PETROS PHARMACEUTICALS Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of Petros' financial
statements with a narrative from the perspective of management on the Company's
financial condition, results of operations, liquidity and certain other factors
that may affect future results. In certain instances, parenthetical references
are made to relevant sections of the Notes to Consolidated Financial Statements
to direct the reader to a further detailed discussion. This section should be
read in conjunction with the Consolidated Financial Statements and Supplementary
Data included in this Quarterly Report on Form 10-Q. This MD&A contains
forward-looking statements reflecting Petros' current expectations, whose actual
outcomes involve risks and uncertainties. Actual results and the timing of
events may differ materially from those stated in or implied by these
forward-looking statements due to a number of factors, including those discussed
in the sections entitled "Risk Factors" and "Cautionary Statement Regarding
Forward-Looking Statements" contained in this Quarterly Report on Form 10-Q and
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 .
Overview
Petros Pharmaceuticals, Inc. ("Petros" or the "Company") is a pharmaceutical company focused on men's health therapeutics, consisting of wholly owned subsidiaries,Metuchen Pharmaceuticals, LLC ("Metuchen"),Timm Medical Technologies, Inc. ("Timm Medical"),Neurotrope, Inc. ("Neurotrope"), andPos-T-Vac, LLC ("PTV"). OnSeptember 30, 2016 , the Company entered into a License and Commercialization Agreement (the "License Agreement") withVivus, Inc ("Vivus") to purchase and receive the license for the commercialization and development of Stendra® for a one-time fee of$70 million . The License Agreement gives the Company the right to sell Stendra® in theU.S and its territories,Canada ,South America , andIndia . Stendra® is aU.S. Food and Drug Administration ("FDA") approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction ("ED") and is the only patent protected PDE-5 inhibitor on the market. Stendra® offers the ED therapeutic landscape a valuable addition as an oral ED therapy that may be taken as early as approximately 15 minutes prior to sexual engagement, with or without food when using the 100mg or 200mg dosing (does not apply to 50mg dosing). Petros is also currently conducting non-clinical consumer studies in connection with the contemplated pursuit of FDA approval for Stendra® for Non-Prescription / Over-The-Counter ("OTC") use in treating ED. In addition to Stendra®, Petros' ED portfolio also includes external penile rigidity devices, namely Vacuum Erection Devices ("VEDs"), which are sold domestically and internationally. In addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men's health. InMarch 2020 , Petros acquired an exclusive global license (the "Hybrid License") for the development and commercialization of H100™ fromHybrid Medical LLC ("Hybrid"). H100™ is a novel and patented topical formulation candidate for the treatment of acute Peyronie's disease. Peyronie's disease is a condition that occurs upon penile tissue disruption often caused by sexual activity or injury, healing into collagen-based scars that may ultimately harden and cause penile deformity. OnSeptember 24, 2020 , the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months toMarch 24, 2021 . In consideration for the extension, the Company paid Hybrid$50,000 inOctober 2020 and an additional$100,000 inDecember 2020 . OnMarch 31, 2021 , the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months toSeptember 24, 2021 . Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of$200,000 , which was paid within seven calendar days of entering into the agreement. OnSeptember 24, 2021 , the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid$150,000 onOctober 1, 2021 ,$200,000 onOctober 31, 2021 ,$200,000 onDecember 1, 2021 ,$200,000 onDecember 23, 2021 and$150,000 onMarch 24, 2022 .
Going Concern
Petros has experienced net losses and negative cash flows from operations since our inception. As ofSeptember 30, 2022 , the Company had cash of approximately$11.2 million , positive working capital of$10.8 million , an accumulated deficit of approximately$86.5 million and used cash in operations during the nine months endedSeptember 30, 2022 of approximately$11.2 million . InJanuary 2022 , the Company executed a promissory note in favor of Vivus in connection with the Vivus Settlement Agreement in the principal amount of$10,201,758 , net of$900,000 prepayment. The terms of this promissory note are discussed in Note 8. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these unaudited interim consolidated financial statements are issued. 27
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In response to these conditions and events, the Company is evaluating various
financing strategies to obtain sufficient additional liquidity to meet its
operating, debt service and capital requirements for the next twelve months
following the date of this Quarterly Report. The potential sources of financing
that the Company is evaluating include one or any combination of secured or
unsecured debt, convertible debt and equity in both public and private
offerings. The Company also plans to finance near-term operations with its cash
on hand, as well by as exploring additional ways to raise capital in addition to
increasing cash flows from operations. There is no assurance the Company will
manage to raise additional capital or otherwise increase cash flows, if
required. The sources of financing described above that could be available to
the Company and the timing and probability of obtaining sufficient capital
depend, in part, on expanding the use of Stendra® and continuing to invest in
research and development pursuant to our Non-Prescription / Over-The-Counter
("OTC") strategies related to Stendra®, which we believe has the potential to
dramatically increase product sales in the future; further developing and
commercializing H100; and future capital market conditions. If the Company's
current assumptions regarding timing of these events are incorrect or if there
are any other changes or differences in our current assumptions that negatively
impact our financing strategy, the Company may have to further reduce
expenditures or significantly delay, scale back or discontinue the development
or commercialization of Stendra® OTC or H100 in order to extend its cash
resources. The Consolidated Financial Statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result
should the Company be unable to continue as a going concern.
Impact of COVID-19
TheWorld Health Organization ("WHO") declared the coronavirus COVID-19 ("COVID-19") a global pandemic onMarch 11, 2020 , and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic, and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of theU.S. economy for the foreseeable future. The Company cannot reasonably estimate the length or severity of the impact that the COVID-19 pandemic, including the emergence of any new variants will have on its financial results, and the Company may experience a material adverse impact on its sales, results of operations, and cash flows in fiscal 2022 and beyond. During 2020, government regulations and the voluntary business practices of the Company and prescribing physicians had prevented in-person visits by sales representatives to physicians' offices. The Company had taken steps to mitigate the negative impact on its businesses of such restrictions. InMarch 2020 , the Company reduced our sales representative head count to reflect the lack of in-person visits. The Company has maintained a core sales team which continued to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company's key opinion leaders to other physicians and pharmacists. In response to the spread of COVID-19, inMarch 2020 , the Company closed its administrative offices. InJanuary 2022 , the Company sub-leased its Manalapan office and all administrative employees are working remotely for the foreseeable future. The Company has fully resumed in-person interactions by its customer-facing personnel in compliance with local and state restrictions. The Company also continues to engage with customers virtually as the Company seeks to continue to support healthcare professionals and patient care. Since the beginning of the COVID-19 pandemic, we have experienced a shift from in-person sales to online, telehealth-based sales. These online sales generally have lower gross margins than in-person sales, which has impacted our net revenues.
Nature of Operations and Basis of Presentation
Petros is a pharmaceutical company focused on men's health therapeutics with a full range of commercial capabilities including sales, marketing, regulatory and medical affairs, finance, trade relations, pharmacovigilance, market access relations, manufacturing, and distribution. Petros consists of wholly owned subsidiaries,Metuchen Pharmaceuticals LLC , aDelaware limited liability company ("Metuchen"),Neurotrope, Inc. , aNevada corporation ("Neurotrope"),Timm Medical Technologies, Inc. ("Timm Medical"), andPos-T-Vac, LLC ("PTV"). The Company is engaged in the commercialization and development of Stendra®, aU.S. Food and Drug Administration ("FDA") approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction ("ED"), which we have licensed fromVivus, Inc. ("Vivus"). Petros also markets its own line of ED products in the form of vacuum erection device products through its subsidiaries, Timm Medical and PTV. In addition to ED products, we have acquired an exclusive global license to develop and commercialize H100™, a novel and patented topical formulation candidate for the treatment of acute Peyronie's disease. The Company was organized as aDelaware corporation onMay 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as ofMay 17, 2020 (as amended, the "Merger Agreement"), by and between Petros, 28
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Neurotrope ,, PM Merger Sub 1, LLC, aDelaware limited liability company and a wholly-owned subsidiary of Petros ("Merger Sub 1"), PN Merger Sub 2, Inc., aDelaware corporation and a wholly-owned subsidiary of Petros ("Merger Sub 2"), and Metuchen. The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly-owned subsidiary of Petros (the "Metuchen Merger") and (2) the merger of Merger Sub 2 with and intoNeurotrope , withNeurotrope surviving as a wholly-owned subsidiary of Petros (the "Neurotrope Merger" and together with the Metuchen Merger, the "Mergers"). As a result of the Mergers, Metuchen andNeurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporation onDecember 1, 2020 . OnDecember 7, 2020 ,Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of$20,000,000 , subject to adjustment as provided in the Merger Agreement, and all of the operating assets and liabilities ofNeurotrope not retained byNeurotrope in connection with the Mergers were contributed to Synaptogenix, Inc. (formerly known asNeurotrope Bioscience, Inc. ), aDelaware corporation ("Synaptogenix"), and a wholly-owned subsidiary ofNeurotrope . The Company manages its operations through two segments. The Company's two segments, Prescription Medications and Medical Devices, focus on the treatment of male ED. The Prescription Medications segment consists primarily of Stendra®, which is sold generally inthe United States . Expenses related to the development of H100™, which is in the early stages of development and has not yet sought FDA approval to begin Phase 1 clinical trials, will be within the Prescription Medications segment. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
Licensing and Distribution
The Company acquired the rights to Stendra® avanafil onSeptember 30, 2016 , when it entered into the License Agreement with Vivus to purchase and receive the license for the commercialization and exploitation of Stendra® avanafil for a one-time fee of$70 million . The License Agreement gives the Company the exclusive right to sell avanafil in theU.S. and its territories, as well asCanada ,South America , andIndia . InDecember 2000 , Vivus originally was granted the license fromMitsubishi Tanabe Pharma Corporation ("MTPC") to develop, market, and manufacture Stendra®. Stendra® was approved by the FDA inApril 2012 to treat male ED. The Company will pay MTPC a royalty of 5% on the first$500 million of net sales and 6% of net sales thereafter until the expiration of the applicable patent in a particular country. The last scheduled patent expiration is inApril 2025 . In consideration for the trademark assignment and the use of the trademarks associated with Stendra® and the Vivus technology, the Company shall (a) during the first, second, and third years following the expiration of the royalty period in a particular country in the Company's territory, pay to Vivus a royalty equal to 2% of the net sales of Stendra® in such territory; and (b) following the fourth and fifth years following the end of the royalty period in such territory, pay to Vivus a royalty equal to 1% of the net sales of Stendra® in such territory. After the royalty period, no further royalties shall be owed with respect to net sales of Stendra® in such territory. In addition, the Company will be responsible for a pro-rata portion of a one-time$6 million milestone payment to be paid once$250 million in sales has been reached on the separate revenue stream of Stendra® during any calendar year. In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement onSeptember 30, 2016 , which has since been terminated, effective as ofSeptember 30, 2021 . Following the termination of the Vivus Supply Agreement, Petros, through its subsidiary Metuchen, entered into a Technology Transfer Service Agreement onJanuary 20, 2022 withPatheon Pharmaceuticals Inc. , part of Thermo Fisher Scientific ("Patheon"), pursuant to which the Company and Patheon agreed to collaborate as strategic partners for commercial production of Stendra® tablets at Patheon's facilities inCincinnati, Ohio . Under the Agreement, Patheon or one of its affiliates is providing pharmaceutical development and technology transfer services in order to establish and validate its ability to manufacture supply of the Company's Stendra® product. Any commercial sale of product manufactured during the performance of the Agreement must be subject to a subsequent commercial manufacturing services agreement (with associated quality agreement) between the parties before it can be offered for commercial sale. The license agreement between MTPC and Vivus contains certain termination rights that will allow MTPC to terminate the agreement if Vivus were to breach any of the terms of the MTPC License or become insolvent or bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra®. OnMarch 27, 2018 , the Company entered into a Sublicense Agreement with Acerus Pharmaceuticals Corporation ("Acerus") whereby the Company granted to Acerus an exclusive sublicense inCanada for, among other things, the development and commercialization of Stendra® avanafil for a one-time fee of$100,000 . The Company was entitled to receive an additional fee of$400,000 if Stendra®
is
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approved by Canadian regulators, as well as commercial milestone payments and
royalty fees of 12% of net sales. However, in April 2020 Health Canada issued a
Notice of Deficiency ("NOD") against the New Drug Submission. Metuchen and
Acerus are currently renegotiating modified terms to the sub-license agreement
including the option to terminate or expire the agreement, as they continue to
assess the pathway required to address the deficiency noted by Health Canada .
In March 2020 , we entered into the Hybrid License for the development and
commercialization of H100™ from Hybrid. H100™ is a topical candidate with at
least one active ingredient and potentially a combination of ingredients
responsible for the improvement of penile curvature during the acute phase of
Peyronie's disease. We paid an initial license fee of $100,000 and additional
payments of $250,000 , with additional annual milestone payments of $125,000 ,
$150,000 , and $200,000 on each of the first, second and third anniversaries of
the entry into the Hybrid License and $250,000 annual payments due thereafter.
On September 24, 2020 , the Company and Hybrid entered into a letter agreement,
pursuant to which the term of the license agreement was extended for an
additional six months to March 24, 2021 . In consideration for the extension, the
Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in
December 2020 . On March 31, 2021 , the Company and Hybrid, entered into a second
letter agreement, pursuant to which the parties agreed to extend the Second
Period (as defined in the License Agreement) for an additional six (6) months to
September 24, 2021 . Additionally, the Company agreed to pay Hybrid a one-time,
non-creditable and non-refundable payment of two hundred thousand U.S. Dollars
($200,000 ), which was paid within seven calendar days of entering into the
agreement. On September 24, 2021 , the Company entered into an amendment to the
license agreement in which the Company exercised its right not to terminate the
Hybrid License even though orphan drug status had not yet been granted by the
FDA. Along with this election, the Company paid Hybrid $150,000 on October 1,
2021 , $200,000 on October 31, 2021 , $200,000 on December 1, 2021 , $200,000 on
December 23, 2021 and $150,000 on March 24, 2022 .
Vivus Settlement Agreement, Promissory Note and the Security Agreement
OnJanuary 18, 2022 , Petros and Vivus entered into a Settlement Agreement (the "Vivus Settlement Agreement") related to the minimum purchase requirements under the Vivus Supply Agreement in 2018, 2019 and 2020 and certain reimbursement rights asserted by a third-party retailer in connection with quantities of the Company's Stendra® product that were delivered to the third-party retailer and later returned. In connection with the Vivus Settlement Agreement, Petros retained approximately$7.3 million of API inventory under the Vivus Supply Agreement. In exchange for the API and reduction of current liabilities, Petros executed an interest-bearing promissory note (the "Note") in favor of Vivus in the principal amount of$10,201,758 , which approximate fair value. The parties also entered into a Security Agreement to secure Petros' obligations under the Note. In addition to the payments to be made in accordance with the Note, the Company further agreed in the Vivus Settlement Agreement to (i) grant to Vivus a right of first refusal to provide certain types of debt and convertible equity (but not preferred equity) financing issued by or to Metuchen (including any subsidiaries and intermediaries) until the Note is paid in full, and (ii) undertake to make certain regulatory submissions to effectuate Vivus' ability to exercise its rights under the License Agreement. OnJanuary 18, 2022 , the Company made a prepayment of the obligations under the Note in the amount of$900,000 , and a payment of$1,542,904 with respect to a purchase order made in 2021 to Vivus. In consideration of these payments and upon the Company's satisfaction of certain regulatory submissions. Vivus released 50% of the quantity of bulk Stendra® tablets under the Company's existing open purchase order (the "Open Purchase Order") being held by Vivus, which represents approximately a six-month supply of inventory. Pursuant to the Vivus Settlement Agreement Vivus also released the remaining 50% of the quantity of bulk Stendra® tablets under the Open Purchase Order, later during the first quarter of 2022, upon the Company's satisfaction of the remaining regulatory submission requirements. As a result of entering into the Vivus Settlement Agreement, the Company decreased the Company's accrued expenses by$6.5 million and decreased accrued inventory purchases by$14.2 million ; which were partially offset by a decrease in API purchase commitments of$6.2 million and an increase to liabilities for the Note of$10.2 million (which is net of the$0.9 million prepayment on the Note). As a result, the Company recorded a$3.4 million gain on settlement for the nine months endedSeptember 30, 2022 . Under the terms of the Note, the principal amount of$10,201,758 is payable in consecutive quarterly installments beginning onApril 1, 2022 throughJanuary 1, 2027 . Interest on the principal amount will accrue at a rate of 6% per year until the principal is repaid in full and is due and payable, in arrears, on the first day of each January, April, July, and October of each calendar year, commencing onApril 1, 2022 . The Company may prepay the Note, in whole or in part, at any time, with no premium or penalty. In the event that the Company defaults under the Security Agreement, all principal outstanding under the Note at the time of the default will bear interest at a rate of 9% per year until the full and final payment of all principal and interest under the Note (regardless of whether any default is waived or cured). If the Note is placed in the hands of any attorney for collection, or if it is collected through any legal proceeding at law or in equity or in bankruptcy, receivership, or other court proceedings, the Company will also be required to pay all costs of collection 30 Table of Contents
including, but not limited to, court costs and attorneys' fees. Pursuant to the Security Agreement, datedJanuary 18, 2022 , the Company granted to Vivus a continuing security interest in all of its Stendra® API and products and its rights under the License Agreement. The Security Agreement contains customary events of default. For the nine months endedSeptember 30, 2022 , the Company has paid Vivus$1,438,925 . As ofSeptember 30, 2022 , the principal balance on the Note is$9,622,834 .
Nasdaq Minimum Bid Price Requirement
OnJune 22, 2022 , we received a letter from theListing Qualifications Department of theNasdaq Stock Market ("Nasdaq") indicating that, based upon the closing bid price of the Company's common stock for the 30 consecutive business day period betweenMay 9, 2022 , throughJune 21, 2022 , we did not meet the minimum bid price of$1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that we will be provided with a compliance period of 180 calendar days, or untilDecember 19, 2022 (the "Compliance Period"), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A). In order to regain compliance with Nasdaq's minimum bid price requirement, our common stock must maintain a minimum closing bid price of$1.00 for at least ten consecutive business days during the Compliance Period. In the event we do not regain compliance by the end of the Compliance Period, we may be eligible for additional time to regain compliance. To qualify, we will be required to meet the continued listing requirement for the market value of our publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. If we meet these requirements, we may be granted an additional 180 calendar days to regain compliance. However, if it appears to Nasdaq that we will be unable to cure the deficiency, or if we are not otherwise eligible for the additional cure period, Nasdaq will provide notice that our common stock will be subject to delisting. We have not regained compliance as of the date of this report. OnOctober 12, 2022 , we filed a definitive proxy statement for our 2022 annual meeting of stockholders, including a proposal to approve an amendment to our Amended and Restated Certificate of Incorporation to effect, at the discretion of the Board, a reverse stock split of all of the outstanding shares of our common stock, at a ratio in the range of 1-for-4 to 1-for-10, with such ratio to be determined by the Board in its discretion and included in a public announcement. The 2022 annual meeting will be held onNovember 29, 2022 .
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including but not limited to those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, intangibles, income taxes, litigation, and contingencies. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our consolidated financial statements as they occur. While our significant accounting policies are more fully described in "Part I; Item 1. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies" in this Quarterly Report on Form 10-Q, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these critical accounting policies with the Audit Committee of our Board of Directors.
Revenue Recognition
The Company recognizes revenue when its performance obligations with its
customers have been satisfied. In the contracts with its customers, the Company
has identified a single performance obligation to provide either its
prescription medication or medical devices upon receipt of a customer order. The
performance obligation is satisfied at a point in time when the Company's
customers obtain control of the prescription medication or medical device, which
is typically upon delivery.
In determining the transaction price, a significant financing component does not
exist since the timing from when the Company delivers either the prescription
medication or medical device to when the customers pay for the product is
typically less than one year. The
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Company records sales net of any variable consideration, including but not
limited to discounts, rebates, returns, chargebacks, and distribution fees. The
Company uses the expected value method when estimating its variable
consideration, unless terms are specified within contracts. The identified
variable consideration is recorded as a reduction of revenue at the time
revenues from sales are recognized. The Company recognizes revenue to the extent
that it is probable that a significant revenue reversal will not occur in a
future period. These estimates may differ from actual consideration received.
The Company evaluates these estimates each reporting period to reflect known
changes.
The most significant sales deductions relate to contract returns, contract
rebates and coupon redemptions, and distribution service fees ("DSA fees"). Our
estimates are based on factors such as our direct and indirect customers' buying
patterns and the estimated resulting contractual deduction rates, historical
experience, specific known market events and estimated future trends, current
contractual and statutory requirements, industry data, estimated customer
inventory levels, current contract sales terms with our direct and indirect
customers, and other competitive factors. Significant judgment and estimation
are required in developing the foregoing and other relevant assumptions.
Consistent with industry practice, the Company maintains a return policy that
generally allows its customers to return either the prescription medication or
medical device and receive credit for product. The provision for returns is
based upon the Company's estimates for future returns and historical experience.
The provision of returns is part of the variable consideration recorded at the
time revenue is recognized. During the three months ended September 30, 2022 ,
the Company revised and increased its estimate of reserves for product returns
by $2.7 million . The higher than estimated wholesaler returns of Stendra® during
the third quarter was primarily related to the return of short-dated product
sold in prior periods above our initial estimates. Throughout each quarter, we
regularly seek to obtain periodic retail demand information and current
inventory levels from our significant wholesalers. As part of this process,
certain wholesalers indicated an increased ability to sell short-dated product
before expiration because prescription demand for Stendra was strong at that
time. Citing the demand of wholesalers at that time, management expected the
short-dated product would sell through to end customers. Because sell through
was below that estimated by the wholesalers, the Company had to increase its
current return exposure.
Accounts Receivable
The Company extends credit to its customers in the normal course of business. Accounts receivable are recorded at the invoiced amount, net of chargebacks, distribution service fees, and cash discounts. Management determines each allowance based on historical experience along with the present knowledge of potentially uncollectible accounts.
Inventories
Inventories consist of finished goods held for sale and raw materials. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Inventories are adjusted for excess and obsolescence. Evaluation of excess inventory includes such factors as expiry date, inventory turnover, and management's assessment of current product demand. Fair Value Measurements Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs (other than Level 1 quoted prices), such as quoted
prices in active markets for similar assets or liabilities, quoted prices in
markets that are not active for identical or similar assets or liabilities, or
other inputs that are observable or can be corroborated by observable markets.
Level 3 - Unobservable inputs which are supported by little or no market
activity and that are significant to determining the fair value of the assets or
liabilities, including pricing models, discounted cash flow methodologies and
similar techniques.
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In connection with the Mergers in December 2020 , each security holder of
Metuchen received a liability classified earnout consideration to be paid in the
form of Petros Common Stock. The Company estimated their fair value using the
Monte Carlo Simulation approach as of September 30, 2022 and December 31, 2021 .
This fair value measurement is based on significant inputs not observable in the
market and thus represents a Level 3 measurement within the fair value
hierarchy.
Intangibles
The Company accounts for recognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. The Company reviews the carrying value and useful lives of its intangible assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which they should be amortized has changed. When indicators of impairment exist, the Company determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The Company evaluates the remaining useful life of each intangible asset that is being amortized during each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset's remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. During the three months endedSeptember 30, 2022 , the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis. While impairment indicators existed in prior periods, in the current period the Company noted with respect to the Stendra® product, a significant decline in gross billings, higher than estimated returns of the 8A lots, along with a significant decline in the Company's overall market capital value. Primarily as a result of these factors, the undiscounted cash flow analysis for the Stendra® product indicated an impairment. The Company then prepared a discounted cash flow analysis resulting in an impairment of approximately$7.5 million . This analysis includes projections of future revenue and expenses, which if not achieved could result in future impairment charges, Additionally, we are planning to continue investing in research and development pursuant to our OTC strategies related to Stendra®, which we anticipate will dramatically increase product sales in the future. Should we be unsuccessful or delayed in our expectations of our OTC strategies, there may be further impairment of the intangible asset.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Results of Operations
The impact on our results of operations of the COVID-19 pandemic and related
changes in economic conditions are highly uncertain and, in many instances,
outside of our control. The duration and severity of the direct and indirect
effects of the pandemic continue to evolve and in ways that are difficult to
anticipate. There are numerous uncertainties related to the COVID-19 pandemic
that have impacted our ability to forecast our future operations as a Company.
The extent to which the COVID-19 pandemic, and the emergence of any new
variants, will affect our business, financial position and operating results in
the future cannot be predicted with certainty; however, any such impact could be
material. The COVID-19 pandemic could also increase the degree to which our
results, including the results of our business segments, fluctuate in the
future.
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Nine Months Ended
The following table sets forth a summary of our statements of operations for the
nine months ended
For the Nine Months
Ended September 30,
2022 2021
Net sales $ 5,193,953 $ 8,678,424
Cost of sales 1,408,086 1,355,838
Gross profit 3,785,867 7,322,586
Operating expenses:
Selling, general and administrative 9,285,317 11,411,113
Gain on settlement with Vivus (3,389,941)
-
Research and development 1,562,518
799,803
Depreciation and amortization expense 4,682,610 5,186,486 Intangible asset impairment 7,460,000 - Total operating expenses 19,600,504 17,397,402 Loss from operations (15,814,637) (10,074,816) Change in fair value of derivative liability 460,000
9,640,000
Interest expense, senior debt -
(356,873)
Interest expense, promissory note (451,075)
- Loss before income taxes (15,805,712) (791,689) Income tax expense 10,501 9,045 Net Loss$ (15,816,213) $ (800,734) Net Sales
Net sales for the nine months ended
Net sales for the nine months ended
For the nine months endedSeptember 30, 2022 , gross billings to customers representing 10% or more of the Company's total gross billings included four customers that represented approximately 27%, 22%, 18%, and 15% of total gross billings, respectively. For the nine months endedSeptember 30, 2021 , gross billings to customers representing 10% or more of the Company's total gross billings included four customers that represented approximately 30%, 25%, 13% and 10% of total gross billings. Prescription Medicines sales consist of sales of Stendra® in theU.S. for the treatment of male ED. Stendra® is primarily sold directly to the four main customers as described above, which collectively accounted for approximately 93% of Stendra® net sales for the nine months endedSeptember 30, 2022 . Individually, sales to the four main customers accounted for 31%, 25%, 20%, and 17%, respectively, of Stendra® gross billings for the nine months endedSeptember 30, 2022 . Medical Device sales consist of domestic and international sales of men's health products for the treatment of ED. The men's health products do not require a prescription and include Vacuum Erection Devices ("VEDs and related accessories"). Net sales were$3,484,471 , or 40%, lower during the nine months endedSeptember 30, 2022 than in the same period in 2021 consisting of a$3,511,442 decrease in the net sales of Stendra® partially offset by a$26,971 increase in Medical Device Sales. During the three 34
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months endedSeptember 30, 2022 , the Company revised and increased its estimate of reserves for product returns by$2.7 million . The decrease in net sales of Stendra® was substantially due to wholesaler returns related to the sale of short-dated product above our initial estimates and decreased wholesaler sales due to decreased demand. Throughout the fiscal quarter, we regularly seek to obtain periodic retail demand information and current inventory levels from our significant wholesalers. As part of this process, certain wholesalers indicated an increased ability to sell short-dated product before expiration because prescription demand for Stendra was strong at that time. Citing the demand of wholesalers at that time, management expected the short-dated product would sell through to end customers. Because sell through was below that estimated by the wholesalers, the Company had to increase its current return exposure. The Company has experienced a significant decrease in prescription demand for Stendra since the second quarter of this year. The increase in net sales for Medical Devices included an increase in international and domestic sales of
VED systems. Cost of Sales Cost of sales for the nine months endedSeptember 30, 2022 , were$1,408,086 , composed of$525,073 of cost of sales for our Prescription Medicines segment and$883,013 for our Medical Devices segment.
Cost of sales for the nine months ended
Cost of sales for the Prescription Medicine segment for the nine months ended
Cost of sales for the Medical Device segment for the nine months ended
Cost of sales increased by
Gross Profit
Gross profit for the nine months endedSeptember 30, 2022 was$3,785,867 , or 73% of net sales, composed of$2,191,238 of gross profit from Prescription Medicines and$1,594,629 from Medical Devices. Gross profit for the nine months endedSeptember 30, 2021 was$7,322,586 , or 84% of net sales, composed of$5,620,172 of gross profit from Prescription Medicines and$1,702,415 from Medical Devices. The decrease in gross profit was driven by the factors noted above.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 , were$9,285,317 , composed of$3,933,295 , of selling, general and administrative expenses of our Prescription Medicines segment,$1,352,239 of selling, general and administrative expenses of our Medical Devices segment and$3,999,783 of general corporate expenses. Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 were$11,411,113 , composed of$4,985,603 of selling, general and administrative expenses of our Prescription Medicines segment,$2,014,424 of selling, general and administrative expenses of our Medical Devices segment and$4,411,086 of general corporate expenses. Selling, general and administrative expenses for both segments include selling, marketing and regulatory expenses. Unallocated general corporate expenses include costs that were not specific to a particular segment but are general to the group, including expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Selling, general and administrative expenses decreased by$2,125,796 , or 19%, during the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Decreased selling general and administrative expenses were primarily driven by a waiver of fees due to the FDA under the Prescription Drug User Fee Act ("PDUFA") for the fiscal year 2022, resulting in a$1,034,032 decrease in fees due under PDUFA, decreased professional service fees of$516,819 as management sought to reduce expenses to improve 35
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operational efficiencies, decreased direct selling and marketing expenses of$119,720 , lower payroll expenses of$282,768 resulting from decreased headcount, decreased bad debt expenses of$65,799 due to improved customer collections, decreased stock compensation expense of$41,691 , and decreased other operating expenses of$64,967 . Gain on settlement with Vivus As a result of the Vivus Promissory Note, as discussed in Note 8 and Note 13 of the Notes to Consolidated Financial Statements, the Company's total liabilities were decreased by$3,389,941 in the form of concession of customer returns, which were recognized as a gain on settlement during the nine months endedSeptember 30, 2022 . There was no such activity in the same period of 2021.
Research and development
Research and development expenses for the nine months endedSeptember 30, 2022 were$1,562,518 , composed of$1,428,848 for our Prescription Medicines segment and$133,670 for our Medical Devices segment, respectively. Research and development expenses for the nine months endedSeptember 30, 2021 were$799,803 and$0 for our Prescription Medicines segment and Medical Devices segment, respectively. Research and development expenses for the Prescription Medicines segment for the nine months endedSeptember 30, 2022 are composed of$793,542 for consulting fees related to the Company's Non-Prescription / Over-The-Counter ("OTC") Strategies related to Stendra®;$150,000 for upfront licensing fees,$239,339 for clinical development expenses, and$67,863 for consulting fees related to the H100 license acquired inMarch 2020 ; and$178,104 related to the Company's tech transfer of its manufacturing process. Research and development expenses for the Prescription Medicines segment for the nine months endedSeptember 30, 2021 are composed of$535,184 for consulting fees related to the Company's Non-Prescription / Over-The-Counter Strategies,$200,000 for upfront licensing fees and$64,619 for legal fees related to the H100 license acquired inMarch 2020 . Research and development expenses for the Medical Devices segment for the nine months endedSeptember 30, 2022 are composed of$133,670 for license fees related to the Company's Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the nine months endedSeptember 30, 2021 were$0 . Research and development expenses increased by$762,715 , or 95%, during the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Increased research and development expenses were primarily driven by increased consulting fees related to the Company's OTC strategies related to Stendra®, increased clinical development expenses related to the H100 license acquired inMarch 2020 , and increased license fees related to the Company's Tissue-Specific Oxygenation Sensor Technology Strategies partially offset by decreased upfront licensing fees related to the H100 license acquired inMarch 2020 .
Depreciation and amortization
Depreciation and amortization expenses for the nine months endedSeptember 30, 2022 , were$4,682,610 , composed of$3,808,991 of depreciation and amortization expenses of our Prescription Medicines segment and$873,619 of depreciation and amortization expenses of our Medical Devices segment. Depreciation and amortization expenses for the nine months endedSeptember 30, 2021 were$5,186,486 , composed of$4,194,809 of depreciation and amortization expenses of our Prescription Medicines segment and$991,677 of depreciation and amortization expenses of our Medical Devices segment. Prescription Medicines depreciation and amortization consists primarily of the amortization of the intangible assets related to Stendra® over its estimated useful life of 10 years. Medical Devices depreciation and amortization primarily consists of the amortization of the intangible assets related to Timm Medical and PTV over their estimated useful life of 12 years.
Intangible asset impairment
During the nine months ended
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Change in fair value of derivative liability
In connection with the Mergers consummated onDecember 1, 2020 , each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros' Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the$460,000 represents the change in fair value of the derivative during the nine months endedSeptember 30, 2022 , primarily driven by the decline in the Company's stock price as well as the passage of time, as it became less likely that the earnout would be met.
Interest expense, senior debt
Interest expense, senior debt for the nine months endedSeptember 30, 2021 , was$356,873 consisting of interest payments on our senior debt, with a weighted average balance of$3,958,927 . The senior debt was repaid in 2021. There was no interest expense, senior debt for the nine months endedSeptember 30, 2022 .
Interest expense, promissory note
InJanuary 2022 , the Company executed a promissory note in favor of Vivus with a principal amount of$10,201,758 in connection with the Vivus Settlement Agreement. Interest expense, promissory note for the nine months endedSeptember 30, 2022 , was$451,075 . There was no interest expense, promissory note for the nine months endedSeptember 30, 2021 .
Three Months Ended
The following table sets forth a summary of our statements of operations for the
three months ended
For the Three Months
Ended September 30,
2022 2021
Net sales $ (1,457,732) $ 2,145,169
Cost of sales 286,525 319,158
Gross profit (1,744,257) 1,826,011
Operating expenses:
Selling, general and administrative 2,170,975 3,413,223
Gain on settlement with Vivus -
-
Research and development 735,916
280,576
Depreciation and amortization expense 1,560,870 1,728,829 Intangible asset impairment 7,460,000 - Total operating expenses 11,927,761 5,422,628 Loss from operations (13,672,018) (3,596,617) Change in fair value of derivative liability -
1,970,000
Interest expense, senior debt -
(67,936)
Interest expense, promissory note (147,677)
- Loss before income taxes (13,819,695) (1,694,553) Income tax expense 10,501 2,345 Net Loss$ (13,830,196) $ (1,696,898) 37 Table of Contents Net Sales
Net sales for the three months ended
Net sales for the three months ended
For the three months ended
For the three months endedSeptember 30, 2021 , gross billings to customers representing 10% or more of the Company's total gross billings included four customers that represented approximately 42%, 17%, 15%, and 14% of total gross billings, respectively. Prescription Medicines sales consist of sales of Stendra® in theU.S. for the treatment of male ED. Stendra® is primarily sold directly to five main customers, which collectively accounted for approximately 97% of Stendra® net sales for the three months endedSeptember 30, 2022 . Individually, sales to the five main customers accounted for 38%, 20%, 19%, 10%, and 10% of Stendra® net sales for the three months endedSeptember 30, 2022 . Medical Device sales consist of domestic and international sales of men's health products for the treatment of ED. The men's health products do not require a prescription and include Vacuum Erection Devices ("VEDs and related accessories"). Net sales were$3,602,901 , or 168%, lower during the three months endedSeptember 30, 2022 , than in the three months endedSeptember 30, 2021 consisting of a$3,517,920 decrease in the net sales of Stendra® and a$84,981 decrease in Medical Device Sales. During the three months endedSeptember 30, 2022 , the Company revised and increased its estimate of reserves for product returns by$2.7 million . The decrease in net sales of Stendra® was substantially due to wholesaler returns related to the sale of short-dated product above our initial estimates and decreased wholesaler sales due to decreased demand, resulting in negative net sales for the period. Throughout the fiscal quarter, we regularly seek to obtain periodic retail demand information and current inventory levels from our significant wholesalers. As part of this process, certain wholesalers indicated an increased ability to sell short-dated product before expiration because prescription demand for Stendra was strong at that time. Citing the demand of wholesalers at that time, management expected the short-dated product would sell through to end customers. Because sell through was below that estimated by the wholesalers, the Company had to increase its current return exposure. The Company has experienced a significant decrease in prescription demand for Stendra since the second quarter of this year. The decrease in net sales for Medical Devices included a decrease in international partially offset by an increase in domestic sales of VED systems.
Cost of Sales
Cost of sales for the three months ended
Cost of sales for the three months ended
Cost of sales for the Prescription Medicine segment for the three months endedSeptember 30, 2022 consisted of 282% third-party logistics provider order fulfillment, shipping expenses and other cost of sales, 114% third-party product cost of sales, 1% inventory obsolescence reserves and a 297% benefit in royalty expenses.
Cost of sales for the Medical Device segment for the three months ended
Cost of sales decreased by$32,633 , or 10%, during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30,2021 . For the three months endedSeptember 30, 2022 andSeptember 30, 2021 , cost of sales as a percentage of net sales was -20% and 15%, respectively. 38 Table of Contents Gross Loss
Gross loss for the three months endedSeptember 30, 2022 , was$(1,744,257) , composed of$(2,176,696) of gross loss from Prescription Medicines net of$432,439 , from Medical Devices. Gross profit for the three months endedSeptember 30, 2021 , was$1,826,011 , or 85% of net sales, composed of$1,332,036 of gross profit from Prescription Medicines and$493,974 from Medical Devices. The decrease in gross profit/loss was driven by the factors noted above as driving the decrease in net sales.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the three months endedSeptember 30, 2022 , were$2,170,975 , composed of$493,128 of selling, general and administrative expenses of our Prescription Medicines segment,$467,700 of selling, general and administrative expenses of our Medical Devices segment and$1,210,147 of general corporate expenses. Selling, general and administrative expenses for the three months endedSeptember 30, 2021 , were$3,413,223 , composed of$1,318,610 of selling, general and administrative expenses of our Prescription Medicines segment,$722,998 of selling, general and administrative expenses of our Medical Devices segment and$1,371,615 of general corporate expenses. Selling, general and administrative expenses for both segments include selling, marketing and regulatory expenses. Unallocated general corporate expenses include costs that were not specific to a particular segment but are general to the group, including expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Selling, general and administrative expenses decreased by$1,242,249 , or 36%, during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Decreased selling general and administrative expenses were primarily driven by a waiver of fees due to the FDA under PDUFA for the fiscal year 2022, resulting in a$1,083,504 decrease in fees due under PDUFA, decreased professional service fees of$295,410 as management sought to reduce expenses to improve operational efficiencies, decreased direct selling and marketing expenses of$52,328 , and decreased other operating expenses of$98,326 partially offset by increased stock based compensation expense of$254,969 increased bad debt expenses of$32,350 due to reserves for uncollectible accounts.
Research and development
Research and development expenses for the three months endedSeptember 30, 2022 , were$735,916 , composed of$678,552 in our Prescription Medicines segment and$57,364 for our Medical Devices segment.
Research and development expenses for the three months ended
Research and development expenses for the Prescription Medicines segment for the three months endedSeptember 30, 2022 are composed of$403,085 for consulting fees related to the Company's Non-Prescription / Over-The-Counter Strategies related to Stendra®;$97,824 for clinical development expenses and$27,408 for consulting fees related to the H100 license acquired inMarch 2020 ; and$150,235 related to the Company's tech transfer of its manufacturing process. Research and development expenses for the Prescription Medicines segment for the three months endedSeptember 30, 2021 are composed of$232,076 for consulting fees related to the Company's Non-Prescription / Over-The-Counter Strategies and$48,500 for legal fees related to the H100 license acquired inMarch 2020 . Research and development expenses for the Medical Devices segment for the three months endedSeptember 30, 2022 , are composed of$57,364 for license fees related to the Company's Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the three months endedSeptember 30, 2021 were$0 . Research and development expenses increased by$455,340 , or 162%, during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30,2021 . Increased research and development expenses were primarily driven by increased consulting fees related to the Company's Non-Prescription / Over-The-Counter strategies related to Stendra®, increased expenses related to the Company's tech transfer of its manufacturing process, increased clinical development expenses related to the H100 license acquired inMarch 2020 and license fees related to the Company's Tissue-Specific Oxygenation Sensor Technology Strategies. 39 Table of Contents
Depreciation and amortization
Depreciation and amortization expenses for the three months endedSeptember 30, 2022 , were$1,560,870 , composed of$1,269,664 of depreciation and amortization expenses of our Prescription Medicines segment and$291,206 of depreciation and amortization expenses of our Medical Devices segment. Depreciation and amortization expenses for the three months endedSeptember 30, 2021 , were$1,728,829 , composed of$1,398,270 of depreciation and amortization expenses of our Prescription Medicines segment and$330,559 of depreciation and amortization expenses of our Medical Devices segment. Prescription Medicines depreciation and amortization consists primarily of the amortization of the intangible assets related to Stendra® over its estimated useful life of 10 years. Medical Devices depreciation and amortization primarily consists of the amortization of the intangible assets related to Timm Medical and PTV over their estimated useful life of 12 years. The increase in amortization expense was primarily driven by the accelerated method of amortization related to the Stendra® product.
Intangible asset impairment
During the three months endedSeptember 30, 2022 , the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis, indicated that the Stendra® product intangible asset was impaired. The Company then prepared a discounted cash flow analysis resulting in an impairment of approximately$7.5 million .
Change in fair value of derivative liability
In connection with the Mergers consummated onDecember 1, 2020 , each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros' Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. The fair value of the derivative liability was reduced to$0 as ofSeptember 30, 2022 .
Interest expense, senior debt
Interest expense, senior debt for the three months endedSeptember 30, 2021 , was$67,936 consisting of interest payments on our senior debt, with a weighted average balance of$2,305,470 . The senior debt was repaid in 2021. There was no interest expense, senior debt for the three months endedSeptember 30, 2022 .
Interest expense, promissory note
InJanuary 2022 , the Company executed a promissory note in favor of Vivus with a principal amount of$10,201,758 in connection with the Vivus Settlement Agreement. Interest expense, promissory note for the three months endedSeptember 30, 2022 , was$147,677 consisting of interest for payments on our promissory note. There was no interest expense, promissory note for the three months endedSeptember 30, 2021 .
Liquidity and Capital Resources
General
Cash on hand totaled
We have experienced net losses and negative cash flows from operations since our inception. As ofSeptember 30, 2022 , we had cash of$11.2 million , positive working capital of$10.8 million , and an accumulated deficit of$86.5 million . For the nine months endedSeptember 30, 2022 , we used cash in operation of approximately$11.2 million . Our plans include, or may include, utilizing our cash on hand, as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. InJanuary 2022 , the Company executed a promissory note in favor of Vivus in connection with the Vivus Settlement Agreement in the principal amount of 40
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$10,201,758 , net of a prepayment of$900,000 . The terms of this promissory note are discussed in the section titled "-Vivus Settlement Agreement, Promissory Note and the Security Agreement" above. To date, our principal sources of capital used to fund our operations have been the revenues from product sales, private sales, registered offerings and private placements of equity securities. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these unaudited interim consolidated financial statements are issued. In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well by as exploring additional ways to raise capital in addition to increasing cash flows from operations. There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra® and continuing to invest in research and development pursuant to our Non-Prescription / Over-The-Counter ("OTC") strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future; further developing and commercializing H100; and future capital market conditions. If the Company's current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC or H100 in order to extend its cash resources. The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. InMarch 2020 , the Company acquired the Hybrid License, providing an exclusive license to H100™. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie's disease. We paid an initial license fee of$100,000 and an additional payment of$250,000 and additional annual milestone payments of$125,000 ,$150,000 and$200,000 are due on each of the first, second and third anniversaries of the license agreement and$250,000 annual payments due thereafter. The Company is also required to make a$1,000,000 payment upon first commercial sale and a sliding scale of percentage payments on net sales in the low single digits. Annual anniversary payments will not be required after commercialization. The Company is also obligated to make royalty payments between 3 and 6% of any net sales. OnSeptember 24, 2020 , the Company and Hybrid entered into a letter agreement, pursuant to which the term of the Hybrid License was extended for an additional six months toMarch 24, 2021 . In consideration for the extension, the Company paid Hybrid$50,000 inOctober 2020 and an additional$100,000 inDecember 2020 . OnMarch 31, 2021 , the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months toSeptember 24, 2021 . Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of two hundred thousandU.S. Dollars ($200,000 ), which was paid within seven calendar days of entering into the second letter agreement. OnSeptember 24, 2021 , the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid$150,000 onOctober 1, 2021 ,$200,000 onOctober 31, 2021 ,$200,000 onDecember 1, 2021 ,$200,000 onDecember 23, 2021 and$150,000 onMarch 24, 2022 . The Company also expects to incur approximately$20 million of research and development expenses relating to H100™ over the estimated four to six-year period of clinical development prior to FDA approval, including approximately$15 million for clinical trials and$5 million of other expenses. The Company anticipates funding these future expenses through additional capital raises, awarded grants or issuance of debt, until revenues become sufficient to cover these ongoing expenses.October 2021 Financing OnOctober 13, 2021 , we entered into a Securities Purchase Agreement (the "October SPA") with certain accredited and institutional investors, pursuant to which we sold 3,323,616 shares of our common stock in a registered direct offering (the "October RD") at an offering price of$1.715 per share and associated October Warrant (as defined below). Also pursuant to the October SPA, in a concurrent private placement (together with the October RD, the "October Offering"), the Company sold to the purchasers warrants to purchase up 41
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to an aggregate of 3,323,616 shares of common stock at an exercise price of$1.715 per share (the "October Warrants"). The October Warrants became exercisable immediately upon the closing of the October Offering onOctober 18, 2021 and will expire five years following that date. In connection with the October Offering, the Company issued warrants to purchase 130,000 shares of common stock to Katalyst as compensation for financial advisory services. The Company received net proceeds from the October Offering, after deducting fees and other offering expenses payable by the Company, of approximately$5.5 million . The October Warrants and the warrants issued to Katalyst in connection with the October Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. Each purchaser represented that it was an "accredited investor" (as defined by Rule 501 under the Securities Act).
OnNovember 29, 2021 , we entered into a Securities Purchase Agreement (the "November SPA") with certain accredited and institutional investors, pursuant to which we sold 2,153,333 shares of our common stock in a registered direct offering (the "November RD) at an offering price of$3.00 per share and associated November Warrant (as defined herein). Also pursuant to the November SPA, in a concurrent private placement (together with the November RD, the "November Offering"), the Company sold to the purchasers (i) 1,180,000 unregistered shares of the Company's common stock (the "November PIPE Shares) at an offering price of$3.00 per share and associated November Warrant and (ii) the warrants to purchase up to an aggregate of 2,500,000 shares of common stock at an exercise price of$3.50 per share (the "November Warrants"). The November Warrants became exercisable immediately upon the closing of the November Offering onDecember 2, 2021 and will expire five years following that date. In connection with the November Offering, the Company issued warrants to purchase 150,000 shares of common stock to Katalyst as compensation for financial advisory services. The Company received net proceeds from the November Offering, after deducting fees and other offering expenses payable by the Company, of approximately$9.3 million . The November PIPE Shares, the November Warrants, and the warrants issued to Katalyst in connection with the November Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. Each purchaser represented that it was an "accredited investor" (as defined by Rule 501 under the Securities Act).December 2021 Financing OnDecember 22, 2021 , we entered into the Securities Purchase Agreement (the "December SPA") with certain accredited and institutional investors, pursuant to which we sold 1,545,183 shares of our common stock in a registered direct offering (the "December RD) at an offering price of$3.43 per share and associated December Warrant (as defined herein). Also pursuant to the December SPA, in a concurrent private placement (together with the December RD, the "December Offering"), the Company sold to the purchasers (i) 641,406 unregistered shares of the Company's common stock (the "December PIPE Shares) at an offering price of$3.43 per share and associated December Warrant and (ii) the warrants to purchase up to an aggregate of 1,639,942 shares of common stock at an exercise price of$3.50 per share (the "December Warrants"). The December Warrants became exercisable immediately upon the closing of the December Offering onDecember 27, 2021 and will expire five years following that date. In connection with the December Offering, the Company issued warrants to purchase 110,000 shares of common stock to Katalyst as compensation for financial advisory services. The Company received net proceeds from the December Offering, after deducting fees and other offering expenses payable by the Company, of approximately$6.9 million . The December PIPE Shares, the December Warrants, and the warrants issued to Katalyst in connection with the December Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. Each purchaser represented that it was an "accredited investor" (as defined by Rule 501 under the Securities Act). We will require additional financing to further develop and market our products, fund operations, and otherwise implement our business strategy at amounts relatively consistent with the expenditure levels disclosed above. We are exploring additional ways to raise capital, but we cannot assure you that we will be able to raise capital. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. We expect to seek additional funds through a variety of sources, which may include additional public or private equity or debt financings, collaborative, or other arrangements with corporate sources, or through other sources of financing. 42
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We are focused on expanding our service offering through internal development, collaborations, and through strategic acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both. DebtVivus Note
As noted above, inJanuary 2022 , the Company executed a promissory note in favor of Vivus with a principal amount of$10,201,758 in connection with the Vivus Settlement Agreement. For more information, see the section above titled "-Vivus Settlement Agreement, Promissory Note and the Security Agreement."
Senior Debt
OnSeptember 30, 2016 , the Company entered into a loan and security agreement (the "Loan Agreement") with Hercules Capital, Inc. ("Hercules"), for a$35 million term loan. The Loan Agreement included an additional Payable-In-Kind ("PIK") interest that increases the outstanding principal on a monthly basis at an annual rate of 1.35% and a$787,500 end of term charge. The end of term charge was being recognized as interest expense and accreted over the term of the Loan Agreement, as amended, using the effective interest method. We refer to the amounts available under the credit facility with Hercules as Senior Debt. OnNovember 22, 2017 , the Company entered into Amendment No. 1 to the Loan Agreement (the "First Amendment"). A covenant was added, in which the Company must achieve a certain minimum EBITDA, as defined in the First Amendment, target for the trailing twelve-month period, endingJune 30, 2018 . The end of term charge was increased from$787,500 to$1,068,750 . The minimum EBITDA for each of the trailing six months and the fixed charge coverage ratio were reduced from 1:1 to 0.9:1. The Company was also required to prepay$10,000,000 in principal. OnAugust 13, 2019 , the Company entered into a forbearance agreement with Hercules under which Hercules agreed to forbear exercising any remedies under the loan for events of default through the earlier ofSeptember 30, 2019 or the occurrence of an event of default under the Loan Agreement, as amended. EffectiveApril 13, 2020 , the Company and Hercules entered into Amendment No. 2 to the Loan Agreement, (the "Second Amendment"), to extend the maturity date toDecember 1, 2021 , if the Company should raise at least$20 million through an equity or debt financing or other transaction. All previously accrued PIK interest was added to principal, and no further PIK interest would accrue. The cash interest accrued at a rate of the greater of (i) the prime rate reported in theWall Street Journal plus 11.50% minus 4.25% and (ii) 11.50%. The end of term charge of$1,068,750 was partially extended with$534,375 due onOctober 1, 2020 , and$534,375 due onFebruary 1, 2021 . The Company incurred a$50,000 amendment fee upon closing of the Second Amendment. EffectiveSeptember 30, 2020 , the Company and Hercules entered into Amendment No. 3 to the Loan Agreement (the "Third Amendment") to provide for interest only payments commencing onOctober 1, 2020 and continuing throughDecember 22, 2020 . The Third Amendment also amended the minimum cash, minimum net revenue and minimum EBITDA financial covenants. On that same date,Juggernaut Capital Partners III, L.P. , an affiliate of JCP Investor, Hercules, andWells Fargo Bank, N.A. entered into an escrow agreement (the "Escrow Agreement") to escrow certain funds in an aggregate amount equal to certain principal payments owed under the Loan Agreement, as amended. In connection with the consummation of the Mergers, the funds held in escrow were disbursed back toJuggernaut Capital Partners III, L.P. and the Escrow Agreement was terminated.
The Company satisfied the maturity date extension requirement pursuant to funds
retained upon the closing of the Mergers in
OnNovember 3, 2021 , the Company repaid the remaining balance due on the Senior Debt. 43 Table of Contents Cash Flows The following table summarizes our cash flows for the nine months endedSeptember 30 2022 and 2021: For the Nine Months EndedSeptember 30, 2022 2021
Net cash used in operating activities
$ 12,665,910 $ 9,004,510
Cash Flows from Operating Activities
Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$11,226,985 , which primarily reflected our net loss of$15,816,213 , in addition to noncash adjustments to reconcile net loss to net cash used in operating activities of$9,288,313 consisting primarily of depreciation and amortization, the gain on the Vivus settlement, changes in the fair value of derivative liability, intangible asset impairment and stock compensation, and changes in operating assets and liabilities of$4,694,085 . Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$3,557,732 , which primarily reflected our net loss of$800,734 , partially offset by cash adjustments to reconcile net income to net cash used in operating activities of$3,131,046 consisting primarily of depreciation and amortization, inventory obsolescence reserves, changes in the fair value of derivative liability, and changes in operating assets and liabilities of$374,048 .
Cash Flows from Financing Activities
Net cash used in financing activities was$1,438,925 for the nine months endedSeptember 30, 2022 , consisting of prepayments of the promissory note, including a prepayment of$900,000 . Net cash used in financing activities was$5,446,778 for the nine months endedSeptember 30, 2021 , consisting of payments of senior debt of$4,912,541 and a payment for the senior debt end-of-term fee of$534,237 .
Off-Balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder's equity or that are not reflected in our financial statements included in this Form 10-Q. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Contingencies
Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company's management, in
consultation with its legal counsel as appropriate, assesses such contingent
liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such proceedings,
the Company, in consultation with legal counsel, evaluates the perceived merits
of any legal proceedings or unasserted claims, as well as the perceived merits
of the amount of relief sought or expected to be sought therein. If the
assessment of a contingency indicates it is probable that a material loss has
been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company's financial statements. If
the assessment indicates a potentially material loss contingency is not
probable, but is reasonably possible, or is probable, but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss, if determinable and material, would be disclosed. Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed.
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Table of Contents
Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure utilized by management to evaluate the Company's performance on a comparable basis. The Company believes that Adjusted EBITDA is useful to investors as a supplemental way to evaluate the ongoing operations of the Company's business as Adjusted EBITDA may enhance investors' ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization and to evaluate the Company's ability to service debt. In addition, Adjusted EBITDA is a financial measurement that management and the Company's Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA is a non-GAAP financial measure commonly used in the Company's industry and should not be construed as an alternative to net income as an indicator of operating performance (as determined in accordance with GAAP). The Company's presentation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items. The Company defines Adjusted EBITDA as net income (loss) adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) income taxes, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance or that are non-recurring in nature. For example, Adjusted EBITDA:
? does not reflect the Company's capital expenditures, future requirements for
capital expenditures or contractual commitments;
? does not reflect changes in, or cash requirements for, the Company's working
capital needs;
? does not reflect the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on the Company's debt; and
? does not reflect payments related to income taxes, if applicable.
The following table presents a reconciliation of net income (loss) to Adjusted
EBITDA for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net Loss $ (13,830,196) $ (1,696,898) $ (15,816,213) $ (800,734)
Interest expense, senior debt - 67,936 - 356,873
Interest expense, promissory
note 147,677 - 451,075 -
Income tax expense 10,501 2,345 10,501 9,045
Depreciation and amortization
expense 1,560,870 1,728,829 4,682,610 5,186,486
EBITDA (12,111,148) 102,212 (10,672,027) 4,751,670
Stock based compensation 308,136 53,167 966,231 1,178,678
Gain on settlement with Vivus - - (3,389,941) -
Intangible asset impairment 7,460,000 - 7,460,000 -
Change in fair value of
derivative liability - (1,970,000) (460,000) (9,640,000)
Adjusted EBITDA $ (4,343,012) $ (1,814,621) $
(6,095,737)
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under GAAP.
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Gross Billings
Gross billings is a non-GAAP financial measure utilized as a key performance
metric by management and the Company's Board of Directors in their financial and
operational decision-making as well as for the preparation of the annual budget.
The Company believes that gross billings is useful to investors as a
supplemental way to provide an alternative measure of the total demand for the
products sold by the Company. Gross billings is a non-GAAP financial measure
commonly used in the Company's industry and should not be construed as an
alternative to net sales as an indicator of operating performance (as determined
in accordance with GAAP). The Company's presentation of gross billings may not
be comparable to similarly titled measures reported by other companies.
Gross billings is adjusted to exclude certain items that affect comparability.
The adjustments are itemized in the tables below. You are encouraged to evaluate
these adjustments and the reason the Company considers them appropriate for
supplemental analysis. In evaluating adjustments, you should be aware that in
the future the Company may incur expenses that are the same as or similar to
some of the adjustments set forth below. The presentation of these adjustments
should not be construed as an inference that future results will be unaffected
by unusual or recurring items.
The Company defines gross billings as the amount of its aggregate sales billed
to customers at standard prices before the application of certain adjustments
that reduce the net amount received from customers, including product returns,
certain rebates and coupon redemptions, discounts and fees.
The negative net sales for the three months ended September 30, 2022 , is the
result of the Stendra® product primarily due to wholesaler returns related to
the sale of short-dated product above our initial estimates and decreased
wholesaler sales due to decreased demand. Throughout the fiscal quarter, we
regularly seek to obtain periodic retail demand information and current
inventory levels from our significant wholesalers. As part of this process,
certain wholesalers indicated an increased ability to sell short-dated product
before expiration because prescription demand for Stendra was strong at that
time. Citing the demand of wholesalers at that time, management expected the
short-dated product would sell through to end customers. Because sell through
was below that estimated by the wholesalers, the Company had to increase its
current return exposure. The Company has experienced a significant decrease in
prescription demand for Stendra since the second quarter of this year.
The following table presents a reconciliation of net sales to gross billings for
the three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net Sales $ (1,457,732) $ 2,145,169 $ 5,193,953 $ 8,678,424
Product Returns 3,280,289 2,256,673 7,644,368 4,069,440
Contract Rebates 416,633 607,143 1,175,073 2,529,625
Chargebacks 53,334 4,748 122,927 270,094
Cash Discounts 38,298 79,722 265,701 346,656
Distribution Service Fees 98,474 540,618 1,402,763 1,486,590
Coupon Redemptions 1,009,138 2,896,935 4,419,128 4,821,786
Gross Billings $ 3,438,434 $ 8,531,008 $ 20,223,913 $ 22,202,615 Gross billings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under GAAP.
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