various lenders from time to time party thereto, and certain of the Company’s subsidiaries party thereto from time to time as guarantors, which provides us with a $300,000,000 first lien secured term loan credit facility, or the Facility. The Facility provides for availability to us in three tranches: (i) $200,000,000 was drawn upon entering into the Financing Agreement; (ii) $50,000,000 will be available to us upon the designation of our ANNOVERA product as a new category of birth control by the FDA on or prior to December 31, 2019 and satisfaction (or waiver) of other customary conditions precedent; and (iii) $50,000,000 will be available to us upon our achieving $11,000,000 in net revenues, as defined in the Financing Agreement, from our IMVEXXY, BIJUVA and ANNOVERA products for the fourth quarter of 2019 and satisfaction (or waiver) of other customary conditions precedent. Borrowings under the Facility accrue interest at either (i) 3-month LIBOR plus 7.75%, subject to a LIBOR floor of 2.70% or (ii) the prime rate plus 6.75%, subject to a prime rate floor of 5.2% as selected by us. Interest on amounts borrowed under the Facility will be payable quarterly. The outstanding principal amount of the Facility is payable in four equal quarterly installments beginning on June 30, 2023, with the Facility maturing on March 31, 2024. We have the right to prepay borrowings under the Facility in whole or in part at any time, subject to a prepayment fee on the principal amount being prepaid of (i) 30.0% for the first two years following the initial funding date of the applicable borrowing, (ii) 5.0% for the third year following the initial funding date of the applicable borrowing, (iii) 3.0% for the fourth year following the initial funding date of the applicable borrowing and (iv) 1.0% for the fifth year following the initial funding date of the applicable borrowing but prior to March 31, 2024. In connection with the initial borrowing under the Facility, we paid, for the benefit of the lenders, a facility fee equal to 2.5% of the initial amount borrowed and will be required to pay such a facility fee in connection with any subsequent borrowings under the Facility. We are also required to pay the Administrative Agent and the lenders an annual administrative fee in addition to other fees and expenses. The Financing Agreement contains customary mandatory prepayments, restrictions and covenants applicable to us that are customary for financings of this type. Among other requirements, we are required to (i) maintain a minimum unrestricted cash balance of $50,000,000, which will increase to $60,000,000 if we draw either the second or third tranche of the Facility, and (ii) achieve certain minimum consolidated net revenue amounts attributable to commercial sales of our IMVEXXY, BIJUVA and ANNOVERA products beginning with the fiscal quarter ending December 31, 2020. The Financing Agreement also includes other representations, warranties, indemnities and events of default that are customary for financings of this type, including an event of default relating to a change of control of the Company. Upon or after an event of default, the Administrative Agent and the lenders may declare all or a portion of our obligations under the Financing Agreement to be immediately due and payable and exercise other rights and remedies provided for under the Financing Agreement. The obligations of our company and its subsidiaries under the Financing Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a first priority perfected security interest in all existing and after-acquired assets of our company and its subsidiaries. The obligations under the Financing Agreement will be guaranteed by each of our future direct and indirect subsidiaries, subject to certain exceptions.

 

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), as amended. The Credit Agreement provided 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 was available to be made in three separate tranches, with each tranche to be made available to us, at our option, upon our achievement of certain milestones. Amounts borrowed under the Term Loan bore 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.

 

On April 24, 2019, we terminated the Credit Agreement. A portion of the initial tranche of borrowing under the Financing Agreement in the amount of approximately $81,661,000 was used to repay all amounts outstanding under the Credit Agreement, which included a prepayment fee of 4%, a repayment fee of 4% and other fees and expenses payable to the lenders under the Credit Agreement. As a result of the termination of the Credit Agreement, we recorded $10,057,632 in loss on extinguishment of debt in the accompanying unaudited consolidated financial statements. Interest on amounts borrowed under the Term Loan was due and payable monthly in arrears. Interest expense for the nine months ending September 30, 2019 related to the Credit Agreement was $1,816,747. During the nine months ended September 30, 2019, and prior to the repayment of the Credit Agreement, we amortized $120,146 of deferred financing fees as interest expense in the accompanying unaudited consolidated financial statements.

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2019, we had $200,000,000 in borrowings outstanding under the Financing Agreement, which are classified as long-term debt in the accompanying unaudited consolidated financial statements. We incurred $6,652,270 in deferred financing fees related to the Financing Agreement. Deferred financing fees related to the entire Financing Agreement have been allocated pro rata between the funded and unfunded portions of each tranche. Allocated deferred financing fees related to Tranche 1 of $6,101,513 have been reflected as a debt discount and are accreted to interest expense using the effective interest method. Deferred financing fees associated with unfunded tranches were deferred as assets until the Tranche 2 and Tranche 3 milestones have been met. As of September 30, 2019, deferred financing fees related to Tranche 2 and Tranche 3 were included in other current assets in the accompanying consolidated financial statements. During the three and nine months ended September 30, 2019, we amortized $265,949 and $462,683, respectively, of deferred financing fees related to Tranche 1 as interest expense in the accompanying unaudited consolidated financial statements. Interest on amounts borrowed under the Financing Agreement is due and payable quarterly in arrears. Interest expense for the three and nine months ended September 30, 2019 was $5,333,056 and $9,318,056, respectively. The overall effective interest rate under the Financing Agreement was approximately 11% as of September 30, 2019.

 

 As of September 30, 2019 and December 31, 2018, the carrying value of debt consisted of the following:

 

    September 30,
2019
    December 31,
2018
 
Financing Agreement   $ 200,000,000     $  
Credit Agreement           75,000,000  
Debt discount and financing fees     (5,638,831 )     (1,618,986 )
TOTAL LONG-TERM DEBT   $ 194,361,169     $ 73,381,014  

 

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – NET LOSS 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 restricted stock awards and were excluded from the calculation of diluted EPS because their effect would have been antidilutive 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.

 

    Three and Nine months ended  
    September 30, 2019     September 30, 2018  
Stock options     24,849,984       24,837,349  
Warrants     1,832,571       3,007,571  
Restricted stock awards     1,240,000        
TOTAL     27,922,555       27,844,920  

 

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At September 30, 2019, we had 10,000,000 shares of preferred stock, par value $0.001 per share, authorized for issuance, of which no shares of preferred stock were issued or outstanding.

 

Common Stock

 

At September 30, 2019, we had 350,000,000 shares of Common Stock authorized for issuance, of which 241,277,076 shares of Common Stock were issued and outstanding.

 

Issuances During the Three and Nine Months Ended September 30, 2019

 

During the three months ended September 30, 2019, certain individuals exercised stock options to purchase 55,236 shares of Common Stock for $8,549 in cash. During the nine months ended September 30, 2019, certain individuals exercised stock options to purchase 331,619 shares of Common Stock for $108,656 in cash. Also, during the same period, stock options to purchase 12,097 shares of Common Stock were exercised pursuant to the options’ cashless exercise provisions, wherein 11,834 shares of Common Stock were issued.

 

Issuances During the Three and Nine Months Ended September 30, 2018

 

During the three months ended September 30, 2018, certain individuals exercised stock options to purchase 1,052,300 shares of Common Stock for $107,318 in cash. During the nine months ended September 30, 2018, certain individuals exercised stock options to purchase 1,446,876 shares of Common Stock for $1,236,313 in cash. Also, during the nine months ended September 30, 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.

 

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, Knight entered into a subscription agreement with us, pursuant to which Knight purchased $20,000,000 of shares of our Common Stock concurrently with the closing of the underwritten public offering of Common Stock on August 6, 2018.

 

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THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Warrants to Purchase Common Stock

 

As of September 30, 2019, we had warrants outstanding to purchase an aggregate of 1,832,571 shares of Common Stock with a weighted-average contractual remaining life of approximately 2.2 years, and exercise prices ranging from $0.24 to $8.20 per share, resulting in a weighted average exercise price of $2.62 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 rate and the term of the warrant.

 

During the nine months ended September 30, 2019, we granted warrants to purchase 75,000 shares of Common Stock to outside consultants at an exercise price of $5.63. The fair value for these warrants was determined by using the Black-Scholes Model on the date of the grant using a term of 5 years; volatility of 60.8%; risk free rate of 2.52%; and dividend yield of 0%. The grant date fair value of the warrants was $3.00 per share. The warrants are vesting ratably over a 12 month period and have an expiration date of February 12, 2024. During the nine months ended September 30, 2018, we granted warrants to purchase 175,000 shares of Common Stock to outside consultants at an exercise price of $5.16. The fair value for these warrants was determined by using the Black-Scholes Model on the date of the grant using a term of 5 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 three months ended September 30, 2019 and 2018, we recorded $56,418 and $150,977, respectively, and during the nine months ended September 30, 2019 and 2018, we recorded $198,306 and $407,292, respectively, as share based compensation expense in the accompanying consolidated financial statements related to warrants. As of September 30, 2019, total unrecognized estimated compensation expense related to the unvested portion of these warrants was approximately $83,000, which is expected to be recognized over a weighted-average period of 0.4 years.

 

During the nine months ended September 30, 2019, warrants to purchase 1,250,000 shares of Common Stock were exercised pursuant to the warrants’ cashless exercise provisions, wherein 471,184 shares of Common Stock were issued. During the nine months ended September 30, 2018, no warrants were exercised.

 

Options to Purchase Common Stock

 

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. 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 September 30, 2019, there were non-qualified stock options to purchase 15,028,509 shares of Common Stock outstanding under the 2009 Plan. Effective upon our adoption of the TherapeuticsMD, Inc. 2019 Stock Incentive Plan, or the 2019 Plan, on June 20, 2019, no future awards may be made under the 2009 Plan.

 

 22 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED 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. As of September 30, 2019, there were non-qualified stock options to purchase 6,316,474 shares of Common Stock outstanding and 1,040,000 restricted stock awards under the 2012 Plan. Effective upon our adoption of the 2019 Plan, no future awards may be made under the 2012 Plan.

 

On June 20, 2019, we adopted the 2019 Plan 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 2019 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 2019 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. As of September 30, 2019, there were 13,779,632 shares of Common Stock available for issuance thereunder, consisting of (i) 11,294,999 new shares, (ii) 2,395,333 unallocated shares previously available for issuance under the 2012 Plan that were not then subject to outstanding “Awards” (as defined in the 2012 Plan), and (iii) 89,300 unallocated shares previously available for issuance under the 2009 Plan that were not then subject to outstanding “Awards” (as defined in the 2009 Plan). Any shares subject to outstanding options or other equity “Awards” under the 2019 Plan, the 2012 Plan and the 2009 Plan that are forfeited, expire or otherwise terminate without issuance of the underlying shares, or if any such Award is settled for cash or otherwise does not result in the issuance of all or a portion of the shares subject to such Award (other than shares tendered or withheld in connection with the exercise of an Award or the satisfaction of withholding tax liabilities), the shares to which those Awards were subject, shall, to the extent of such forfeiture, expiration, termination, cash settlement or non-issuance, again be available for delivery with respect to Awards under the 2019 Plan. As of September 30, 2019, there were non-qualified stock options to purchase 3,505,001 shares of Common Stock outstanding and 200,000 restricted stock awards outstanding under the 2019 Plan.

 

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 assumptions used in the Black-Scholes Model for options granted during the nine months ended September 30, 2019 and 2018 are set forth in the table below.

 

 

Nine months ended

September 30,

  2019   2018
Risk-free interest rate 1.83-2.54%   2.78-2.82%
Volatility 61.25-64.49%   61.8-63.34%
Term (in years) 5.5-6.5   5.5-6.25
Dividend yield 0.00%   0.00%

 

 23 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of activity under the 2009, 2012 and 2019 Plans and related information follows:

 

    Number of Shares Underlying Stock Options     Weighted Average Exercise Price     Weighted
Average
Remaining
Contractual
Life in Years
    Aggregate Intrinsic Value  
Balance at December 31, 2018     20,872,824     $ 4.93       5.94 years     $ 12,239,876  
Granted     4,419,501     $ 3.13                  
Exercised     (343,716 )   $ 0.32             $ 1,426,828  
Expired/Forfeited     (98,625 )   $ 5.63                  
Balance at September 30, 2019     24,849,984     $ 4.67       6.05 years     $ 13,761,778  
Vested and Exercisable at September 30, 2019     17,601,027     $ 4.85       4.81 years     $ 9,745,527  
Unvested at September 30, 2019     7,248,957     $ 4.22       9.06 years     $ 4,016,251  

 

At September 30, 2019, our outstanding stock options had exercise prices ranging from $0.19 to $8.92 per share. The weighted average grant date fair value per share of options granted was $1.84 and $3.27 during the nine months ended September 30, 2019 and 2018, respectively. Share-based compensation expense for options recognized in our results of operations for the three months ended September 30, 2019 and 2018 ($2,194,667 and $2,109,218, respectively) and for the nine months ended September 30, 2019 and 2018 ($6,568,736 and $5,981,343, respectively) is based on vested awards. At September 30, 2019, total unrecognized estimated compensation expense related to unvested options granted prior to that date was approximately $13,468,000 which may be adjusted for future changes in forfeitures. This cost is expected to be recognized over a weighted-average period of 2.4 years. No tax benefit was realized due to a continued pattern of operating losses.

 

Restricted Stock Awards

 

Restricted stock awards granted under our 2009, 2012 and 2019 Plans entitle the holder to receive, 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 on 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.

 

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 was $4.06 per unit. On July 30, 2019, we granted 200,000 restricted stock units to certain executive employees which will vest on January 31, 2022. The grant date fair value was $2.18 per unit. During the three and nine months ended September 30, 2019, we recorded $384,061 and $1,080,738, respectively, in share-based compensation expense related to restricted stock units. At September 30, 2019, total unrecognized estimated compensation expense related to unvested restricted stock units was approximately $3,505,000, which may be adjusted for future changes in forfeitures. This cost is expected to be recognized over a weighted-average period of 2.2 years. At September 30, 2019, we had 1,240,000 restricted stock awards 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 began on July 1, 2018 and ended on or immediately following June 30, 2019. SARs were granted with a grant price equal to the market value of a share of our Common Stock on the date of grant. Cash-settled SARs provided 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 cash and not in Common Stock. 

 

 24 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Cash settled SARs were recorded in our consolidated balance sheets as a liability until the date of exercise. The fair value of each SAR award was estimated using the Black-Scholes valuation model. In accordance with ASC Topic 718, “Stock Compensation,” the fair value of each SAR award was 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 June 30, 2019, the fair market value of our Common Stock was lower than the grant price of SARs and, as a result, the recorded liability was reversed and no cash payment was made.

 

NOTE 12 – INCOME TAXES

 

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do not expect to pay any significant federal or state income tax for 2019 as a result of (i) the losses recorded during the nine months ended September 30, 2019, (ii) additional losses expected for the remainder of 2019, and/or (iii) net operating loss carry forwards from prior years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized. As of September 30, 2019, we maintain a full valuation allowance for all deferred tax assets. Based on these requirements, no provision or benefit for income taxes has been recorded. There were no recorded unrecognized tax benefits at the end of the reporting period.

 

 

NOTE 13 – RELATED PARTIES

 

In July 2015, J. Martin Carroll, a director of our 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 Company, or a committee consisting of independent directors of our company, since July 2015. During the three months ended September 30, 2019 and 2018, we were billed by Catalent approximately $2,196,000 and $830,000, respectively, for manufacturing activities related to our clinical trials, scale-up, registration batches, stability and validation testing. During the nine months ended September 30, 2019 and 2018, we were billed by Catalent approximately $4,118,000 and $2,774,000, respectively, for manufacturing activities related to our clinical trials, scale-up, registration batches, stability and validation testing. As of September 30, 2019 and December 31, 2018, there were amounts due to Catalent of approximately $425,000 and $88,000, respectively.

 

NOTE 14 – BUSINESS CONCENTRATIONS

 

We purchase our prescription products from several suppliers with approximately 36%, 28%, and 26% of our purchases supplied by three vendors each, respectively, during the nine months ended September 30, 2019. Approximately 100% of our products were manufactured by one vendor related to each of IMVEXXY and prenatal vitamins during the nine months ended September 30, 2018.

 

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 nine months ended September 30, 2019, four customers each generated more than 10% of our total prescription revenues. During the nine months ended September 30, 2018, four customers each generated more than 10% of our total prescription revenues. Prescription revenue generated from the four customers combined accounted for approximately 68% of our prescription revenue for the nine months ended September 30, 2019, and prescription revenue generated from the four customers combined accounted for approximately 71% of our prescription revenue for the nine months ended September 30, 2018.

 

During the nine months ended September 30, 2019, PI Services accounted for approximately $1,935,000 of our prescription revenue, Pillpack, Inc. accounted for approximately $6,397,000 of our prescription revenue, AmerisourceBergen accounted for approximately $2,226,000 of our prescription revenue and Cardinal Health accounted for approximately $1,863,000 of our prescription revenue. During the nine months ended September 30, 2018, PI Services accounted for approximately $1,559,000 of our prescription revenue, Pillpack, Inc. accounted for approximately $3,057,000 of our prescription revenue, AmerisourceBergen accounted for approximately $1,834,000 of our prescription revenue and Cardinal Health accounted for approximately $1,399,000 of our prescription revenue.

 

 

 25 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES

 

We adopted ASC 842 effective January 1, 2019. Substantially all our operating lease right-of-use assets and operating lease liabilities represent leases for office space used to conduct our business. Upon adoption, we have recognized a right-of-use asset and a lease liability for all leases that have commenced as of January 1, 2019. The right-of-use assets represent the right to use the leased asset for the lease term. The lease liabilities represent the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using our secured incremental borrowing rate for the same term as the underlying lease because the rates are not implicit in the leases. Some of our leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability.

  

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.

  

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 the full premises, of which lease on 7,561 square feet commenced in 2018 and the lease on the remaining 48,651 square feet commenced in August 2019, or the 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 5 years. The extension option is not included in the determination of the lease term as it is not reasonably certain to be exercised. 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 June 2019, we entered into an agreement with the same lessors to lease additional 6,536 square feet of administrative office space in the same location, pursuant to an addendum to such lease, which is expected to commence as soon as the fourth quarter of 2019.

 

 26 
 

 

THERAPEUTICSMD, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Supplemental lease information
at September 30, 2019
     
Right-of-use asset   $ 10,459,635  
Short-term operating lease liability (included in Other current liabilities)   $ 1,242,290  
Long-term operating lease liability   $ 9,500,133  
Weighted average remaining term     9 Years  
Weighted average discount rate     8.25 %
       
Supplemental cash flow information
for nine months ended September 30, 2019
     
Cash paid for amounts included in the measurement of lease liabilities for operating lease   $ 849,440  
Right-of-use assets obtained in exchange for lease obligation   $ 11,171,471  

 

The following table reconciles the undiscounted cash flows for all operating leases at September 30, 2019 to the operating lease liabilities recorded on the balance sheet:

 

     
Years Ending December 31,      
2019 (3 months)   $ 314,670  
2020     1,566,617  
2021     2,198,541  
2022     1,262,302  
2023     1,293,859  
Thereafter     9,363,136  
Total undiscounted lease payments     15,999,125  
Less: imputed interest     (5,256,702 )
Present value of lease payments   $ 10,742,423  

 

During the three and nine months ended September 30, 2019, operating lease expense related to our real estate leases was approximately $458,000 and $1,062,000, respectively, and variable lease expense was insignificant for the three and nine months ended September 30, 2019. Rent expense totaled $257,000 and $772,000 during the three and nine months ended September 30, 2018, 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 7, 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 number of softgels during the first contract year and a higher number of 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. 

 

NOTE 16 – SUBSEQUENT EVENTS

 

On October 24, 2019, we entered into an underwriting agreement with J.P. Morgan Securities LLC, as representative of the underwriters, relating to an underwritten public offering of 26,000,000 shares of our Common Stock at a public offering price of $2.75 per share. We granted the underwriters an option, exercisable for a period of 30 days, to purchase up to 3,900,000 additional shares of Common Stock, which was exercised in full. The net proceeds from the offering were approximately $77.0 million, after deducting the underwriting discount and offering expenses payable by us. The offering closed on October 29, 2019.

 

 

 27 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The following discussion and analysis provides information that we believe to be relevant to an assessment and understanding of our results of operations and financial condition for the periods described. This discussion should be read together with our unaudited consolidated financial statements and the notes to the financial statements, which are included in this Quarterly Report on Form 10-Q. This information should also be read in conjunction with the information contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission, or the SEC, on February 27, 2019, or our Annual Report, including the audited financial statements and notes included therein. The reported results will not necessarily reflect future results of operations or financial condition.

 

In addition, this Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies as well as statements, other than historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. These statements are often characterized by terminology such as “believes,” “hopes,” “may,” “anticipates,” “should,” “intends,” “plans,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy” and similar expressions and are based on assumptions and assessments made in light of management’s experience and perception of historical trends, current conditions, expected future developments and other factors believed to be appropriate. Forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we undertake no duty to update or revise any such statements, whether as a result of new information, future events or otherwise, except as required by law or by the rules and regulations of the SEC. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of our control. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the sections titled “Risk Factors” in our Annual Report, and include the following: our ability to maintain or increase sales of our approved products; our ability to develop and commercialize IMVEXXY, BIJUVA, ANNOVERA and our hormone therapy drug candidates and obtain additional financing necessary therefor; our commercialization, marketing and manufacturing capabilities and strategy for our approved products; the size of markets and the potential market opportunity for which our products are approved and our ability to penetrate such markets; the rate and degree of market acceptance of our products; the willingness of healthcare providers to prescribe and patients to use our products; our ability to obtain additional financing when needed; our competitive position and the success of competing products that are or become available for the indications that we are pursuing; our intellectual property position; whether we will be able to comply with the covenants and conditions under our term loan facility, including the conditions to draw additional tranches thereunder; the length, cost and uncertain results of our clinical trials, the potential of adverse side effects or other safety risks that could adversely affect the commercialization of our current or future approved products; our reliance on third parties to conduct our clinical trials, research and development and manufacturing; the ability of our licensees to commercialize and distribute IMVEXXY and BIJUVA; the availability of reimbursement from government authorities and health insurance companies for our products; the impact of product liability lawsuits; and the influence of extensive and costly government regulation.

 

Throughout this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “TherapeuticsMD,” or “our company” refer to TherapeuticsMD, Inc., a Nevada corporation, and unless specified otherwise, include our 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.

 

This Quarterly Report on Form 10-Q includes our trademarks, trade names and service marks, such as vitaMedMD®, BocaGreenMD®, IMVEXXY®, BIJUVA® and ANNOVERA which are protected under applicable intellectual property laws and are the property of, or licensed to, our company. This Quarterly Report on Form 10-Q also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this quarterly report may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

28

 

Overview

 

We are a women’s healthcare company focused on creating and commercializing innovative products to 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. Our solutions range from advanced hormone therapy pharmaceutical products to patient-controlled, long-acting contraceptive. We also manufacture and distribute branded and generic prescription prenatal vitamins under the vitaMedMD® and 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 commercialization plan allows us to efficiently leverage and grow our marketing and sales organization to commercialize our recently approved products. During 2018, the 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 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. In April 2019, we launched our FDA-approved product BIJUVA, 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. In October 2019, we began a “test and learn” market introduction phase of launch for our licensed FDA-approved product ANNOVERA (segesterone acetate and ethinyl estradiol vaginal system), the first and only long-lasting, patient-controlled, procedure-free, reversible prescription contraceptive option for women, which was approved by the FDA on August 10, 2018. We expect the full commercial launch of ANNOVERA in the first quarter of 2020. On July 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. On June 6, 2019, we entered into an exclusive license and supply agreement, or the License Agreement, with Theramex HQ UK Limited, or Theramex, to commercialize BIJUVA and IMVEXXY outside of the U.S., excluding Canada and Israel, or the Territory.

 

Our common stock, par value $0.001 per share, or the Common Stock, is traded on the Nasdaq Global Select Market of The Nasdaq Stock Market LLC, or the Nasdaq, under the symbol “TXMD.” We maintain websites at www.therapeuticsmd.com as well as various product websites. The information contained on our websites or that can be accessed through our websites does not constitute part of this Quarterly Report on Form 10-Q.

 

29

 

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.

 

On July 9, 2018, we launched IMVEXXY 10-μg with our early experience program to a targeted sample of healthcare providers, or HCPs, throughout the U.S. The national launch of the 10-μg dose of IMVEXXY began in August 2018, and the 4-μg dose of IMVEXXY launched on September 13, 2018. Since FDA approval of our NDA for IMVEXXY, we have been focused on executing our launch plan. The key objectives of our launch plan include: (i) providing broad commercial access at the retail level and with commercial payers, (ii) increasing awareness and appreciation of the clinical and patient features of IMVEXXY amongst HCPs, (iii) designing and deploying our customer facing model, and (iv) developing our internal capabilities (for example, in the areas of finance, human resources, medical affairs, information technology, data analytics, pharmacovigilance capacity and compliance) to support our commercial-stage company. We have made progress in each of these key strategic areas:

 

Commercial Access:

 

 

Both the 4-μg and 10-μg doses of IMVEXXY are broadly available in major pharmacy chains in the U.S., as well as with our BIO-IGNITE™ partners, via our third-party logistics and our distribution partners.

We have obtained the majority of commercial payer coverage and continue to seek unrestricted coverage from the remaining commercial insurance plans that we have not yet contracted with to provide affordable access for patients.

 

Through September 30, 2019, we achieved unrestricted coverage with eight of the top ten commercial payers of VVA products by commercial payer lives and we continue to sign new agreements with payers to cover IMVEXXY.  In addition, as of September 30, 2019, two of the top six Medicare Part D payers of VVA products were adjudicating IMVEXXY, with additional decisions for other Medicare Part D payers expected during the fourth quarter of 2019.

 

Beginning at launch, we instituted a patient education and affordability program that allows all eligible patients who enroll to receive IMVEXXY at a reasonable cost. When a product is not covered, the patient is responsible to pay the full price for the medication, which can significantly limit a patient’s ability to pay and subsequent utilization of the product. Prior to October 1, 2019, enrolled patients did not pay more than $35 for a prescription of IMVEXXY. Starting October 1, 2019, enrolled patients pay as little as $35 for a prescription of IMVEXXY with commercial insurance coverage and pay as little as $50 for a prescription of IMVEXXY without commercial insurance coverage.

 

We have designed initiatives to drive starter pack volume and target competitors using clinical data, which are expected to begin in the first quarter of 2020. We have also begun a distribution optimization process that we expect will result in improvement over current distribution costs by the third quarter of 2020, including improved fees and new retail partnerships.

 

Brand Awareness and Adoption:

 

 

In addition to our focus on direct selling from our sales organization, we have executed a branded multichannel awareness campaign for HCPs leveraging digital, non-personal promotion and journal advertising and have already reached most of the active writing HCPs within the VVA category with IMVEXXY branded messages. The focus of our interactions with HCPs included: (i) introducing IMVEXXY and highlighting the unmet medical need that IMVEXXY can fulfill for many women, (ii) increasing awareness of the clinical data and patient features of IMVEXXY, and (iii) familiarizing HCPs with our patient support services for IMVEXXY. As of September 30, 2019, approximately 15,600 HCPs had sent an IMVEXXY prescription to a pharmacy for at least one patient.

 

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Patient Awareness, Affordability and Adherence Programs:

 

 

We believe the patient affordability and adherence programs that we created and piloted around our prescription prenatal vitamin business have the potential to improve patient compliance for IMVEXXY, compared to other products in the VVA category. We launched our patient affordability and adherence program for IMVEXXY to help patients manage out-of-pocket costs and improve education regarding VVA and IMVEXXY with the goal of increasing patient adherence and compliance for an improved treatment experience.  As of September 30, 2019, approximately 92% of our total IMVEXXY fills have utilized the patient savings programs. We launched print, social, point of care and digital direct-to-consumer marketing for IMVEXXY in the third quarter of 2019. As of September 30, 2019, we had approximately 95,300 patients who have received at least one paid IMVEXXY prescription filled at a pharmacy.

 

Customer Model:

 

 

As of September 30, 2019, we had a sales force that covers approximately 200 territories throughout the U.S. Within these territories there are approximately 40,000 HCPs that represent the majority of the volume of FDA-approved prescriptions for these product categories. The sales representatives target a subset of these specific HCPs based on product and messaging objectives for a particular quarter. Our sales force is deploying a hybrid sales model that combines an internal sales leadership team with a fully dedicated contract sales force to call on our customer universe. Additionally, we have an internal sales team that covers areas of the U.S. where key HCPs are located but where we do not have defined territories and we have launched our Key Account Managers (KAMs) to engage with our BIO-IGNITE partners. Bio-Ignite is a program focused on supporting the synergistic relationships between community pharmacies and HCPs so that offering BIJUVA and IMVEXXY as appropriate treatment alternatives is economically practical for the pharmacy.

 

Infrastructure:

 

 

We continue to expand our internal capabilities to support the continued launch of IMVEXXY. We have launched KAMs to support our BIO-IGNITE partners and continue to build our internal capabilities to support both organizations, including compliance professionals and programs and key data support systems that provide real-time data for the sales force and KAMs. Our KAMs have national coverage and target over 1,900 community pharmacies that have a focus on compounded bio-identical hormones and the over 2,000 additional HCPs that are affiliated with these pharmacies. The KAM role is a dual role in delivering a trade message at the pharmacy level and a commercial message at the HCP level. 

 

Regulatory:

 

 

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. The FDA has also asked the sponsors of other vaginal estrogen products to also participate in the observational study. In connection with the observational study, we will be required to provide progress reports to the FDA on an annual basis. The development of this method is underway, and we 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, fully completing this request.  

 

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BIJUVA

 

On October 28, 2018, the FDA approved BIJUVA (estradiol and progesterone) capsules, 1 mg/100 mg, the first and only FDA-approved bioidentical hormone therapy combination of estradiol and progesterone in a single, oral capsule for the treatment of moderate-to-severe vasomotor symptoms, or VMS (commonly known as hot flashes or flushes), due to menopause in women with a uterus. The estrogen and progesterone in BIJUVA have the same chemical and molecular structure as the hormones that are naturally produced in a woman’s body. Following meetings with the FDA, we plan to submit a New Drug Application (NDA) efficacy supplement for the 0.5/100 mg dose of BIJUVA to the FDA in the fourth quarter of 2019 for review and potential approval using existing data from our Phase 3 REPLENISH trial for BIJUVA, for which we announced results in December 2016, together with additional information and analyses. We do not anticipate that the FDA will require any new clinical trials in connection with our submission of the NDA efficacy supplement. If accepted for review by the FDA, we expect that the NDA efficacy supplement will be reviewed, under current Prescription Drug User Fee Act timeline goals, within ten months of receipt by the FDA.

 

We launched BIJUVA on April 17, 2019 with a similar model to IMVEXXY. The key objectives of our launch plan include: (i) broad commercial access at the retail level and with commercial payers, (ii) increasing awareness and appreciation of the clinical and patient features of BIJUVA amongst HCPs, (iii) expanding and leveraging our existing customer facing model, and (iv) leverage our internal capabilities (for example, in the areas of finance, human resources, information technology, data analytics and compliance) to support the launch of BIJUVA.

 

Our initial focus has been on key OB/GYN targets, particularly those that already adopted IMVEXXY, to deliver the core clinical messages as well as provide information on our patient affordability and adherence programs. In support of BIJUVA, our field force expanded to approximately 200 territories in April 2019. In addition, we will continue to deploy our BIO-IGNITE program with a fuller expansion towards the end of 2019 into 2020 when we have achieved coverage for the majority of commercial insurance plans that is beyond the six month payer block.

 

We launched our patient affordability and adherence program for BIJUVA, similar to IMVEXXY, to help patients manage out-of-pocket costs and improve patient education with the goal of increasing patient adherence and compliance for an improved treatment experience. As of September 30, 2019, approximately 88% of our total BIJUVA fills have utilized the patient savings programs. Prior to October 1, 2019, enrolled patients did not pay more than $35 for a prescription of BIJUVA. Starting October 1, 2019, enrolled patients pay as little as $35 for a prescription of BIJUVA with commercial insurance coverage and pay as little as $50 for a prescription of BIJUVA without commercial insurance coverage. As of September 30, 2019, we have approximately 9,100 patients who have received at least one paid BIJUVA prescription filled at a pharmacy.

 

We believe that the successful launch of IMVEXXY allows us to leverage existing contracts with our third-party logistics partner and our distribution partners. We anticipate similar timing regarding commercial payer coverage as we experienced with IMVEXXY as many commercial payers employ “new-to-market blocks” for newly launched brands while they make their decision on coverage. However, our ability to leverage existing payer contracts by amending to include BIJUVA, along with our recent experience with the payers may simplify and accelerate the process. Through September 30, 2019, we achieved unrestricted coverage with five of the top ten commercial payers of VMS products by commercial payer lives and we continue to sign new agreements with payers to cover BIJUVA. Although Medicare is a small percentage of the VMS market, as of September 30, 2019, two of the top six Medicare Part D payers of VMS products was adjudicating BIJUVA.

 

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 the FDA as required in our approval.

 

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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 and ethinyl estradiol vaginal system), the first and only patient-controlled, procedure-free, reversible prescription contraceptive that can prevent pregnancy for up to a full year, which was approved by the FDA on August 10, 2018.

 

ANNOVERA was classified by the FDA as a “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, which is made with a silicone elastomer, 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 contraceptive products. Segesterone acetate, a new chemical entity, is a potent progestin. Segestrone acetate also does not bind to the androgen or estrogen receptors and has no glucocorticoid effects at contraceptive doses.   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 seven 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 (one 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 launched ANNOVERA in the third quarter of 2019 with limited sales and a full-scale launch expected in the first quarter of 2020. In October 2019, we began a “test and learn” market introduction phase of launch for ANNOVERA, with 36 of our existing sales representatives currently promoting ANNOVERA in addition to our other products, and our 23 regional sales managers and 12 compounding KAMs introducing ANNOVERA to top targeted healthcare practitioners outside of these 36 territories.

 

We believe that the strong initial commercial net revenue per unit of ANNOVERA and rapid commercial insurance adoption provide us with an opportunity to deploy additional financial resources to maximize ANNOVERA’s consumer-focused commercialization strategy and leverage the ability of doctor/patient choice of contraceptive to override insurance company formularies when a generic equivalent has not been established.  As part of this strategy, we are pursuing distribution opportunities for ANNOVERA with multiple direct-to-consumer contraceptive platforms that are both low cost to TXMD and offer an attractive return to the platforms.

 

We continue to dialogue with the FDA regarding the potential inclusion of ANNOVERA as a new class of contraception for women in the FDA’s Birth Control Guide, which would require private health plans to cover ANNOVERA with no patient out-of-pocket costs as part of the Affordable Care Act. Eight states require insurance coverage of prescription contraception with co-pay regardless of inclusion in the FDA’s Birth Control Guide and 11 states, plus Washington D.C., require coverage of prescription contraception with no co-pay regardless of inclusion in the FDA’s Birth Control Guide. We believe that a recent reorganization of the FDA’s Division of Bone Reproductive and Urologic Products (DBRUP) may delay a decision regarding the inclusion of ANNOVERA as a new class of contraception for women in the FDA’s Birth Control Guide beyond the fourth quarter of this year, which could affect our ability to borrow an additional tranche of $50 million under our financing agreement, or the Financing Agreement, with TPG Specialty Lending, Inc., as administrative agent, or the Administrative Agent. Given the strong initial commercial net revenue per unit of ANNOVERA and rapid commercial insurance adoption during our “test and learn” market introduction phase of launch, as well as the potential for the FDA’s decision regarding the inclusion of ANNOVERA as a new class of contraception to come after the fourth quarter of this year, we have begun discussions with the Administrative Agent about revising the draw trigger for this $50 million tranche in order to take into account the positive ANNOVERA launch trends that we are experiencing. The Administrative Agent has informed us that it is open to considering a revision to the terms and timing of this draw trigger, although there is no assurance that we and the Administrative Agent will agree on any such revisions.

 

 

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As part of the approval of ANNOVERA, the FDA has required a post-approval observational study be performed to measure the risk of venous thromboembolism.  A draft protocol submission for the study was submitted to the FDA in August 2019. We have agreed to perform and pay the costs 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 such 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 costs of the study will be material on an annual basis.

 

As of September 30, 2019, we had 28 issued foreign patents and 26 issued domestic or, U.S., patents, which included 12 domestic utility patents that relate to BIJUVA, three domestic patents that relate to estradiol and progesterone product candidates, five domestic patents that relate to IMVEXXY, which establish an important intellectual property foundation for IMVEXXY, one domestic utility patent that relates to a pipeline transdermal patch technology, one domestic utility patent that relates to our topical-cream candidates, one domestic utility patent that relates to a product candidate containing d-limonene, one domestic utility patent that relates to our OPERA® information technology platform that we wrote off in the second quarter of 2019, and two domestic utility patents that relate to TX-009HR, our progesterone and estradiol drug candidate.

 

Research and Development Expenses

 

A 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 candidates.  Our business model is dependent upon our company continuing to conduct research and development.  Our research and development expenses consist primarily of expenses incurred under agreements with contract research organizations, or CROs, and consultants that conduct 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 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 Investigational New Drug application approval from the FDA.

 

The following table indicates our research and development expense by project for the periods indicated:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
   (000s)   (000s) 
TX 001-HR (BIJUVA)  $454   $3,017   $2,869   $8,432 
TX 004-HR(IMVEXXY)   527    764    1,869    3,922 
ANNOVERA   396        2,109     
Other research and development   2,701    2,927    8,513    8,192 
Total  $4,078   $6,708   $15,360   $20,546 

 

Research and development expenditures will continue to be incurred as we develop our drug pipeline, continue stability testing and validation on our drugs, develop and validate secondary manufacturers, prepare regulatory submissions and work with regulatory authorities on existing submissions.

 

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The costs of clinical trials may vary significantly over the life of a project owing to a variety of factors. 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. For a discussion of the nature of efforts, steps and costs necessary to complete these projects, see “Item 1. Business — Research and Development” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Research and Development Expenses” contained in our Annual Report.

 

Results of Operations

 

Three months ended September 30, 2019 compared with three months ended September 30, 2018

 

   Three Months Ended
September 30,
     
   2019   2018   Change 
   (000s) 
Product revenue, net  $8,213   $3,474   $4,739 
License revenue   15,506        15,506 
Cost of goods sold   1,444    699    745 
Operating expenses   49,347    37,136    12,211 
Operating loss   (27,072)   (34,361)   (7,289)
Other expense, net   (4,895)   (1,244)   3,651 
Net loss  $(31,967)  $(35,605)  $(3,638)

 

Revenues and Cost of Goods Sold

 

Product revenue is recorded net of sales discounts, chargebacks, wholesaler fees, customer rebates, coupons and estimated returns. Product revenue for the three months ended September 30, 2019 increased approximately $4,739,000, or 136%, to approximately $8,213,000, compared with approximately $3,474,000 for the three months ended September 30, 2018.  Product revenue increased primarily due to an increase in sales of approximately $4,560,000 of IMVEXXY in the current period, partially offset by a decrease in prenatal vitamin sales of approximately $711,000. Product revenue for the three months ended September 30, 2019 also included sales of BIJUVA of approximately $490,000 and sales of ANNOVERA of approximately $400,000. The revenue decrease related to our prenatal vitamins was primarily affected by lower number of units sold as compared to the prior year period, partially offset by increased revenue per unit. We launched IMVEXXY in the third quarter of 2018, BIJUVA in the second quarter of 2019 and ANNOVERA in the third quarter of 2019. Since the launches, revenues related to IMVEXXY and BIJUVA have been greatly affected by the co-pay assistance programs that we introduced to launch these products, which allows eligible enrolled patients to access the products at a reasonable cost regardless of insurance coverage. We expect our product revenues to improve as commercial and Medicare payer coverage increases, and plans complete the process needed to adjudicate IMVEXXY, BIJUVA and ANNOVERA prescriptions at pharmacies. In addition to our product revenue, during the three months ended September 30, 2019, we recognized license revenue of approximately $15,506,000 from the upfront fee, which was a non-refundable payment, payable to us by Theramex under the terms of the License Agreement, which we recognized at the point in time when Theramex was able to use and benefit from the license, which was when the knowledge transfer of regulatory documents occurred.

 

Cost of goods sold increased approximately $745,000, or 107%, to approximately $1,444,000 for the three months ended September 30, 2019, compared with approximately $699,000 for the three months ended September 30, 2018.  Our gross margin related to prescription products was approximately 82% and 80% for the three-month periods ended September 30, 2019 and 2018, respectively. The change in our gross margin is primarily related to the change in product mix between the two periods.

 

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Operating Expenses

 

Our principal operating costs include the following items as a percentage of total operating expenses.

 

   Three Months Ended
September 30,
 
   2019   2018 
Sales and marketing costs, excluding human resources costs   45.7%   44.6%
Human resources related costs, including salaries, benefits and taxes   27.4%   24.0%
Product research and development costs   8.3%   18.1%
Professional fees and consulting costs   8.3%   4.4%
Other operating expenses   10.3%   8.9%

 

Operating expenses increased by approximately $12,211,000, or 33%, to approximately $49,347,000 for the three months ended September 30, 2019, from approximately $37,136,000 for the three months ended September 30, 2018 as a result of the following items:

 

   Three Months Ended
September 30,
     
   2019   2018   Change 
   (000s) 
Sales and marketing, excluding human resources costs  $22,547   $16,577   $5,970 
Human resources related costs   13,507    8,911    4,596 
Product research and development costs   4,078    6,708    (2,630)
Professional fees and consulting costs   4,100    1,650    2,450 
Other operating expenses   5,115    3,290    1,825 
Total operating expenses  $49,347   $37,136   $12,211 

 

Sales and marketing costs for the three months ended September 30, 2019 increased by approximately $5,970,000, or 36%, to approximately $22,547,000, compared with approximately $16,577,000 for the three months ended September 30, 2018, primarily as a result of increased expenses associated with sales and marketing efforts to support launch and commercialization of our prescription products, including costs related to outsourced sales personnel and their related expenses, physician education, 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 and ANNOVERA and continue to support our growing business and commercialization of our products.

 

Human resources costs, including salaries, benefits and taxes, for the three months ended September 30, 2019 increased by approximately $4,596,000, or 52%, to approximately $13,507,000, compared with approximately $8,911,000 for the three months ended September 30, 2018, primarily as a result of an increase of approximately $4,259,000 in personnel costs in sales, marketing and regulatory areas to support commercialization of our prescription products and an increase of approximately $337,000 in non-cash compensation expense included in this category related to employee stock-based compensation during 2019 as compared to 2018.

 

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Research and development costs for the three months ended September 30, 2019 decreased by approximately $2,630,000, or 39%, to approximately $4,078,000, compared with approximately $6,708,000 for the three months ended September 30, 2018.  Research and development costs include costs related to manufacturing validation and early development trials, as well as salaries, wages, non-cash compensation and benefits of personnel involved in research and development activities. Research and development costs decreased primarily as a result of certain employees and activities that were previously classified as research and development being transferred to operations as they began to support commercial and launch efforts after the FDA approvals of IMVEXXY and BIJUVA.

 

 

Since the project’s inception in February 2013, we have incurred approximately $130,056,000 in research and development costs with respect to BIJUVA.

 

Since the project’s inception in August 2014, we have incurred approximately $47,608,000 in research and development costs with respect to IMVEXXY.

 

For a discussion of the nature of efforts, steps and costs related to our research and development projects, see “Item 1. Business — Research and Development” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Research and Development Expenses” contained in our Annual Report.

 

Professional fees and consulting costs for the three months ended September 30, 2019 increased by approximately $2,450,000, or 148%, to approximately $4,100,000, compared with approximately $1,650,000 for the three months ended September 30, 2018, primarily as a result of increased recruiting and consulting fees.

 

All other operating expense for the three months ended September 30, 2019 increased by approximately $1,825,000, or 55%, to approximately $5,115,000, compared with approximately $3,290,000 for the three months ended September 30, 2018, as a result of increased information technology, travel, dues and subscriptions, 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 decreased approximately $7,289,000, or 21%, to approximately $27,072,000 for the three months ended September 30, 2019, compared with approximately $34,361,000 for the three months ended September 30, 2018, primarily as a result of increased total net revenue, partially offset by an increase in total operating expenses.

 

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, BIJUVA and ANNOVERA will be successful.

 

Other expense, net

 

Other non-operating expense, net increased by approximately $3,651,000, or 293%, to an expense of approximately $4,895,000 for the three months ended September 30, 2019, compared with an expense of approximately $1,244,000 for the three months ended September 30, 2018, primarily as a result of loss on extinguishment of debt and increased interest expense related to our Financing Agreement.  For more information regarding our Financing Agreement, see “Liquidity and Capital Resources” below.

 

Net Loss

 

Because of the net effects of the foregoing, net loss decreased approximately $3,638,000, or 10%, to approximately $31,967,000 for the three months ended September 30, 2019, compared with approximately $35,605,000 for the three months ended September 30, 2018.  Net loss per share of Common Stock, basic and diluted, was ($0.13) and ($0.16) for the three months ended September 30, 2019 and 2018, respectively.

 

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Nine months ended September 30, 2019 compared with nine months ended September 30, 2018

 

   Nine Months Ended
September 30,
     
   2019   2018   Change 
         (000s)     
Product revenue, net  $18,239   $11,010   $7,229 
License revenue   15,506        15,506 
Cost of goods sold   3,456    1,787    1,669 
Operating expenses   137,102    101,323    35,779 
Operating loss   (106,813)   (92,100)   (14,713)
Other expense, net   (19,896)   (1,126)   (18,770)
Net loss  $(126,709)  $(93,226)  $(33,483)

 

Revenues and Cost of Goods Sold

 

Product revenue is recorded net of sales discounts, chargebacks, wholesaler fees, customer rebates, coupons and estimated returns. Product revenue for the nine months ended September 30, 2019 increased approximately $7,229,000, or 66%, to approximately $18,239,000, compared with approximately $11,010,000 for the nine months ended September 30, 2018.  Product revenue increased primarily due to an increase in sales of approximately $9,693,000 of IMVEXXY in the current period partially offset by a decrease in prenatal vitamin sales of approximately $3,489,000. Product revenue during the nine months ended September 30, 2019 also included sales of BIJUVA of approximately $625,000 and sales of ANNOVERA of approximately $400,000. The revenue decrease related to our prenatal vitamins was primarily affected by lower number of units sold as compared to the prior year period. We launched IMVEXXY in the third quarter of 2018, BIJUVA in the second quarter of 2019 and ANNOVERA in the third quarter of 2019. Since the launches, revenues related to IMVEXXY and BIJUVA have been greatly affected by the co-pay assistance programs that we introduced to launch these products, which allows eligible enrolled patients to access the products at a reasonable cost regardless of insurance coverage. We expect our product revenues to improve as commercial and Medicare payer coverage increases, and plans complete the process needed to adjudicate IMVEXXY, BIJUVA and ANNOVERA prescriptions at pharmacies. In addition to our product revenue, during the nine months ended September 30, 2019, we recognized license revenue of approximately $15,506,000 from the upfront fee, which was a non-refundable payment, payable to us by Theramex under the terms of the License Agreement, which we recognized at the point in time when Theramex was able to use and benefit from the license, which was when the knowledge transfer of regulatory documents occurred.

 

Cost of goods sold increased approximately $1,669,000, or 93%, to approximately $3,456,000 for the nine months ended September 30, 2019, compared with approximately $1,787,000 for the nine months ended September 30, 2018, primarily due to an increased number of units sold.  Our gross margin for our prescription products was approximately 81% and 84% for the nine months ended September 30, 2019 and 2018, respectively.  The change in our gross margin is primarily related to the change in product mix between the two periods.

 

Operating Expenses

 

Our principal operating costs include the following items as a percentage of total operating expenses.

 

   Nine Months Ended
September 30,
 
   2019   2018 
Sales and marketing costs, excluding human resources costs   44.2%   43.1%
Human resources related costs, including salaries, benefits and taxes   27.1%   23.0%
Product research and development costs   11.2%   20.3%
Professional fees and consulting costs   7.3%   5.3%
Other operating expenses   10.2%   8.3%

 

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Operating expenses increased by approximately $35,779,000, or 35%, to approximately $137,102,000 for the nine months ended September 30, 2019, from approximately $101,323,000 for the nine months ended September 30, 2018 as a result of the following items:

 

   Nine Months Ended
September 30,
     
   2019   2018   Change 
      (000s)      
Sales and marketing, excluding human resources costs  $60,537   $43,695   $16,842 
Human resources related costs   37,162    23,296    13,866 
Product research and development costs   15,360    20,546    (5,186)
Professional fees and consulting costs   10,025    5,411    4,614 
Other operating expenses   14,018    8,375    5,643 
Total operating expenses  $137,102   $101,323   $35,779 

 

Sales and marketing costs for the nine months ended September 30, 2019 increased by approximately $16,842,000, or 39%, to approximately $60,537,000, compared with approximately $43,695,000 for the nine months ended September 30, 2018, primarily as a result of increased expenses associated with sales and marketing efforts to support launch and commercialization of our prescription products, 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 and ANNOVERA, and continue to support our growing business and commercialization of our products.

 

Human resources costs, including salaries, benefits and taxes, for the nine months ended September 30, 2019 increased by approximately $13,866,000, or 60%, to approximately $37,162,000, compared with approximately $23,296,000 for the nine months ended September 30, 2018, as a result of an increase of approximately $12,278,000 in personnel costs in sales, marketing and regulatory areas to support commercialization of our prescription products and an increase of approximately $1,588,000 in non-cash compensation expense included in this category related to employee stock-based compensation during 2019 as compared to 2018.

 

Research and development costs for the nine months ended September 30, 2019 decreased by approximately $5,186,000, or 25%, to approximately $15,360,000, compared with approximately $20,546,000 for the nine months ended September 30, 2018. Research and development costs included costs related to on-going stability and laboratory testing, early development trials, as well as salaries, wages, non-cash compensation and benefits of personnel involved in research and development activities. Research and development costs decreased for the nine months ended September 30, 2019 as compared to the prior period primarily as a result of lower costs related to scale-up and manufacturing activities as well as decreased pre-clinical work to support our product pipeline. Research and development costs also decreased as a result of certain employees and activities that were previously classified as research and development being transferred to operations as they began to support commercial and launch efforts after the FDA approvals of IMVEXXY and BIJUVA.

 

For a discussion of the nature of efforts, steps and costs related to our research and development projects, see “Item 1. Business — Research and Development” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Research and Development Expenses” contained in our Annual Report.

 

39

 

Professional fees and consulting costs for the nine months ended September 30, 2019 increased by approximately $4,614,000, or 85%, to approximately $10,025,000, compared with approximately $5,411,000 for the nine months ended September 30, 2018, primarily as a result of increased recruiting and consulting fees, partially offset by lower legal fees.

 

All other operating expense for the nine months ended September 30, 2019 increased by approximately $5,643,000, or 67%, to approximately $14,018,000, compared with approximately $8,375,000 for the nine months ended September 30, 2018, 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 $14,713,000, or 16%, to approximately $106,813,000 for the nine months ended September 30, 2019, compared with approximately $92,100,000 for the nine months ended September 30, 2018, primarily as a result of increased personnel costs, sales and marketing expenses to support commercialization of our prescription products, including costs related to outsourced sales personnel and their related expenses, professional fees and other operating expenses, partially offset by a decrease in research and development costs and an increase in total net revenue.

 

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, BIJUVA, and ANNOVERA will be successful.

 

Other Expense, net

 

Other non-operating expense increased by approximately $18,770,000 to an expense of approximately $19,896,000 for the nine months ended September 30, 2019 compared with an expense of approximately $1,126,000 for the nine months ended September 30, 2018, primarily as a result of loss on extinguishment of debt and increased interest expense related to our Financing Agreement.  For more information regarding our Financing Agreement, see “Liquidity and Capital Resources” below.

 

Net Loss

 

Because of the net effects of the foregoing, net loss increased approximately $33,483,000, or 36%, to approximately $126,709,000 for the nine months ended September 30, 2019, compared with approximately $93,226,000 for the nine months ended September 30, 2018. Net loss per share of Common Stock, basic and diluted, was ($0.53) and ($0.42) for the nine months ended September 30, 2019 and 2018, respectively.

 

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 years ended December 31, 2018, we received approximately $293,344,000 in net proceeds from the issuance of shares of our Common Stock. As of September 30, 2019, we had cash and cash equivalents totaling approximately $155,330,000, 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.

 

40

 

 

Our net days sales outstanding, or net DSO, is calculated by dividing gross accounts receivable less the reserve for doubtful accounts, chargebacks and payment discounts by the average daily net product revenues during the quarter. We also disclose gross DSO, which includes the calculation of gross accounts receivable divided by the average daily gross product revenues to distributors during the quarter. For the three months ended September 30, 2019, our gross DSO was 46 days compared to 77 days for the three months ended December 31, 2018 and our net DSO was 172 days for the three months ended September 30, 2019 compared to 200 days for the three months ended December 31, 2018. Our DSO decreased primarily due to more favorable arrangements with customers that we entered into in the second quarter of 2019. We anticipate that our DSO will fluctuate in the future based upon a variety of factors, including longer payment terms associated with the launch of IMVEXXY, BIJUVA and ANNOVERA and changes in the healthcare industry.

 

On October 29, 2019, we closed our underwritten public offering of 29,900,000 shares of our common stock at a price to the public of $2.75 per share, inclusive of the underwriters’ option to purchase additional shares of common stock, which option was exercised in full. We received net proceeds from the offering of approximately $77.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

On April 24, 2019, we entered into the Financing Agreement with the Administrative Agent, various lenders from time to time party thereto, and certain of the Company’s subsidiaries party thereto from time to time as guarantors, which provided us with a $300,000,000 first lien secured term loan credit facility, or the Facility. The Facility provides for availability to us in three tranches: (i) $200,000,000 was drawn upon entering into the Financing Agreement; (ii) $50,000,000 will be available to us upon the designation of ANNOVERA as a new category of birth control by the FDA on or prior to December 31, 2019 and satisfaction (or waiver) of other customary conditions precedent; and (iii) $50,000,000 will be available to us upon our achieving $11,000,000 in net revenues from our IMVEXXY, BIJUVA and ANNOVERA products for the fourth quarter of 2019 and satisfaction (or waiver) of other customary conditions precedent. A portion of the initial tranche of borrowing under the Facility in the amount of approximately $81,661,000 was used to repay all amounts outstanding under our prior financing agreement with MidCap Financial Trust, or the MidCap Agreement. As a result of the termination of the MidCap Agreement, we recorded $10,057,632 in loss on extinguishment of debt in our unaudited consolidated financial statements. We believe that our existing cash and availability under the Facility will allow us to fund our operating plan through at least the next 12 months from the date of this Quarterly Report. However, if the commercialization of IMVEXXY, BIJUVA, or ANNOVERA is delayed, our existing cash and availability under the Facility, if we are able to access such funds, may be insufficient to satisfy our liquidity requirements until we are able to commercialize IMVEXXY, BIJUVA and ANNOVERA and we may not be able to access funds under the Facility. 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 additional debt financing is restricted pursuant to the Financing Agreement. To the extent that we raise additional capital through the sale of equity or convertible debt securities, to the extent permitted under the Financing 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 Financing Agreement, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or proposed products, if permitted under the Financing Agreement. Additionally, we may have to grant licenses on terms that may not be favorable to us.

 

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License Agreement with Theramex

 

On June 6, 2019, we entered into an exclusive license and supply agreement, or the License Agreement, with Theramex, a leading, global specialty pharmaceutical company dedicated to women’s health, to commercialize BIJUVA and IMVEXXY outside of the U.S., excluding Canada and Israel, or the Territory. Under the terms of the License Agreement, Theramex paid us EUR 14 million in cash as an upfront fee on August 5, 2019. Within thirty days of signing the License Agreement, we provided Theramex the regulatory materials and clinical data that were necessary for Theramex to obtain marketing authorizations and other applicable regulatory approvals for commercializing BIJUVA and IMVEXXY. We recognized the revenue related to the upfront fee, which was a non-refundable payment, during the third quarter of 2019, at a point in time when Theramex was able to use and benefit from the license which was when the knowledge transfer of regulatory documents occurred. We are eligible to receive additional milestone payments comprised of (i) up to an aggregate of EUR 2 million in regulatory milestone payments based on regulatory approvals for BIJUVA and IMVEXXY in certain specified markets and (ii) up to an aggregate of EUR 27.5 million in sales milestone payments to be paid in escalating tranches based on Theramex first attaining certain aggregate annual net sales milestones of BIJUVA and IMVEXXY in the Territory ranging from EUR 25 million to EUR 100 million. We are also entitled to receive quarterly royalty payments on net sales of BIJUVA and IMVEXXY in the Territory. Theramex will be responsible for all regulatory and commercial activities for BIJUVA and IMVEXXY in the Territory. Theramex may sublicense its rights to commercialize BIJUVA and IMVEXXY in the Territory, except for certain specified markets. We may terminate the License Agreement if Theramex does not submit all regulatory applications, submissions and/or registrations required for regulatory approval to use and commercialize BIJUVA and IMVEXXY within certain specified time periods. We also may terminate the License Agreement if Theramex challenges our patents. Either party may terminate the 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.

 

We need substantial amounts of cash to complete the launch and commercialization of our hormone therapy 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

 

   Nine Months Ended
September 30,
 
   2019   2018 
    (000s) 
Net cash used in operating activities  $(114,900)  $(78,667)
Net cash used in investing activities  $(3,178)  $(20,827)
Net cash provided by financing activities  $111,796   $162,357 

 

Operating Activities

 

The principal use of cash in operating activities for the nine months ended September 30, 2019 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 $36,233,000 in cash used in operating activities for the nine months ended September 30, 2019 compared with the comparable period in the prior year was due primarily to an increase in our net loss and changes in the components of working capital, partially offset by an increase in non-cash items.

 

Investing Activities

 

Investing activities for the nine months ended September 30, 2019 decreased primarily due to a $20,000,000 payment for an intellectual property license fee that occurred during the nine months ended September 30, 2018, partially offset by higher spending related to patent, trademark and fixed asset costs during the nine months ended September 30, 2019.

 

Financing Activities

 

Financing activities represent the principal source of our cash flow. Our financing activities for the nine months ended September 30, 2019 provided net cash of approximately $111,796,000 which consisted of the net funding from our Facility of approximately $193,348,000 and exercise of options and warrants to purchase Common Stock of approximately $109,000, partially offset by the repayment of our Credit Agreement of approximately $81,661,000. Our financing activities for the nine months ended September 30, 2018 provided net cash of approximately $162,357,000, which consisted of the net funding from our Credit Agreement of approximately $71,213,000 and the exercise of options to purchase Common Stock of approximately $1,236,000 and approximately $89,908,000 in proceeds from the sale of our Common Stock.

 

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New Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2018-13 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 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 is 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 share-based payments to nonemployees by aligning it with the accounting for 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 supersedes the guidance in ASC 505-50. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASC 606. We adopted this standard on January 1, 2019 and the adoption of this standard did not have a material effect on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires lessees to record most leases on their balance sheets while recognizing 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. 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 adopted ASU 2016-02 on January 1, 2019 utilizing the alternative transition method allowed for under ASU 2018-11 and we recorded a $3.8 million right of use asset and a $4.1 million liability related to adoption of this standard. In addition, upon commencement of additional lease space in the third quarter of 2019, we recorded an additional $7.4 million right of use asset and an additional $7.2 million liability related to our new lease space. Comparative financial information was not adjusted and will continue to be reported under ASC 840. We also elected the transition relief package of practical expedients and as a result we did not assess (1) whether existing or 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 elected not to separate lease components from non-lease components for our specified asset classes. Additionally, the adoption of the new standard resulted in increased disclosure requirements in our quarterly and annual filings.

 

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.

 

43

 

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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 an investment 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.

 

As of April 24, 2019, we repaid all amounts outstanding under the MidCap Agreement and became subject to market risk in connection with borrowings under the Financing Agreement. Amounts borrowed under the Financing Agreement will accrue interest at either (i) 3-month LIBOR plus 7.75%, subject to a LIBOR floor of 2.70% or (ii) the prime rate plus 6.75%, subject to a prime rate floor of 5.20%. Considering the total outstanding principal balance under the Financing Agreement of approximately $200,000,000 at September 30, 2019, a 1.0% change in interest rates would result in an impact to income before income taxes of approximately $2,000,000 per year.  

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions in connection with required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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 benefits 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 result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.

 

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Changes in Internal Controls

 

During the three months ended September 30, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In August 2019, without admitting or denying the findings, we consented to an order issued by the Securities and Exchange Commission charging us with violations of Regulation FD in connection with communications during 2017 regarding TX-004HR and agreed to pay a $200,000 penalty. 

 

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 1A. Risk Factors

 

There have been no material changes to the risk factors previously disclosed in our Annual Report.

 

45

 

Item 6. Exhibits

 

Exhibit

 

Date

 

Description

10.1*+

 

September 28, 2018

 

Commercial Supply Agreement by and between TherapeuticsMD, Inc. and QPharma AB.

10.2*+

 

October 5, 2018

 

Lease by and between 951 Yamato Acquisition Company, LLC and TherapeuticsMD, Inc.

31.1*

 

November 8, 2019

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)

 

 

 

 

 

31.2*

 

November 8, 2019

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)

32.1**

 

November 8, 2019

 

Section 1350 Certification of Chief Executive Officer

32.2**

 

November 8, 2019

 

Section 1350 Certification of Chief Financial Officer

101.INS*

 

n/a

 

XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document

101.SCH*

 

n/a

 

XBRL Taxonomy Extension Schema Document

101.CAL*

 

n/a

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

n/a

 

XBRL Taxonomy Extension Definition Linkbase Instance Document

101.LAB*

 

n/a

 

XBRL Taxonomy Extension Label Linkbase Instance Document

101.PRE*

 

n/a

 

XBRL Taxonomy Extension Presentation Linkbase Instance Document

104*

 

n/a

 

Cover Page Interactive Data File (formatted as Inline XBRL and Contained in Exhibit 101)

 

 

*

Filed herewith.

**

Furnished herewith.

+ Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10). The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed.

46

 

SIGNATURES

 

Pursuant to the requirements 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: November  8, 2019

 

 

THERAPEUTICSMD, INC.

 

 

 

 

By:

/s/ Robert G. Finizio

 

 

Robert G. Finizio

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Daniel A. Cartwright

 

 

Daniel A. Cartwright

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

47

 

TherapeuticsMD, Inc. 10-Q

Exhibit 10.1

 

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED. [***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

 

 

COMMERCIAL SUPPLY AGREEMENT

 

This Commercial Supply Agreement (the “Agreement”) is made as of the 28th day of September, 2018, by and between TherapeuticsMD, Inc., a Nevada corporation, with a place of business at 6800 Broken Sound Parkway NW, Third Floor, Boca Raton, Florida 33487 (“TXMD”), and QPharma AB, a Sweden corporation, having a place of business at Agneslundsvagen 27, Malmo, Sweden (“QPharma”).

 

Each of QPharma and TXMD is sometimes referred to herein as a “Party” and collectively as the “Parties”.

 

RECITALS

 

A.            TXMD is a company that develops, markets and sells pharmaceutical products;

 

B.             QPharma is a developer and contract manufacturer of a variety of pharmaceutical products and medical devices including, but not limited to, intra-vaginal devices eluting pharmaceutical substances;

 

C.             TXMD is the exclusive licensee of the Population Council to commercialize in the United States a certain intra-vaginal ring system eluting segesterone acetate and ethinyl estradiol;

 

D.            QPharma is a qualified manufacturer of such intra-vaginal ring systems; and

 

E.             TXMD desires to engage QPharma to manufacture and supply quantities of such intra-vaginal ring systems, and QPharma desires to manufacture and supply such quantities of intra-vaginal ring systems, all pursuant to the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties intending to be legally bound, hereby agree as follows:

 

ARTICLE 1

DEFINITIONS

 

The following terms have the following meanings in this Agreement:

 

1.1           “Acknowledgement” has the meaning set forth in Section 4.3.

 

1.2           “Affiliate(s)” means, with respect to a referenced party, whether TXMD, QPharma or a third party, any corporation, firm, partnership or other entity that controls, is controlled by or is under common control with such referenced party. For the purposes of this definition, “control” means the ownership of at least 50% of the voting share capital of an entity or any other comparable equity or ownership interest or possession of the right to control the management and policies of such entity.

 

 

1.3           “Agreement” has the meaning set forth in the introductory paragraph, and includes all its Attachments and other appendices agreed to by the parties (all of which are incorporated herein by reference) and any amendments to any of the foregoing made as provided herein or therein.

 

1.4           “API(s)” means the compounds segesterone acetate and ethinyl estradiol, as further described in the Specifications that either (i) have been procured and released by TXMD and provided to QPharma or (ii) have been procured and released by QPharma, in either case along with a certificate of analysis from the manufacturer of such compounds, as provided in this Agreement.

 

1.5           “Applicable Laws” means, with respect to TXMD, all laws, ordinances, rules and regulations of each jurisdiction in which an API or Product is produced, marketed, distributed, used or sold; and with respect to QPharma, all laws, treaties, or ordinances, rules, regulations, cGMP, guidances, interpretations, authorizations, judgments, directives, injunctions, or orders of any court of any international, national, regional, local, or other governmental body, agency, authority, or court, or arbitrator, that has jurisdiction over the location where QPharma performs services, handles or stores an API, Raw Materials or Product, and manufactures Product under this Agreement (and applicable cGMP), including, but not limited to, the Federal Food, Drug and Cosmetic Act and Good Laboratory Practices, in each of the foregoing cases as in effect from time-to-time.

 

1.6           “Batch” means a defined quantity of Product that has been or is being Processed in accordance with the Specifications in a single production run. At the date of this Agreement, the theoretical size of a commercial validated Batch is approximately [***] units of Product.

 

1.7           “Components” means the silicon ring system and other tangible elements incorporated into or packaged with the Product, but for the avoidance of doubt, excluding APIs.

 

1.8           “cGMP” means current Good Manufacturing Practices promulgated by the Regulatory Authorities in the jurisdictions included in Applicable Laws (as applicable to TXMD and QPharma, respectively). In the United States, this includes 21 C.F.R. Parts 210, 211 and 820, as amended from time-to-time, together with pertinent guidelines and guidance documents, and in the European Union, to the extent applicable to the manufacture, handling and storage of the Product in Sweden for shipment to, and sale in, the United States, 2003/94/EEC Directive (as supplemented by Volume 4 of EudraLex published by the European Commission), as amended, Council Directive 90/385/EEC on Active Implantable Medical Devices (AIMDD)(1990) and Council Directive 93/42/EEC on Medical Devices (MDD) (1993), as amended, supplemented and superseded from time-to-time, together with pertinent guidelines and guidance documents then in effect.

 

1.9           “Commencement Date” means the first day of the Initial Pricing Term as established pursuant to Section 7.1, provided such date follows approval by a Regulatory Authority of QPharma as a manufacturer of the Product.

 

1.10         “Confidential Information” has the meaning set forth in Section 10.1.

 

1.11         “Contract Year” means each consecutive twelve (12) month period beginning on the Commencement Date or anniversary thereof, as applicable.

 

2

 

1.12         “Defective Product” has the meaning set forth in Section 5.2.

 

1.13         “Discloser” has the meaning set forth in Section 10.1.

 

1.14         “Effective Date” means July 26, 2018, [***].

 

1.15         “Exception Notice” has the meaning set forth in Section 5.2.

 

1.16         “Facility” means QPharma’s facility located in Malmo, Sweden, or such other facility as agreed by the parties in writing.

 

1.17         “Initial Pricing Term” has the meaning set forth in Section 7.1.

 

1.18         “Initial Term” means the period of time commencing as of July 26, 2018, and ending on July 26, 2024.

 

1.19         “Index” has the meaning set forth in Section 7.2.

 

1.20         “Losses” has the meaning set forth in Section 13.1.

 

1.21         “Marks” means trademarks, trade names, service marks, logos and symbols.

 

1.22         “Process” or “Processing” means the compounding, filling, manufacturing, producing, testing and packaging of APIs, TXMD-supplied Materials, if any, and Raw Materials into Product by QPharma, and their handling, storage and delivery in accordance with the Specifications and under the terms of this Agreement.

 

1.23         “Processing Date” means the day on which the first step of physical Processing is scheduled to occur, as identified in an Acknowledgement.

 

1.24         “Process Know-How” means all know-how provided by or on behalf of TXMD to QPharma and know-how to the extent it relates to the processing, manufacture, quality control, formulation, filling, finishing, testing and packaging of a Product, whether in bulk or final form, and regardless of container, including, without limitation, analytical tests methods for in-process and final Product, copies of manufacturing records, formulation recipes, designs and drawings, and formulae, used in the Processing for a Product to the extent it is in the possession, or under the control, of QPharma, its Affiliates and their respective subcontractors. For the avoidance of doubt, such Process Know-How includes the Know-How TXMD obtained from The Population Council by operation of TXMD’s acquisition of the Product’s New Drug Application under the License Agreement with The Population Council dated August 1, 2018.

 

1.25         “Process Know-How Transfer” means the commercially reasonable efforts of the parties undertaken pursuant to the Process Know-How Transfer Plan to transfer copies of all Process Know-How (together with relevant books and records) and the “Standards” (defined below) in QPharma’s possession or under its control, to TXMD as set forth in greater detail in the Process Know-How Transfer Plan. As used herein “Standards” means data, information, or samples of validated or QPharma manufactured or partially manufactured Product or other indicia measured at various points during Processing, to the extent QPharma possesses such data, information, or samples.

 

3

 

1.26         “Process Know-How Transfer Plan” means that plan addressing orderly Process Know-How Transfer, to be prepared in writing and reasonably agreed to by the parties within the sixty (60) day period following notice from TXMD to QPharma of its intention to commence Process Know-How Transfer.

 

1.27         “Product” means a silicon-based removable intra-vaginal ring system eluting segesterone acetate and ethinyl estradiol meeting the Specifications.

 

1.28         “Product Maintenance Services” has the meaning set forth in Section 2.2.

 

1.29         “Purchase Order” has the meaning set forth in Section 4.3.

 

1.30         “QPharma” has the meaning set forth in the introductory paragraph, or any successor or permitted assign. QPharma shall have the right to cause any of its Affiliates, upon prior written notice to and approval from TXMD, to perform any of its obligations hereunder, and TXMD upon its prior approval of the use of such an Affiliate, shall accept such performance as if it were performance by QPharma, but QPharma shall remain jointly and severally liable for the performance by any of its Affiliates under this Agreement.

 

1.31         “QPharma Defective Processing” has the meaning set forth in Section 5.2.

 

1.32         “QPharma Indemnitees” has the meaning set forth in Section 13.2.

 

1.33         “Qualified Person (QP)” means a company employee that fulfils the requirements as described in European Directive 2001/83(2)/EC. These requirements include personal qualities of integrity, maturity, open-mindedness, assertiveness, sound analytical skills and judgment as well as a level of education, combined with practical work experience within pharmaceutical development, manufacture, or Quality Assurance. The regulations specify that no batch of medicinal product can be released for sale or supply prior to certification by a QP that the batch is in accordance with the relevant requirements.

 

1.34         “Quality Agreement” has the meaning set forth in Section 9.7.

 

1.35         “Raw Material(s)” means any and all raw materials, supplies, Components and packaging necessary to manufacture and ship Product in accordance with the Specifications, but excluding the APIs and TXMD-supplied Materials, if any.

 

1.36         “Recall” has the meaning set forth in Section 9.5.

 

1.37         “Recipient” has the meaning set forth in Section 10.1.

 

1.38         “Regulatory Approval” means any approvals, permits, product and/or establishment licenses, registrations or authorizations, including approvals pursuant to U.S. Investigational New Drug Applications, New Drug Applications and Abbreviated New Drug Applications, as applicable, of any Regulatory Authorities that are necessary or advisable in connection with the development, manufacture, testing, use, storage, exportation, importation, transport, promotion, marketing, distribution or sale of APIs or Product in the Territory.

 

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1.39         “Regulatory Authority” means the international, federal, state or local governmental or regulatory bodies, agencies, departments, bureaus, courts or other entities in the Territory that are responsible for (A) the regulation (including pricing) of any aspect of pharmaceutical or medicinal products intended for human use including, but not limited to, their manufacture, handling and storage, or (B) health, safety or environmental matters generally. In the United States, this includes the United States Food and Drug Administration.

 

1.40         “Representatives” of an entity mean such entity’s duly-authorized officers, directors, employees, agents, accountants, attorneys or other professional advisors.

 

1.41         “Review Period” has the meaning set forth in Section 5.2.

 

1.42         “Risk Mitigation Plan” has the meaning set forth in Section 16.5(B).

 

1.43         “Specifications” means the procedures, requirements, standards, quality control testing and other data and the scope of services as set forth in Attachment A, as modified from time to time in accordance with Article 8.

 

1.44         “Term” has the meaning set forth in Section 16.1.

 

1.45         “Term Sheet” means that certain Binding Pricing Term Sheet for Supply of Product entered into on [***], between TherapeuticsMD and QPharma.

 

1.46         “Territory” means the United States of America, its territories, insular possessions and commonwealths.

 

1.47         “TXMD” has the meaning set forth in the introductory paragraph, or any successor or permitted assign.

 

1.48         “TXMD Equipment” means the equipment listed on Attachment B, together with all diagrams, schematics, operator’s manuals, operating software and warranties.

 

1.49         “TXMD Indemnitees” has the meaning set forth in Section 13.1.

 

1.50         “TXMD IP” has the meaning set forth in the Development Agreement.

 

1.51         “TXMD-supplied Materials” means materials to be supplied by or on behalf of TXMD to QPharma, other than APIs, for Processing, if any.

 

1.52         “Unit Pricing” has the meaning set forth in Section 7.1(A).

 

1.53         “Validation Plan” has the meaning set forth in Section 7.7.

 

1.54         “Vendor” has the meaning set forth in Section 3.1(B).

 

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ARTICLE 2

PROCESSING & RELATED SERVICES

 

2.1           Supply and Purchase of Product. QPharma shall Process Product and deliver the same to TXMD, its Affiliates and licensees in accordance with the Specifications, Applicable Laws and the terms and conditions of this Agreement.

 

2.2           Product Maintenance Services. TXMD will receive the following product maintenance services (the “Product Maintenance Services”): one annual audit (as further described in Section 9.5); regulatory audits (as further described in Section 9.4); one annual Product review (within the meaning of 21 CFR § 211.180); access to document library over and above the Quality Agreement, including additional copies of Batch paperwork or other Batch documentation; assistance in preparing Regulatory Approvals; Product document and sample storage relating to cGMP requirements; vendor re-qualification; and maintenance, updates and storage of master batch records and audit reports. For avoidance of doubt, the following services and items are not included in Product Maintenance Services: technology transfer; analytical work; stability; and process rework.

 

2.3           Other Related Services. QPharma shall provide such Product-related services, other than Processing or Product Maintenance Services, as agreed to in writing by the parties from time to time. Such writing shall include the scope and fees for any such services and be appended to this Agreement. The terms and conditions of this Agreement shall govern and apply to such services.

 

2.4           Validation Services. QPharma operates a validated Process for the production of the Product, and will continue to do so.

 

ARTICLE 3

API, MATERIALS & EQUIPMENT

 

3.1          The APIs and Raw Materials.

 

A.            TXMD shall be responsible for establishing a source of supply of the APIs. TXMD, at its option, shall enable QPharma to place orders for the API’s from such source of supply. QPharma shall be responsible for inspecting and releasing adequate quantities of the APIs and Raw Materials as necessary to meet the Firm Commitment, unless otherwise agreed to by the parties in writing. QPharma shall not be liable for any delay in delivery of Product if (i) TXMD is unable to obtain, in a timely manner, a particular API or (ii) QPharma is unable to obtain, in a timely manner, a particular API through its placement of orders therefor from TXMD’s source of supply or Raw Material necessary for Processing and (iii) QPharma placed orders for such API or Raw Material promptly following receipt of TXMD’s Firm Commitment. In the event that any API or Raw Material becomes subject to purchase lead time beyond the Firm Commitment time frame, the parties will negotiate in good faith an appropriate amendment to this Agreement. TXMD shall reimburse to QPharma its cost for the APIs. QPharma shall provide a credit to TXMD in the amount of any credit received by QPharma from an API supplier resulting from a pricing agreement with such supplier, with such credits to be applied to the next invoice issued thereafter to TXMD and successive invoices until fully expended. In order to facilitate the ordering and delivery of initial supplies of APIs to QPharma, TXMD, in consultation with QPharma, may purchase supplies of APIs for delivery to QPharma. Further, in order to facilitate the timely manufacture of Product for the Firm Commitment, QPharma shall maintain a safety stock of APIs and Raw Materials. Such safety stock shall be in an amount mutually agreed to by the Parties. TXMD shall be responsible for payment of the purchase price of any such APIs so ordered by it for delivery to QPharma.

 

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B.             In certain instances, TXMD may require a specific supplier, manufacturer or vendor (“Vendor”) to be used for a Raw Material. In such an event occurring after the date of this Agreement, such Vendor will be identified in the Specifications. If the cost of such Raw Material from any such Vendor is greater than QPharma’s costs for the same Raw Material of equal quality from other vendors, QPharma shall add the difference between QPharma’s cost of such Raw Material and the Vendor’s cost of the Raw Material to the Unit Pricing. TXMD will be responsible for all costs associated with qualification of any Vendor specifically required to be used upon written instruction from TXMD, which Vendor has not been previously qualified by QPharma.

 

C.             In the event of (i) a Specification change for any reason, (ii) obsolescence of any API or Raw Material or (iii) termination or expiration of this Agreement, TXMD shall bear the cost of any unused API or Raw Materials (including packaging), so long as QPharma purchased such API and Raw Materials in quantities consistent with TXMD’s most recent Firm Commitment and the vendor’s minimum purchase obligations. Such APIs and Raw Material shall be the property of TXMD upon payment therefor.

 

3.2          Supply of Materials.

 

A.            TXMD shall supply to QPharma for Processing, at TXMD’s cost, all TXMD-supplied Materials set forth on Attachment C, if any, in quantities sufficient to meet TXMD’s requirements for Product. TXMD shall deliver such items and associated certificates of analysis to the Facility no later than [***] ([***]) days before the Processing Date. TXMD’s failure to fulfill the foregoing obligations in this Section 3.2 shall not by itself give rise to a cause of action in QPharma or a right by it to terminate this Agreement. However, QPharma shall not be held liable for a delayed Processing Date related to TXMD’s own delay in delivering TXMD supplied Materials and associated certificates to the Facility. TXMD shall be responsible at its expense for securing any necessary DEA, export or import, similar clearances, permits or certifications required in respect of such supply. QPharma shall use such items solely for Processing. Prior to delivery of any such items, TXMD shall provide to QPharma a copy of all associated material safety data sheets, safe handling instructions and health and environmental information and any Regulatory certifications or authorizations that may be required under Applicable Laws with respect thereto, and shall promptly provide any updates thereto.

 

B.             Following receipt of TXMD-supplied Materials, QPharma shall inspect, test and release such items employing such measures as are set forth in the Specifications. QPharma will receive, handle, store and use all TXMD-supplied Materials in compliance with all Applicable Laws and labeled storage requirements, or lacking labeled storage requirement, the written instructions of TXMD, as agreed to by QPharma, such agreement not to be unreasonably withheld. In the event that QPharma detects a nonconformity with Specifications, QPharma shall give TXMD prompt notice of such nonconformity. QPharma shall not be liable for any defects in TXMD-supplied Materials, or in Product resulting from defective TXMD-supplied Materials, unless QPharma failed to properly perform the foregoing obligations. QPharma shall follow TXMD’s reasonable written instructions in respect of return or disposal of defective TXMD-supplied Materials, at TXMD’s cost.

 

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C.             TXMD shall retain title to TXMD-supplied Materials at all times and shall bear the risk of loss thereof, except for losses to the extent due to the negligent acts or omissions of QPharma or QPharma’s failure to follow storage and handling requirements or mutually agreed to written instructions of TXMD, in each case, subject to Article 14.

 

3.3          Artwork and Labeling. TXMD shall provide or approve, prior to the procurement of applicable Raw Materials, all artwork, advertising and labeling information necessary for Processing, if any. Such artwork, advertising and labeling information is and shall remain the exclusive property of TXMD, and TXMD shall be solely responsible for the content thereof. Hence, TXMD will be responsible for the artwork and labelling information communicated to QPharma for Processing and ensure itself that the latter comply with provided text and relevant applicable laws and regulations prevailing in the Territory. Such artwork, advertising and labeling information or any reproduction thereof may not be used by QPharma in any manner other than performing its obligations hereunder.

 

3.4          TXMD Equipment. QPharma hereby acknowledges that the TXMD Equipment is the sole and exclusive property of TXMD, and is in the possession of QPharma. During the Term, except as set forth below, QPharma shall be entitled to use the TXMD Equipment in the performance of its obligations to TXMD pursuant to this Agreement. QPharma (i) shall mark the TXMD Equipment so as to identify it as the property of TXMD, (ii) shall safeguard the TXMD Equipment with the same degree of care as it uses in connection with the safeguarding of its own equipment and (iii) shall be responsible for the proper operation, maintenance and repair of the TXMD Equipment. QPharma shall not sell, lease or lend the TXMD Equipment to any third party or relinquish possession or control of the TXMD Equipment. QPharma shall not move the TXMD Equipment from its current location without the advance written consent of TXMD. QPharma shall not grant a security interest in, use as collateral or otherwise encumber the TXMD Equipment in any way, or suffer the placement of a lien or other security device upon the TXMD Equipment. Upon request of TXMD, whether at the expiration of the Term or prior thereto, QPharma shall promptly make the TXMD Equipment ready for removal by TXMD or its designees, and shall grant access to TXMD and its designees to QPharma facilities for the purpose of such removal. During the Term, in the event, and to the extent, there exists capacity in the use of the TXMD Equipment in excess of its use to fulfill purchase orders of TXMD, QPharma may use the TXMD Equipment for its intended purpose in the performance of its manufacturing obligations for The Population Council, Inc. or its designee.

 

3.5          Additional Manufacturing Line. In order to plan for and meet potential demand for the Product in excess of QPharma’s current capacity, the Parties will prepare and reasonably agree to a manufacturing capacity expansion plan within ninety (90) days of the date of this Agreement, such plan to address the actions to be taken, the equipment to be purchased and installed, and financial responsibility therefor, along with a timeline, headcount plan, budget and assignment of responsibilities in the implementation of a second manufacturing line and other capacity improvements, all as set forth in such plan. For the avoidance of doubt, the Additional Manufacturing Line will also be comprised of TXMD Equipment.

 

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ARTICLE 4

PURCHASE ORDERS & RELATED MATTERS

 

4.1          Purchase Order Requirement. No purchase order shall be submitted for less than [***] commercial validated [***]. Purchase orders reflecting purchases in excess of [***] shall be submitted only in [***] Batch multiples.

 

4.2          Guidance. TXMD shall keep QPharma generally informed of its anticipated need for Product, including anticipated launch quantities, through delivery of a summary report every [***] ([***]) months. The parties shall cooperate in an effort to provide for an orderly process of purchase order submissions and deliveries of Product.

 

4.3          Purchase Orders.

 

A.            As provided in this Section 4.3(A), TXMD shall submit to QPharma a binding, non-cancelable purchase order for Product specifying the number of Batches to be Processed, the Batch size (to the extent the Specifications permit Batches of different sizes) and the requested delivery date for each Batch (“Purchase Order”).

 

B.             Promptly following receipt of a Purchase Order, QPharma shall issue a written acknowledgement (“Acknowledgement”) that it accepts or rejects such Purchase Order. Each acceptance Acknowledgement shall either confirm the delivery date set forth in the Purchase Order or set forth a reasonable alternative delivery date, and shall include the Processing Date. QPharma may reject any Purchase Order not given in accordance with this Agreement; provided, however, QPharma shall accept any Purchase Order that meets the requirements of this Agreement.

 

C.             In the event of a conflict between the terms of any Purchase Order or Acknowledgement and this Agreement, the terms of this Agreement shall control. No Purchase Order, confirmation, shipping document, receipt or similar document shall amend any term set forth in this Agreement or set forth any term inconsistent with the terms and conditions contained in this Agreement.

 

4.4          QPharma’s Cancellation of Purchase Orders. Notwithstanding Section 4.5, QPharma reserves the right to cancel all, or any part of, a Purchase Order upon written notice to TXMD, and QPharma shall have no further obligations or liability with respect to such Purchase Order, if TXMD refuses or fails to timely supply conforming TXMD-supplied Materials in accordance with Section 3.2. Any such cancellation of Purchase Orders shall not constitute a breach of this Agreement by QPharma. QPharma shall use reasonable efforts to re-schedule Processing reflected on such Purchase Order promptly after conforming TXMD-supplied Materials are delivered to QPharma.

 

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4.5           TXMD’s Modification or Cancellation of Purchase Orders. TXMD may modify the delivery date or quantity of Product in a Purchase Order only by submitting a written change order to QPharma at least [***] ([***]) days in advance of the earliest Processing Date covered by such change order. Such change order shall be effective and binding against QPharma only upon the written approval of QPharma. QPharma shall endeavor in good faith to mitigate the costs of such change order, but TXMD shall be responsible to QPharma for unavoidable costs, including those resulting from non-cancellable contracts entered into by QPharma in good faith.

 

4.6           Unplanned Delay or Elimination of Processing. QPharma shall use commercially reasonable efforts to meet the Purchase Orders, subject to the terms and conditions of this Agreement. QPharma shall provide TXMD with as much advance notice as practicable if QPharma determines that any Processing will be delayed or eliminated for any reason.

 

4.7           Observation of Processing. In addition to TXMD’s audit right pursuant to Section 9.5, TXMD may send up to [***] ([***]) Representatives to the Facility to observe Processing. Provided that QPharma has given TXMD adequate notice of commencement of Processing, TXMD shall give QPharma written notice of its intention to observe processing at least [***] ([***]) days prior to the date of its visit. The foregoing limitations shall not apply to time spent by TXMD Representatives on site at the Facility to participate in or witness research and development activities or to witness Processing of validation Batches of Product. Such Representatives shall abide by all QPharma safety rules and other applicable employee policies and procedures, and TXMD shall be responsible for such compliance. TXMD shall indemnify and hold harmless QPharma for any action, omission or other activity of such Representatives while on QPharma’s premises. TXMD’s Representatives who are not employees of TXMD shall be required to sign QPharma’s standard visitor confidentiality agreement prior to being allowed access to the Facility. QPharma shall not be required to accommodate any observation request or activity that would violate GMP or Swedish law. TXMD acknowledges that space constraints at QPharma’s facilities also may limit its ability to observe.

 

ARTICLE 5

TESTING; RELEASE

 

5.1           Batch Release. After QPharma completes Processing of a Batch, QPharma shall also provide TXMD or its designee with QPharma’s certificate of analysis, certificate of compliance and Qualified Person release for such Batch. Issuance of a certificate of analysis, executed batch records and a certificate of compliance by QPharma constitutes release of the Batch by QPharma to TXMD. TXMD shall be responsible for final release of Product to the market.

 

5.2           Testing; Rejection. No later than [***] days after receipt of the Batch (“Review Period”), TXMD or its designee shall notify QPharma whether the Batch conforms to Specifications. Upon receipt of notice from TXMD that a Batch meets Specifications, or upon failure of TXMD to respond by the end of the Review Period, the Batch shall be deemed accepted by TXMD and TXMD shall have no right to reject such Batch other than for defects which existed at the time of delivery and were not discovered or discoverable in the exercise of reasonable care (“Latent Defects”). For the avoidance of doubt, (i) Batches failing to meet Specifications at the time of delivery due to Latent Defects may be rejected, if at all, only upon notice to QPharma within [***] ([***]) days following the date on which such Latent Defect was discovered or should have been discovered in the exercise of reasonable care and (ii) in no event may TXMD reject Product after such Product’s expiration date. If TXMD or its designee timely notifies QPharma in writing (an “Exception Notice”) that a Batch does not conform to the Specifications or otherwise does not meet the warranty set forth in Section 12.1(A), whether due to a Latent Defect or otherwise (“Defective Product”), and provides a sample of the alleged Defective Product, QPharma shall conduct an appropriate investigation in its discretion to determine whether or not it agrees with TXMD that Product is Defective Product and to determine the cause of any nonconformity. If QPharma agrees that Product is Defective Product and determines that the cause of nonconformity is attributable to QPharma’s failure to perform the Processing in accordance with the Specifications (“QPharma Defective Processing”), then Section 5.4 shall apply. For avoidance of doubt, where the cause of nonconformity cannot be determined or assigned, it shall be deemed not QPharma Defective Processing. For the avoidance of doubt, the Processing of any Batch that does not proceed to completion or any Batch that does not pass release testing by QPharma shall be treated as Defective Product resulting from QPharma Defective Processing. In such case, the remedies set forth in Section 5.4 shall apply.

 

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5.3           Discrepant Results. If the parties disagree as to whether Product is Defective Product and/or whether the cause of the nonconformity is QPharma Defective Processing, and this is not resolved within [***] days of the Exception Notice date, the parties shall cause a mutually acceptable independent third party to review records, test data and to perform comparative tests and/or analyses on samples of the alleged Defective Product and its components, including TXMD-supplied Materials. The independent party’s results as to whether or not Product is Defective Product and the cause of any nonconformity shall be final and binding. Unless otherwise agreed to by the parties in writing, the costs associated with such testing and review shall be borne by QPharma if Product is Defective Product attributable to QPharma Defective Processing, and by TXMD in all other circumstances. TXMD will be apprised in writing of all Defective Product investigations executed by QPharma on TXMD’s materials/products, including Product and TXMD-supplied Materials, as well as final investigation outcome and conclusion(s).

 

5.4           Defective Processing. QPharma shall, at TXMD’s option, either (A) replace at its cost another Batch of Product (as a replacement for any Batch of Defective Product attributable to QPharma Defective Processing) using TXMD-supplied Materials provided at QPharma’s cost, if any such items are required or (B) credit any payments made by TXMD for such Batch. THE OBLIGATION OF QPHARMA TO REPLACE QPHARMA DEFECTIVE PROCESSING IN ACCORDANCE WITH THE SPECIFICATIONS OR CREDIT PAYMENTS MADE BY TXMD FOR DEFECTIVE PRODUCT ATTRIBUTABLE TO QPHARMA DEFECTIVE PROCESSING SHALL BE TXMD’S SOLE AND EXCLUSIVE REMEDY UNDER THIS AGREEMENT FOR DEFECTIVE PRODUCT (APART FROM RECALL COSTS SET FORTH IN SECTION 9.6, AND IS IN LIEU OF ANY OTHER WARRANTY, EXPRESS OR IMPLIED).

 

ARTICLE 6

DELIVERY

 

6.1           Delivery. QPharma shall deliver Product ExWorks (Incoterms 2010) at the Facility promptly following TXMD’s approval and notification to QPharma’s to release the Product; provided, however, QPharma shall be responsible for loading the Product on the carrier’s vehicle using due care. QPharma shall segregate and store all Product until tender of delivery. Title to Product shall transfer to TXMD upon such delivery. TXMD shall qualify at least [***] ([***]) carriers to ship Product and then designate the priority of such qualified carriers to QPharma.

 

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6.2          Storage. Any items temporarily stored at QPharma shall be stored in compliance with requirements set forth in the Specification, or if no such storage Specification exists for such item, QPharma shall store such items using due care taking into account the identity of such item.

 

6.3          Subcontracting. QPharma may utilize third parties to provide any part of the Processing only with the prior written approval of TXMD, provided that the foregoing will not apply to generally available goods and services or to subcontracting to QPharma Affiliates. If TXMD approves a subcontractor, then QPharma shall enter a written agreement with such subcontractor that enables QPharma to comply with its obligations under this Agreement and places such subcontractors under obligations of confidentiality, non-use and intellectual property ownership no less burdensome than those set forth herein and applicable to QPharma. QPharma will oversee all services performed by any subcontractor, and will be responsible for such services as if such services were performed by QPharma. QPharma shall remain liable for the performance of its subcontractors under this Agreement. The use of subcontractors shall not relieve QPharma of any responsibility under this Agreement.

 

ARTICLE 7

PAYMENTS

 

7.1          Fees. In consideration for QPharma performing services hereunder:

 

A.            TXMD shall pay QPharma the unit pricing for Product set forth on Attachment D (“Unit Pricing”), which shall be in effect for the period ending on (i) the third anniversary of delivery by QPharma of the first commercial Batch of Product to or for TXMD; provided launch occurs on or before [***], or (ii) [***], if there is no such launch on or before [***] (the “Initial Pricing Term”). QPharma shall sell and deliver Product in final dosage form, packaged for end user use. QPharma shall submit an invoice to TXMD for such fees upon tender of delivery of Product as provided in Section 6.1.

 

B.             Other Fees. TXMD shall pay QPharma for all other fees and expenses of QPharma owing in accordance with the terms of this Agreement, including pursuant to Sections 2.3 and 4.1. QPharma shall submit an invoice to TXMD for such fees as and when appropriate.

 

7.2          Unit Pricing Increase. After the Initial Pricing Period, the Unit Pricing may be adjusted on an annual basis, effective on each July 1st (with the first possible price adjustment to be effective on July 1, 2021), upon [***] days’ prior written notice from QPharma to TXMD, to reflect increases in labor, utilities and overhead and shall be in an amount equal to the change in the Producer Price Index (the “Index”), “Pharmaceutical Preparation Manufacturing” (Series ID: PCU325412325412), not seasonally adjusted, as published by the U.S. Department of Labor, Bureau of Labor Statistics. The initial base period for comparison shall be the twelve (12) month period ending on June 30 immediately preceding the expiration of the Initial Pricing Period. For the avoidance of doubt, if launch of the Product occurs on or after [***], but before [***], QPharma shall be entitled to adjust Unit Pricing for the Initial Pricing Period based upon the difference in the Index on [***] and on [***], but not to exceed [***] percent ([***]%). For the further avoidance of doubt, Unit Pricing Increases after the Initial Pricing Period shall not exceed [***] percent ([***]%) in the aggregate for the Index. In addition, price increases (or decreases) for APIs and Raw Materials shall be passed through at cost to TXMD and not included in the Index-based price adjustment described above.

 

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7.3           Payment Terms. All QPharma invoices shall be due [***] ([***]) days after the date of receipt of invoice. No invoice shall be issued to TXMD for Processing until the Batch so Processed has been released pursuant to Section 5.1; provided, however, with respect to purchase orders for the initial [***] ([***]) Batches ordered by TXMD pursuant to this Agreement (the “Initial Batches”), QPharma shall be entitled to issue invoices to TXMD upon receipt of such purchase orders in a non-refundable pre-paid amount equal to [***] percent ([***]%) of the price of each such purchase order. Purchase orders for the Initial Batches shall be placed only for even numbers of Batches to be Processed. Under a given purchase order covering some or all of the Initial Batches, TXMD shall pay for all Batches released pursuant to Section 5.1, but shall first receive a credit in the amount of the pre-payment made pursuant to such purchase order. If more than [***] percent ([***]%) the Batches Processed pursuant to a given purchase order for the Initial Batches fail release pursuant to Section 5.1, QPharma nevertheless shall be entitled to retain the pre-payment made in respect of such purchase order. TXMD shall make payment in U.S. dollars, and otherwise as directed in the applicable invoice. If any payment is not received by QPharma by its due date, then QPharma may, in addition to any other remedies available at equity or in law, charge interest on the outstanding sum from the due date (both before and after any judgment) at [***]% per month until paid in full (or, if less, the maximum amount permitted by Applicable Laws).