THERAPEUTICSMD, INC. You should read the following discussion and analysis in conjunction with the information set forth under our consolidated financial statements and the notes to those financial statements included elsewhere in this 2022 10-K Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. See "Statement Regarding Forward-Looking Information." Our actual results may differ materially from those contained in or implied by any forward-looking statements as a result of various factors, including, but not limited to, the risks and uncertainties described under "Risk Factors" elsewhere in this 2022 10-K Report.
Certain amounts in the Management's discussion and analysis of financial condition and results of operations may not add due to rounding, and all percentages have been calculated using unrounded amounts.
Business overview
InDecember 2022 , we changed our business to become a pharmaceutical royalty company, currently receiving royalties on products licensed to pharmaceutical organizations that possess commercial capabilities in the relevant territories. OnDecember 30, 2022 , the Company completed the Mayne Transaction pursuant to which the Company and its subsidiaries (i) granted Mayne Pharma an exclusive license to commercialize the Company's IMVEXXY, BIJUVA and prescription prenatal vitamin products sold under the BocaGreenMD® and vitaMedMD® brands inthe United States and its possessions and territories, (ii) assigned to Mayne Pharma the Company's exclusive license to commercialize ANNOVERA inthe United States and its possessions and territories, and (iii) sold certain other assets to Mayne Pharma in connection therewith. Pursuant to a License Agreement, datedDecember 4, 2022 , the Company granted Mayne Pharma, on the Closing Date, (i) an exclusive, sublicensable, perpetual, irrevocable license to research, develop, register, manufacture, have manufactured, market, sell, use, and commercialize the Licensed Products inthe United States and its possessions and territories and (ii) an exclusive, sublicensable, perpetual, irrevocable license to manufacture, have manufactured, import and have imported the Licensed Products outsidethe United States for commercialization inthe United States and its possessions and territories. Pursuant to the Mayne License Agreement, Mayne Pharma will make one-time, milestone payments to the Company of each of (i)$5.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$100.0 million , (ii)$10.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$200.0 million and (iii)$15.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$300.0 million . Further, Mayne Pharma will pay to the Company royalties on net sales of all Products inthe United States at a royalty rate of 8.0% on the first$80 million in annual net sales and 7.5% on annual net sales above$80.0 million , subject to certain adjustments, for a period of 20 years following the Closing Date. 42 -------------------------------------------------------------------------------- The royalty rate will decrease to 2.0% on a Product-by-Product basis upon the earlier to occur of (i) the expiration or revocation of the last patent covering a Product and (ii) a generic version of a Product launching inthe United States . Mayne Pharma will pay to the Company minimal annual royalties of$3.0 million per year for 12 years, adjusted for inflation at an annual rate of 3%, subject to certain further adjustments, including as described below. Upon the expiry of the 20-year royalty term, the licenses granted to Mayne Pharma under the Mayne License Agreement will become a fully paid-up and royalty free license for the Licensed Products. Pursuant to a Transaction Agreement, datedDecember 4, 2022 , between the Company and Mayne Pharma, the Company sold to Mayne Pharma, at closing, certain assets for Mayne Pharma to commercialize the Products inthe United States , including the Company's exclusive license from thePopulation Council to commercialize ANNOVERA. The total consideration from Mayne Pharma to the Company for the purchase of the Transferred Assets and the grant of the licenses under the Mayne License Agreement was (i) a cash payment of$140.0 million at closing, (ii) a cash payment of approximately$12.1 million at closing for the acquisition of net working capital as determined in accordance with the Transaction Agreement and subject to certain adjustments, (iii) a cash payment of approximately$1.0 million at closing for prepaid royalties in connection with the Mayne License Agreement Amendment and (iv) the right to receive the contingent consideration set forth in the Mayne License Agreement, as amended. On the Closing Date, the Company and Mayne Pharma entered into Amendment No. 1 to the Mayne License Agreement. Pursuant to the Mayne License Agreement Amendment, Mayne Pharma agreed to pay the Company approximately$1.0 million in prepaid royalties on the Closing Date. The prepaid royalties will reduce the first four quarterly payments that would have otherwise been payable pursuant to the Mayne License Agreement by an amount equal to$257,250 per quarterly royalty payment plus interest calculated at 19% per annum accruing from the Closing Date until the date such quarterly royalty payment is paid to the Company. In addition, the parties agreed that Mayne Pharma will reduce one quarterly royalty payment (other than the first quarterly royalty payment) otherwise payable to the Company by$1.5 million in consideration of Mayne Pharma assuming the Company's obligations under a long-term services agreement, including the Company's minimum payment obligations thereunder. As part of the transformation that included the Mayne License Agreement, historical results of commercial operations have been reflected as discontinued operations in the Company's consolidated financial statements for all periods prior to the Closing Date. Assets and liabilities associated with the commercial business are classified as assets and liabilities of discontinued operations in the Company's consolidated balance sheets. Additional disclosures regarding discontinued operations are provided in Note 2 Discontinued Operations to the consolidated financial statements included in this Annual Report.
The Company also has license agreements with strategic partners to commercialize
IMVEXXY and BIJUVA outside of the
• In
pursuant to which we granted Knight an exclusive license to commercialize
IMVEXXY and BIJUVA in
• In
to commercialize IMVEXXY and BIJUVA outside of the
and
certain European countries and began commercialization efforts in those
countries.
In connection with the Company's transformation into a pharmaceutical royalty company, the termination of our executive management team (except for Mr.Marlan Walker , our former General Counsel and current Chief Executive Officer) and all other employees was completed byDecember 31, 2022 . Severance obligations for all employees other than executive officers were paid in full in the first quarter of 2023 and severance obligations for terminated executive officers will be paid in accordance with their employment agreements and separation agreements as previously disclosed. As ofDecember 31, 2022 , we employed one full-time employee primarily engaged in an executive position. We have engaged external consultants, including certain former members of our management team, who support our relationship with current partners and assist with certain financial, legal and regulatory matters and the continued wind-down of our historical business operations.
vitaCare divestiture
OnApril 14, 2022 , we completed the divestiture of vitaCare with the sale of all vitaCare's issued and outstanding capital stock (the "vitaCare Divestiture"). We received net proceeds of$142.6 million , net of transaction costs of$7.2 million , and we recognized a gain on sale of business of$143.4 million . Included in the net proceeds amount was$11.3 million of customary holdbacks as provided in the Purchase Agreement, which is recorded as restricted cash in the consolidated balance sheets. The restricted cash was held by an escrow agent and was released to us inMarch 2023 . Additionally, we may receive up to an additional$7.0 million in earn-out consideration, 43 --------------------------------------------------------------------------------
contingent upon vitaCare's financial performance through 2023 as determined in accordance with the terms of the Purchase Agreement. We will record the contingent consideration at the settlement amount when the consideration is realized or realizable.
The Purchase Agreement contains customary representations and warranties, covenants, and indemnities of the parties thereto. The commitments under a long-term services agreement related to vitaCare was transferred to Mayne Pharma as part of the Mayne Transaction. In addition, under the Mayne License Agreement Amendment, Mayne Pharma will reduce one quarterly royalty payment (other than the first quarterly royalty payment) otherwise payable to us by$1.5 million in consideration of Mayne Pharma assuming our obligations under the long-term services agreement related to vitaCare.
The operations of vitaCare were classified as discontinued operations in
COVID-19 With multiple variant strains of the SARS-Cov-2 virus and the COVID-19 disease that it causes (collectively, "COVID-19") still circulating, we continue to be subject to risks and uncertainties in connection with the COVID-19 pandemic. The extent of the future impact of the COVID-19 pandemic on our business continues to be highly uncertain and difficult to predict. As of the date of the filing of this Annual Report, the future extent to which the COVID-19 pandemic may continue to materially impact our financial condition, liquidity, or results of operations remains uncertain and difficult to predict. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.
Portfolio of our licensed products
InDecember 2022 , we changed our business to become a pharmaceutical royalty company, currently receiving royalties on products licensed to pharmaceutical organizations that possess commercial capabilities in the relevant territories. OnDecember 30, 2022 , we granted an exclusive license to commercialize the Company's IMVEXXY, BIJUVA, and prescription prenatal vitamin products sold under the BocaGreenMD® and vitaMedMD® brands and assigning the Company's exclusive license to commercialize ANNOVERA to Mayne Pharma.
IMVEXXY (estradiol vaginal inserts), 4-?g and 10-?g
This pharmaceutical product is for the treatment of moderate-to-severe dyspareunia (vaginal pain associated with sexual activity), a symptom of vulvar and vaginal atrophy due to menopause. As part of theFDA's approval of IMVEXXY, we 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. OnDecember 30, 2022 , we granted an exclusive license to commercialize the Company's IMVEXXY inthe United States and its possessions and territories to Mayne Pharma. We also have entered into licensing agreements with third parties to market and sell IMVEXXY outside of theU.S. We entered into the Knight License Agreement, with Knight pursuant to which, we granted Knight an exclusive license to commercialize IMVEXXY inCanada andIsrael . We entered into the Theramex License Agreement withTheramex HQ UK Limited ("Theramex") pursuant to which we granted Theramex an exclusive license to commercialize IMVEXXY for human use outside of theU.S. , except forCanada andIsrael . As ofDecember 31, 2022 , no IMVEXXY sales had been made through these licensing agreements. The FDA has also asked the sponsors of other vaginal estrogen products to participate in the observational study. In connection with the observational study, we would have been required to provide progress reports to the FDA on an annual basis. The obligation to conduct this study was transferred to Mayne Pharma as part of the License Agreement.
BIJUVA (estradiol and progesterone) capsules, 1 mg/100 mg
This pharmaceutical product is 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 (commonly known as hot flashes or flushes) due to menopause in women with a uterus.
OnDecember 30, 2022 , we granted an exclusive license commercialize the Company's BIJUVA inthe United States and its possessions and territories to Mayne Pharma. We also have entered into the Knight License Agreement with Knight pursuant to which we granted Knight an exclusive license to commercialize BIJUVA inCanada andIsrael . We have entered into the Theramex License Agreement with Theramex pursuant to which we granted Theramex an exclusive license to commercialize BIJUVA for human use outside of the 44 --------------------------------------------------------------------------------U.S. , except forCanada andIsrael . During 2022 and 2021, we had BIJUVA sales of$1.4 million made through the Theramex License Agreement, and such sales were included as license revenue in the statements of operations. In addition, in 2021, we received milestone payments comprised of an aggregate ofEUR 1.0 million , or$1.2 million , in regulatory milestone payments based on regulatory approvals for BIJUVA in certain specified markets.
ANNOVERA (segesterone acetate ("SA") and ethinyl estradiol ("EE") vaginal system)
OnDecember 30, 2022 , we assigned the Company's exclusive license to commercialize ANNOVERA to Mayne Pharma. This pharmaceutical product is a one-year ring-shaped contraceptive vaginal system ("CVS") and the first and only patient-controlled, procedure-free, reversible prescription contraceptive that can prevent pregnancy for up to a total of 13 cycles (one year). ANNOVERA is commercially sold in theU.S. pursuant to the terms of thePopulation Council License Agreement. 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. We 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$20.0 million , half of such excess will offset against royalties or other payments owed by us under the Population Council License Agreement. InAugust 2021 , we filed a supplemental New Drug Application ("NDA") with the FDA to modify the testing specifications for ANNOVERA to allow increased consistency of supply of ANNOVERA. InMay 2022 , the FDA approved the supplemental NDA for ANNOVERA.
Prenatal vitamin products
OnDecember 30, 2022 , we granted an exclusive license to commercialize, inthe United States and its possessions and territories, our prescription prenatal vitamin product lines under our vitaMedMD brand name and authorized generic formulations of some of our prescription prenatal vitamin products under our BocaGreenMD Prena1 name to Mayne Pharma.
Results of operations
InDecember 2022 , we granted an exclusive license to commercialize our IMVEXXY, BIJUVA, and prescription prenatal vitamin products and assigning the Company's exclusive license to commercialize ANNOVERA to Mayne Pharma, which resulted in a business shift that had a major effect on our operations and financial results. As part of the transformation that included the Mayne License Agreement, historical results of commercial operations have been reflected as discontinued operations in the Company's consolidated financial statements for all periods prior to the Closing Date. Assets and liabilities associated with the commercial business are classified as assets and liabilities of discontinued operations in the Company's consolidated balance sheets. Additional disclosures regarding discontinued operations are provided in Note 2 to the financial statements included in this Annual Report. 45 --------------------------------------------------------------------------------
The discussion below, and the revenues and expenses discussed below, are based on and relate to the continuing operations of the company.
2022 compared to 2021
Year ended December 31,
2022 2021
Revenue:
Product revenue, net $ - $ -
License revenue 69,963 2,573
Total revenue, net 69,963 2,573
Cost of revenue 1,397 1,402
Gross profit 68,566 1,171
Operating expenses:
Selling and marketing - -
General and administrative 57,903 80,748
Research and development - -
Restructuring expense 9,472 -
Total operating expenses 67,375 80,748
Income (loss) from operations 1,191 (79,577 )
Other (expense) income:
Other (expense) income, net (117 ) 272
Total other (expense) income, net (117 )
272
Income (loss) from continuing operations before income taxes 1,074 (79,305 ) Provision for income taxes -
-
Net income (loss) from continuing operations 1,074 (79,305 ) Income (loss) from discontinued operations, net of income taxes 110,923 (93,110 ) Net income (loss)$ 111,997 $ (172,415 ) Revenue. As part of the transformation of our Company and the Mayne License Agreement, historical results of commercial operations have been reflected as discontinued operations in the Company's consolidated financial statements for all periods presented. Revenue from continuing operations is related to our license agreements. We recorded$70.0 million in license revenue related to the allocation of the initial upfront payment and guaranteed minimum royalties from the Mayne License Agreement during the year endedDecember 31, 2022 , and$2.6 million in license revenue related to achieving previously established milestone payment targets and sales from other licensee during the year endedDecember 31, 2021 . Gross profit. Our gross profit for 2022 was$68.6 million , an increase of$67.4 million , compared to 2021. The increase in our gross profit was primarily a result of an increase in license revenue related to the initial upfront payment and guaranteed minimums from the Mayne Transaction. Operating expenses. Total operating expenses for 2022 were$67.4 million , a decrease of$13.4 million , or 16.6%, compared to 2021. Total operating expenses decreased primarily due to lower general and administrative expenses described below during 2022, partially offset by$9.5 million of restructuring expenses including severance, employee termination costs contract termination costs and write off of fixed assets related to restructuring activities following the Mayne Transaction. Our general and administrative costs were$57.9 million for 2022, a decrease of$22.8 million , or 28.3%, compared to 2021. This decrease was primarily related to$12.7 million in lower compensation and employee benefit costs,$6.7 million in lower stock-based compensation expenses, and$3.6 million in lower information technology expenses. These decreases were partially offset by$3.2 million in higher expenditures attributable to various professional fees, such as legal, consulting, etc. Income (loss) from operations. For 2022, we had an income from operations of$1.2 million , as compared to a loss from operations of$79.6 million for 2021. This change was attributable to$13.4 million in lower operating expenses and$67.4 million in higher gross profit.
Other income (expense), net. In 2022, we had non-operating expense of
46
--------------------------------------------------------------------------------Provision for income taxes. In 2022 or 2021, we recorded no provision for income taxes for continuing operations.
Net income (loss) from continuing operations. For 2022, we had a net income of$1.1 million , or$0.12 per basic and$0.11 per diluted common share, compared to a loss of$79.3 million , or$9.96 per basic and diluted common share, for 2021. Discontinued Operations-Revenues were$80.7 million for 2022, a decrease of$3.6 million , or 4.3%, as compared to the prior year. The decrease was driven by a decrease in IMVEXXY revenue of$4.7 million , lower BIJUVA revenue of$0.5 million and lower prenatal vitamins revenue of$2.2 million , partially offset by higher revenue of ANNOVERA of$3.8 million . Operating expenses were$97.6 million for 2022, a decrease of$35.7 million , as compared to the prior year. Operating expenses decreased due to lower selling and marketing expenses of$33.0 million and lower research and development expenses of$2.1 million as compared to the prior year, partially offset by restructuring charges of$6.2 million recorded in 2022, which were recorded due to our business shift after granting an exclusive license to commercialize the Company's IMVEXXY, BIJUVA, and prescription prenatal vitamin products and assigning the Company's exclusive license to commercialize ANNOVERA to Mayne Pharma. The decrease in operating expenses also reflected the reduction of vitaCare operating expenses in connection with its divestiture inApril 2022 and the termination of employees onDecember 31, 2022 following the Mayne Transaction. Operating loss from discontinued operations was$32.5 million , a decrease of$27.7 million as compared to the prior year. We reclassified certain expenses that were associated with debt that was required to be repaid as a result of transaction with Mayne Pharma and the vitaCare divestiture to discontinued operations, which included interest, amortization of deferred financing costs as well as expense for accretion of the Company's newly-designated Series A Preferred Stock, par value$0.001 per share (the "Series A Preferred Stock") and loss on extinguishment of debt. Discontinued operations other income (expense) reflects a$143.4 million gain on the sale of the vitaCare business and a$62.0 million gain on sale of ANNOVERA, net of transaction costs partially offset by$17.0 million in expense for accretion of Series A Preferred Stock in 2022,$8.4 million in loss on extinguishment of debt in connection with amendments to the Financing Agreement (as defined below) during 2022 and$3.1 million in higher interest expense and amortization of deferred financing costs as compared to 2021. For additional information, see Note 2 - Discontinued Operations, in the notes to the consolidated financial statements appearing elsewhere in this Annual Report.
Liquidity and capital resources
Our primary use of cash is to fund the continued operations of our company. We have funded our operations primarily through public offerings of our common stock and private placements of equity and debt securities. As ofDecember 31, 2022 , we had cash totaling$38.1 million . We maintain cash at financial institutions that at times may exceed theFederal Deposit Insurance Corporation insured limits of$0.25 million per bank. We have never experienced any losses related to these funds. OnApril 14, 2022 , we completed the vitaCare Divestiture and included$11.3 million of customary holdbacks, as provided in the Purchase Agreement, which is recorded as restricted cash in the consolidated balance sheets. The restricted cash was held by an escrow agent and was be released to us inMarch 2023 . Additionally, we may receive up to an additional$7.0 million in earn-out consideration, contingent upon vitaCare's financial performance through 2023 as determined in accordance with the terms of the Purchase Agreement. We utilized$120.0 million of net proceeds from the vitaCare Divestiture to make a prepayment of the loans under the Financing Agreement under the terms of Amendment No. 9 of the Financing Agreement. OnDecember 30, 2022 , we granted Mayne Pharma (i) an exclusive, sublicensable, perpetual, irrevocable license to research, develop, register, manufacture, have manufactured, market, sell, use, and commercialize the Licensed Products inthe United States and its possessions and territories and (ii) an exclusive, sublicensable, perpetual, irrevocable license to manufacture, have manufactured, import and have imported the Licensed Products outsidethe United States for commercialization inthe United States and its possessions and territories. The total consideration from Mayne Pharma to us under the License Agreement was (i) a cash payment of$140.0 million at closing, (ii) a cash payment of approximately$12.1 million at closing for the acquisition of net working capital as determined in accordance with the transaction agreement datedDecember 4, 2022 , and subject to certain adjustments, (iii) a cash payment of approximately$1.0 million at closing for prepaid royalties in connection with the License Agreement Amendment and (iv) the right to receive the contingent consideration set forth in the License Agreement, as amended. Pursuant to the Mayne License Agreement, Mayne Pharma will make one-time, milestone payments to the Company of each of (i)$5.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$100.0 million , (ii)$10.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$200.0 million and (iii)$15.0 million if aggregate net sales of all Products inthe United States during a calendar year reach$300.0 million . Further, Mayne Pharma will pay to the Company royalties on net sales of all Products inthe United States at a royalty rate of 8.0% on the first$80 million in annual net sales and 7.5% on annual net sales above$80.0 million , subject to certain adjustments, for a period of 20 years following the Closing Date. The royalty rate will decrease to 2.0% on a Product-by-Product basis upon the earlier to occur of (i) the expiration or revocation of the last patent covering a Product and (ii) a generic version of a Product launching inthe United States . Mayne Pharma will pay to the Company minimal annual royalties of$3.0 million per year for 12 years, adjusted for inflation at an annual rate of 3%, subject to certain 47 --------------------------------------------------------------------------------
further adjustments, including as described below. Upon the expiry of the 20-year royalty term, the licenses granted to Mayne Pharma under the Mayne License Agreement will become a fully paid-up and royalty free license for the Licensed Products.
See "Going Concern" below for further discussion related to our ability to generate and obtain adequate amounts of cash to meet our liquidity needs and our plans for to satisfy our such needs in the short-term and in the long-term.
Cash flows
The following table reflects the major categories of cash flows from continuing operations for each of the periods (in thousands).
Cash flow from continuing operations 2022 2021
Net cash provided by (used in) operating activities
(355 ) (2,223 ) Net cash (used in) provided by financing activities (235,206 ) 129,552
2022 compared to 2021 Operating Activities from continuing operations. Net cash provided by operating activities in 2022 was$9.4 million , compared to net cash used in operating activities of$55.1 million for 2021. This decrease of$64.5 million or 117%, was primarily due to a$80.4 million decrease in our net loss from continuing operations resulting from allocated to day one license revenue from the Mayne Transaction, a$8.7 million decrease in cash usage related to changes in operating assets and liabilities, and a$7.2 million increase in non-cash expenditure adjustments as compared to 2021. Investing Activities from continuing operations. Net cash used in investing activities for 2022 was$0.4 million , compared to net cash used in investing activities of$2.2 million for 2021. This change was due to lower fixed asset and patent related costs as compared to 2021. Financing Activities from continuing operations. Net cash used in financing activities for 2022 was$235.2 million , compared to net cash provided by financing activities of$129.6 million for 2021. This change of$364.8 million , or 281.6%, was primarily related to higher repayment of debt of$169.4 million as compared to 2021, the redemption of our Series A Preferred Stock of$38.7 million at liquidation preference, and the repayment of make-whole derivative of$3.0 million as compared to 2021. This was partially offset by proceeds from Series A Preferred Stock of$21.7 million , proceeds from make-whole payment of$3.3 million , lower proceeds from sale of common stock of$181.7 million , lower payment for financing fees of$3.5 million and lower proceeds from sale of stock related to employee stock purchase plan of$0.2 million as compared to 2021. Operating Activities from discontinued operations. Net cash used in operating activities in 2022 was$13.4 million as compared to net cash used in operating activities of$87.6 million for 2021. This decrease relates to a decrease in net loss of$204.0 million reflecting four months of vitaCare activities in 2022 as compared to a full year in 2021 and reductions in marketing expenses for the commercial business as well as lower research and development expenses to preserve cash in 2022, as well as increase in non-cash expenditure adjustments which included debt financing fees, non-cash interest expense, accretion of Series A Preferred Stock and make-whole payment accretion and the loss of extinguishment of debt as compared to 2021. Investing Activities from discontinued operations. Net cash provided by investing activities for 2022 was$223.8 million which included proceeds from divesture of vitaCare of$142.6 million and proceeds from the sale of ANNOVERA of$81.2 million in 2022.
For additional details, see the consolidated statements of cash flows included in this 2022 10-K Report.
Other liquidity measures Receivable. OnDecember 30 , Mayne Pharma acquired our account receivable balance of approximately$29.3 million which is subject to certain working capital adjustments. As ofDecember 31, 2022 , we had a royalty receivable of$1.5 million relating to the short-term portion of receivable from Mayne Pharma and$20.3 million relating to the long term portion of royalty receivable which includes royalties recognized from the Minimum Annual Royalty. See Note 1 Business, basis of presentation, new accounting standards and summary of significant accounting policies (L Revenue Recognition) to the consolidated financial statements included in this Annual Report.
Inventory. On
Debt. On
48
--------------------------------------------------------------------------------Going concern
OnDecember 4, 2022 , we entered into agreements with Mayne Pharma pursuant to which we (i) granted Mayne Pharma an exclusive license to commercialize IMVEXXY, BIJUVA, and prescription prenatal vitamin products (inthe United States and its possessions and territories), (ii) assigned to Mayne Pharma the Company's exclusive license to commercialize ANNOVERA inthe United States and its possessions and territories, and (iii) sold certain other assets to Mayne Pharma. The total consideration from Mayne Pharma to the Company for the purchase of the Transferred Assets and the grant of the licenses under the License Agreement was (i) a cash payment of$140.0 million at closing, (ii) a cash payment of approximately$12.1 million at closing for the acquisition of net working capital subject to certain adjustments, (iii) a cash payment of approximately$1.0 million at closing for prepaid royalties in connection with the License Agreement Amendment and (iv) the right to receive the contingent consideration set forth in the License Agreement, as amended. On the Closing Date, we repaid all obligations under the Financing Agreement, dated as ofApril 24, 2019 , as amended, with Sixth Street Specialty Lending, Inc., as administrative agent, the various lenders from time-to-time party thereto, and certain of the Company's subsidiaries party thereto from time to time as guarantors (the "Financing Agreement") and the Financing Agreement was terminated. Following the transaction with Mayne Pharma, we changed our business to become a royalty company, currently receiving royalties on products licensed to pharmaceutical organizations that possess commercial capabilities in the relevant territories. We may need to raise additional capital to provide additional liquidity to fund our operations until we become cash flow positive. To address our capital needs, we are pursuing various equity and debt financing and other alternatives. The equity financing alternatives may include the private placement of equity, equity-linked, or other similar instruments or obligations with one or more investors, lenders, or other institutional counterparties or an underwritten public equity or equity-linked securities offering. Our ability to sell equity securities may be limited by market conditions, including the market price of our common stock, and our available authorized shares. To the extent that we raise additional capital through the sale of such securities, the ownership interests of our existing stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we are not successful in obtaining additional financing, we could be forced to discontinue or curtail our business operations, sell assets at unfavorable prices, or merge, consolidate, or combine with a company with greater financial resources in a transaction that might be unfavorable to us. Along with considering additional financing and other strategic alternatives, we have reviewed numerous potential scenarios in connection with steps that we may take to reduce our operating expenses.
Our ability to sell equity securities may be limited by market conditions, including the market price of our common stock and the potential delisting of our common stock from the Nasdaq Global Select Market, and our available authorized shares.
To the extent that we raise additional capital through the sale of such securities, the ownership interests of our existing stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we are not successful in obtaining additional financing, we could be forced to discontinue or curtail our business operations, sell assets at unfavorable prices, or merge, consolidate, or combine with a company with greater financial resources in a transaction that might be unfavorable to us. If Mayne Pharma's sales of IMVEXXY, BIJUVA, or ANNOVERA are delayed, if the net working capital settlement with Mayne Pharma under the Transaction Agreement is greater than estimated, or if we are unsuccessful with future financings and or the continued impact of the COVID-19 pandemic or the supply chains related to the third-party contract manufacturers is worse than we anticipate, our existing cash reserves would be insufficient to satisfy our liquidity. The presence of these projected factors in conjunction with the uncertainty of the capital markets raises substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of these financial statements.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Contractual obligations, off-balance sheet arrangements, purchase commitments and employment agreements
Our contractual obligations and off-balance sheet arrangements are set forth
below. For additional information on any of the following and other obligations
and arrangements, see "Note 7. Debt" and "Note 8. Commitments and Contingencies"
to the consolidated financial statements included in this 2022 10-K Report.
49
--------------------------------------------------------------------------------Contractual obligations
A summary of contractual obligations is as follows:
Total Year 1 Years 2-3 Years 4-5 > 5 years
Operating lease obligations $ 11,868 $ 1,443 $ 2,990 $ 3,141 $ 4,294
Total contractual obligations $ 11,868 $ 1,443 $ 2,990 $ 3,141 $ 4,294
In the ordinary course of business, we enter into agreements with third parties
that include indemnification provisions, which, in our judgment, are normal and
customary for companies in our industry sector. Pursuant to these agreements, we
generally agree to indemnify, hold harmless, and reimburse indemnified parties
for losses suffered or omitted by us. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
sometimes unlimited. We have not incurred material costs to defend lawsuits or
settle claims related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is minimal.
Accordingly, we have no liabilities recorded for these provisions as of December
31, 2022 and 2021.
In the normal course of business, we may be confronted with issues or events
that may result in contingent liability. These generally relate to lawsuits,
claims, environmental actions, or the actions of various regulatory agencies. We
consult with counsel and other appropriate experts to assess the claim. If, in
our opinion, we have incurred a probable loss as set forth by U.S. GAAP, an
estimate is made of the loss and the appropriate accounting entries are
reflected in our financial statements.
Purchase commitments
Information regarding purchase commitments is in "Note 8. Commitments and contingencies" to the consolidated financial statements included in this 2022 10-K Report.
Employment agreements
Information regarding employment agreements is in "Note 8. Commitments and contingencies" to the consolidated financial statements included in this 2022 10-K Report.
Critical accounting policies and estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this 2022 10-K Report, which has been prepared in accordance withU.S. GAAP ("U.S. GAAP"). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to unbilled revenue, identifiable intangible assets, certain accrued liabilities, and income taxes. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the areas described below as critical to our business operations and the understanding of our results of operations given the uncertainties associated with the assumptions underlying each estimate. For a detailed discussion on the application of these and other significant accounting policies, see "Note 1. Basis of presentation, new accounting standards and summary of significant accounting policies" to the consolidated financial statements included in this 2022 10-K Report.
Discontinued Operations
Discontinued operations comprise activities that were disposed of at the end of
the period, represent a separate major line of business that can be clearly
distinguished for operational and financial reporting purposes and represent a
business shift having a major effect on the Company's operations and financial
results according to Accounting Standard Codification ("ASC") Topic 205,
Presentation of Financial Statements. An adjustment has been made to the
consolidated statements of operations for the twelve months ended December 31,
2022 and 2021 to reclassify commercial activities and vitaCare activities to
discontinued operations as the cessation of these operations, in the aggregate,
represented a business shift that will have a major effect on the Company's
operations and financial results. For additional information, see Note 2 -
Discontinued Operations, in the notes to the consolidated financial statements
appearing elsewhere in this Report.
50
--------------------------------------------------------------------------------Segment reporting
We manage and operate as one business, which prior toDecember 2022 was focused on creating and commercializing products targeted exclusively for women and after we signed License Agreement with Mayne Pharma, it is focused on collecting royalties from licensing our products. Our business is led by our chief executive officer. 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. Accordingly, we view our business as one reportable operating segment.
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 may include multiple performance obligations. 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 right to use functional intellectual property is transferred to the customer. OnDecember 30, 2022 , we closed a License Agreement with Mayne Pharma pursuant to which we sold to Mayne Pharma the exclusive license rights in our product ANNOVERA and granted an exclusive license in other products, including IMVEXXY and BIJUVA. Under the terms of the License Agreement, we received$140 million at closing and we are eligible to receive additional payments in the aggregate of up to an additional$30 million based on the achievement of sales milestones (collectively, the "Milestone Amounts"). The proceeds at closing were allocated between consideration for the sale of ANNOVERA and the initial license fee for the Licensed Products, as the sale of ANNOVERA was accounted for under ASC 610-20, Gains and Losses from Derecognition of Nonfinancial Assets in arriving at the gain on disposal (see Note 2 to the financial statements included in this Annual Report), while the license grant of the other products were recognized under the provisions of ASC 606, Revenue from Contracts with Customers, as a license of functional intellectual asset. The proceeds were allocated among the Licensed Products on the relative net present value of forecasted future product sales from those products. The Milestone Amounts will be recognized, as applicable, in subsequent periods based on actual product sales that exceed the respective net sales milestones as such variable consideration is constrained by the occurrence of the subsequent sales. Our royalty revenue recognized in 2022 primarily related to royalties provided for under the Mayne License Agreement based on Mayne Pharma's sales of the Licensed Products subject to that agreement. Under the agreement, the Mayne License Agreement, the Company is entitled to earn royalties on net sales of all of the Licensed Products at a royalty rate of (i) 8% on the first$80 million of net sales of the Licensed Products and (ii) 7.5% on net sales of all of the Licensed Products after the first$80 million of net sales. The royalty rate is subject to a 2% reduction upon the earlier to occur of (i) the expiration or revocation of the last valid claim covering a Licensed Product, and (ii) a generic product launch (a "LOE"). We are entitled to minimum annual royalties beginning with the year endingDecember 31, 2023 ($3 million annual minimum) and continuing with 3% annual increases through the year endingDecember 31, 2034 (the "Minimum Annual Royalty"). The Minimum Annual Royalty totaled$42.6 million , and this total amount was allocated among the Licensed Products on the relative net present value of forecasted future product sales from those products. The portion allocated to consideration for the sale of ANNOVERA was attributed towards the gain on disposal of that asset. For the remaining portion allocated to the license grants for the other products, we determined that the minimum guarantee underlying the Minimum Annual Royalty should be treated as fixed consideration and recognized under ASC 606 at the point in time when the license was transferred. Since the Minimum Annual Royalty will be received in annual installments through 2034, we determined the transaction price allocated under ASC 606 contained a significant financing component, and we therefore determined the initial royalty revenue and corresponding receivable based on the present value of the allocated Minimum Annual Royalty. The present value was calculated using a discount rate of 10.45%, based on the credit characteristics of Mayne Pharma and the timing of future payments, and the value will be accreted to full value through the earlier ofJanuary 1, 2034 or a LOE. This royalty receivable is a contract asset as ofDecember 31, 2022 , and is further subject to offset by Mayne Pharma. Royalty revenue earned in excess of the Minimum Annual Royalty will be recognized under ASC 606, which provides revenue recognition constraints by requiring the recognition of revenue at the later of the following: 1) when the subsequent sale occurs or 2) when the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied). We applied the royalty recognition constraint required under the guidance for sales-based royalties, which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by Mayne Pharma will be recognized in the subsequent periods that the Licensed Products are sold. For additional discussion on revenue, see "L. Revenue recognition" in Note 1. Basis of presentation, new accounting standards and summary of significant accounting policies to the consolidated financial statements included in this 2022 10-K Report. 51 -------------------------------------------------------------------------------- During 2022 and 2021, we had BIJUVA sales of$1.4 million made through the Theramex License Agreement, and such sales were included as license revenue in the statements of operations. In addition, in 2021, we received milestone payments comprised of an aggregate ofEUR 1.0 million , or$1.2 million , in regulatory milestone payments based on regulatory approvals for BIJUVA in certain specified markets. We previously granted licenses to commercialize the Company's BIJUVA product outside ofthe United States to Theramex and Knight.
Share-based payment awards
We account for share-based payment awards on a fair value basis of the equity instrument issued. Under fair value accounting, the grant-date fair value of the share-based payment award is amortized as compensation expense, on a straight-line basis, over the service period (generally, the vesting period) for both graded and cliff vesting awards. We have elected to account for forfeitures as they occur. Income taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and income tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recorded as a component of the income tax provision in the period that includes the enactment date. Regular assessments are made on the likelihood that our deferred tax assets will be recovered from our future taxable income. Our evaluation is based on estimates, assumptions, and includes an analysis of available positive and negative evidence, giving weight based on the evidence's relative objectivity. Sources of positive evidence include estimates of future taxable income, future reversal of existing taxable temporary differences, taxable income in carryback years, and available tax planning strategies. Sources of negative evidence include current and cumulative losses in recent years, losses expected in early future years, any history of operating losses or tax credit carryforwards expiring unused, and unsettled circumstances that, if unfavorably resolved, would adversely affect future profit levels. The remaining carrying value of our deferred tax assets, after recording the valuation allowance on our deferred tax assets, is based on our present belief that it is more likely than not that we will be able to generate sufficient future taxable income to utilize such deferred tax assets. The amount of the remaining deferred tax assets considered recoverable could be adjusted if our estimates of future taxable income during the carryforward period change favorably or unfavorably. To the extent we believe that it is more likely than not that some or all the remaining deferred tax assets will not be realized, we must establish a valuation allowance against those deferred tax assets, resulting in additional income tax expense in the period such determination is made. To the extent a valuation allowance currently exists, we will continue to monitor all positive and negative evidence until we believe it is more likely than not that it is no longer necessary, resulting in an income tax benefit in the period such determination is made. Our policy is to recognize both interest and penalties related to uncertain tax positions as part of the income tax provision. Significant judgment is required in evaluating our tax positions, and in determining our provisions for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We establish reserves when, despite our belief that the income tax return positions are fully supportable, certain positions are likely to be challenged and we may ultimately not prevail in defending those positions. Restructuring Costs.
Our restructuring costs consist primarily of severance, employee termination costs contract termination costs and write off of fixed assets related to restructuring activities.
Recent accounting pronouncements
Information regarding accounting standards adopted during 2022 is included in "Note 1. Basis of Presentation, New Accounting Standards and Significant Accounting Policies" to the consolidated financial statements.
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