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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
Overview
Petros 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"), and Pos-T-Vac,
LLC ("PTV"). On September 30, 2016, the Company entered into a License and
Commercialization Agreement (the "License Agreement") with Vivus, 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 the U.S and its territories, Canada, South
America, and India. Stendra® is a U.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 in the US. 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.
42
Table of Contents
In addition to Stendra®, Petros' ED portfolio also includes external penile
rigidity devices, namely 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. In March 2020, Petros acquired an
exclusive global license (the "Hybrid License") for the development and
commercialization of H100™ from Hybrid 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.
Petros is also currently conducting non-clinical consumer studies in connection
with the contemplated pursuit of FDA approval for Stendra® for over-the-counter
("OTC") use in treating ED. 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 Hybrid License) 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
$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.
Going Concern
Petros has experienced net losses and negative cash flows from operations since
our inception. As of December 31, 2022, the Company had cash of approximately
$9.4 million, positive working capital of $7.6 million, an accumulated deficit
of approximately $90.7 million and used cash in operations during the twelve
months ended December 31, 2022 of approximately $12.8 million. 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 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 Annual 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 as by 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 H100 and possibly Stendra® OTC 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
The World Health Organization ("WHO") declared the coronavirus COVID-19
("COVID-19") a global pandemic on March 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 the U.S. economy for the foreseeable future. The Company cannot
reasonably estimate the length 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.
43
Table of Contents
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. In March 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, in March 2020, the
Company closed its administrative offices. In January 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 was organized as a Delaware corporation on May 14, 2020 for the purpose
of effecting the transactions contemplated by that certain Agreement and Plan of
Merger, dated as of May 17, 2020 (as amended, the "Merger Agreement"), by and
between Petros, Neurotrope, Inc., a Nevada corporation ("Neurotrope"), PM Merger
Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary
of Petros ("Merger Sub 1"), PN Merger Sub 2, Inc., a Delaware corporation and a
wholly-owned subsidiary of Petros ("Merger Sub 2"), and Metuchen Pharmaceuticals
LLC, a Delaware limited liability company ("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 into Neurotrope, with
Neurotrope 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 and Neurotrope became wholly-owned subsidiaries of Petros,
and Petros became a publicly traded corporation on December 1, 2020.
On December 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 of
Neurotrope not retained by Neurotrope in connection with the Mergers were
contributed to Synaptogenix, Inc. (formerly known as Neurotrope
Bioscience, Inc.), a Delaware corporation ("Synaptogenix" and a wholly-owned
subsidiary of Neurotrope prior to the spin-off) and (ii) holders of record of
Neurotrope common stock, par value $0.0001 per share, Neurotrope preferred
stock, par value $0.001 per share and certain warrants as of November 30, 2020
received a pro rata distribution of common stock of Synaptogenix, resulting in a
separate, independent publicly traded company.
The Mergers were accounted for as a reverse recapitalization in accordance with
U.S. GAAP. Metuchen was determined to be the accounting acquirer based on an
analysis of the criteria outlined in the Financial Accounting Standards Board's
Accounting Standards Codification ("ASC") No. 805, Business Combinations ("ASC
805"), and the facts and circumstances specific to the Mergers, including:
(1) Metuchen Securityholders owned approximately 51.0% of Neurotrope and
Metuchen at closing of the equity securities of the combined company immediately
following the closing of the transaction; (2) a majority of the board of
directors of the combined company are composed of directors designated by
Metuchen under the terms of the Mergers; and (3) a majority of the existing
members of Metuchen's management are the management of the combined company. The
net assets of Metuchen are stated at historical costs in the Company's
Consolidated Financial Statements, with no goodwill or intangible assets
recorded. Accordingly, the historical financial statements of Metuchen through
November 30, 2020 became the Company's historical financial statements,
including the comparative prior periods. These Consolidated Financial Statements
include the results of Petros from December 1, 2020, the date the reverse
recapitalization was consummated.
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 in the 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.
44
Table of Contents
Licensing and Distribution
The Company acquired the rights to Stendra® avanafil on September 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 the U.S. and its territories, as well as
Canada, South America, and India. In December 2000, Vivus originally was granted
the license from Mitsubishi Tanabe Pharma Corporation ("MTPC") to develop,
market, and manufacture Stendra®. Stendra® was approved by the FDA in April 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 in April 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 on September 30, 2016, which has since been terminated,
effective as of September 30, 2021. Following the termination of the Vivus
Supply Agreement, Petros, through its subsidiary Metuchen, entered into a
Technology Transfer Service Agreement on January 20, 2022 with Patheon
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 in Cincinnati,
Ohio. Under the Agreement, Patheon or one of its affiliates will provide
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®.
On March 27, 2018, the Company entered into a Sublicense Agreement with Acerus
Pharmaceuticals Corporation ("Acerus") whereby the Company granted to Acerus an
exclusive sublicense in Canada 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
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
and the viability of a pathway required to address the deficiency noted by
Health Canada. The outcome of these negotiations is uncertain and depends on a
variety of factors, including the result of Acerus' ongoing dissolution
proceedings.
45
Table of Contents
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 $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
On January 18, 2022, Petros (through its wholly-owned subsidiary) 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 (representing the 2018 and 2019 minimum purchase requirements)
out of approximately $12.4 million due under the Vivus Supply Agreement, in
conjunction with forgiveness of approximately $4.25 million of current
liabilities relating to returned goods and minimum purchase commitments. 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. The parties also entered into a Security Agreement to
secure Petros' obligations under the Note. The Company recorded the impact of
this transaction, including the gain in the first quarter of 2022.
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. On January 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 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. The Vivus Settlement Agreement stipulated that Vivus is the sole
owner of all API unless or until such time as certain quantities of API are
shipped to the Company upon the fulfillment of the aforementioned payment
conditions.
Under the terms of the Note, the principal amount of $10,201,758 is payable in
consecutive quarterly installments beginning on April 1, 2022 through January 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 on April 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
including, but not limited to, court costs and attorneys' fees. Pursuant to the
Security Agreement, dated January 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 year ended December 31, 2022, the Company has paid
Vivus $1.6 million. As of December 31, 2022, the principal balance on the Note
is $9.5 million.
46
Table of Contents
Reverse Stock Split
On November 30, 2022 we effected a 1-for-10 reverse stock split of the issued
and outstanding shares of our Common Stock. All share and per share information
herein has been adjusted to retrospectively reflect this reverse stock split.
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 II; Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; Note 2. Summary of Significant Accounting
Policies" below in this Form 10-K, 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 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 Stendra® and receive credit for product
within six months prior to expiration date and up to one year after expiration
date. The provision for returns is based upon the Company's estimates for future
Stendra® returns and historical experience. The provision of returns is part of
the variable consideration recorded at the time revenue is recognized. As of
December 31, 2022 and 2021, the reserves for product returns were $2.3 million
and $3.8 million, respectively, and are included as a component of accrued
expenses. During the years ended December 31, 2022 and December 2021,
respectively, the Company recorded $9.4 million and $8.3 million of returns as a
reduction of gross revenue.
47
Table of Contents
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.
Inventory
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.
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 December 31, 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 that 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 ended September 30, 2022, the Company noted that
indicators of impairment existed and prepared an undiscounted cash flow
analysis, which indicated for the Stendra® product an impairment. The Company
then prepared a discounted cash flow analysis through December 2029,
representing the remaining economic useful life for the Stendra® product
resulting in an impairment of approximately $7.5 million. As indicators of
impairment exist as of December 31, 2022, the Company prepared an undiscounted
cash flow analysis. This analysis includes projections of future revenue and
expenses, which if not achieved could result in future impairment charges. These
projections include continued sales of prescription Stendra®. Additionally, the
Company is investing in research and development pursuant to our OTC Strategies
related to Stendra®, which we anticipate will dramatically increase product
sales in the future, such that if our Stendra® OTC strategy is not successful,
we
48
Table of Contents
may have to partially or fully impair the remaining intangible balance. Based on
the impairment assessment as of December 31, 2022, the Company determined that
no additional intangible asset impairment occurred as the undiscounted cash
flows exceeded the respective carrying values of the assets by $59.7 million.
The Company has prepared projections including the undiscounted cash flows of
the remaining estimated useful lives through December 2031 for the medical
device products. Based on the impairment assessment as of December 31, 2022, and
2021, the Company determined that no intangible asset impairment occurred as the
undiscounted cash flows exceeded the respective carrying values of the assets by
approximately $0.8 million.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2 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 COVID-19 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 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.
Years ended December 31, 2022 and December 31, 2021
The following table sets forth a summary of our statements of operations for
the years ended December 31, 2022 and 2021:
For the Year Ended
December 31,
2022 2021
Net sales $ 5,992,054 $ 7,811,264
Cost of sales 2,289,418 1,599,566
Gross profit 3,702,636 6,211,698
Operating expenses:
Selling, general and administrative 12,209,162 15,593,233
Gain on settlement with Vivus (3,389,941) -
Research and development 1,740,280 1,788,491
Depreciation and amortization expense 5,598,884 6,877,990
Intangible asset impairment 7,460,000 -
Total operating expenses 23,618,385 24,259,714
Loss from operations (19,915,749) (18,048,016)
Change in fair value of derivative liability 460,000 9,430,000
Interest income 14,194 -
Interest expense, senior debt - (368,660)
Interest expense, promissory note (596,018) -
Net loss $ (20,037,573) $ (8,986,676)
49
Table of Contents
Net Sales
Net sales for the year ended December 31, 2022 were $5,992,054, composed of
$2,734,639 of net sales from Prescription Medicines and net sales of $3,257,415
from Medical Devices.
Net sales for the year ended December 31, 2021 were $7,811,264, composed of
$4,605,043 of net sales from Prescription Medicines and net sales of $3,206,221
from Medical Devices.
For the year ended December 31, 2022, gross billings to customers representing
10% or more of the Company's total gross billings included four customers that
represented approximately 26%, 21%, 17%, and 16% of total gross billings. Gross
billings is a non-GAAP financial measure. For a reconciliation of net sales to
gross billings, see the section titled "Reconciliation of Non-GAAP Financial
Measures" below.
For the year ended December 31, 2021, gross billings to customers representing
10% or more of the Company's total gross billings included five customers that
represented approximately 27%, 22%, 16%, 13% and 11% of total gross billings.
Gross billings is a non-GAAP financial measure. For a reconciliation of net
sales to gross billings, see the section titled "Reconciliation of Non-GAAP
Financial Measures" below.
Prescription Medicines sales consist of sales of Stendra® in the U.S. for the
treatment of male ED. Stendra® is primarily sold directly to four main
customers, as described above, which collectively accounted for approximately
92% of Stendra® net sales for the year ended December 31, 2022. Individually,
sales to the four main customers, accounted for 30%, 25%, 19%, and 18% of
Stendra® gross billings for the year ended December 31, 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 $1,819,210, or 23% lower during year ended December 31, 2022 than
in the same period in 2021 consisting of a $1,870,404 decrease in the net sales
of Stendra® and a $51,194 increase in Medical Device Sales. The decrease in net
sales of Stendra® was substantially due to increased wholesaler returns related
to the sale of short-dated product and decreased wholesaler sales due to
decreased demand. The increase in net sales for Medical Devices included an
increase in domestic sales of VED systems and a decrease in international sales
of VED systems.
Cost of Sales
Cost of sales for the year ended December 31, 2022 were $2,289,418, composed of
$949,197 of cost of sales for our Prescription Medicines segment and $1,340,221
for our Medical Devices segment.
Cost of sales for the year ended December 31, 2021 were $1,599,566 composed of a
benefit of $577,795 of cost of sales for our Prescription Medicines segment and
$1,021,771 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the year ended December
31, 2022 consisted of 37% inventory obsolescence reserves, 34% third-party
product cost of sales, 15% 3PL order fulfillment, shipping expenses and other
cost of sales and 14% royalty expenses.
Cost of sales for the Medical Device segment for the year ended December 31,
2022 consisted of 85% raw materials and 15% production labor.
Cost of sales increased by $689,852 or 43% during the year ended December 31,
2022 compared to the same period in 2021. For the years ended December 31, 2022
and 2021, cost of sales as a percentage of net sales was 38% and 20%,
respectively. The increase in cost of sales as a percentage of net sales was
primarily the result of an increase in excess and obsolete inventory.
50
Table of Contents
Gross Profit
Gross profit for the year ended December 31, 2022 was $3,702,636 or 62%,
composed of $1,785,442 of gross profit from Prescription Medicines and
$1,917,194 from Medical Devices. Gross profit for the year ended December 31,
2021 was $6,211,698 or 80%, composed of $4,027,248 of gross profit from
Prescription Medicines and $2,184,450 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 year ended December 31,
2022 were $12,209,162, composed of $4,947,466 of selling, general and
administrative expenses of our Prescription Medicines segment, $1,685,678 of
selling, general and administrative expenses of our Medical Devices segment and
$5,576,018 of general corporate expenses.
Selling, general and administrative expenses for the year ended December 31,
2021 were $15,593,233, composed of $6,473,482 of selling, general and
administrative expenses of our Prescription Medicines segment, $2,620,403 of
selling, general and administrative expenses of our Medical Devices segment and
$6,499,348 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 $3,384,071 or 22%
during the year ended December 31, 2022, compared to the same period in 2021.
Decreased selling general and administrative expenses were primarily driven by a
waiver of FY 22 and FY 23 PDUFA fees by the FDA resulting in a $1,311,092
decrease in PDUFA expenses, decreased professional service fees of $1,074,359 as
management sought to reduce expenses to improve operational efficiencies, lower
payroll expenses of $542,128 resulting from decreased headcount, decreased
direct selling and marketing expenses of $262,821, decreased bad debt expenses
of $128,951 due to improved customer collections, and decreased other operating
expenses of $125,402 partially offset by increased stock compensation expense of
$60,682.
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 year ended December 31,
2022. There was no such activity in the year ended December 31, 2021.
Research and Development
Research and development expenses for the year ended December 31, 2022 were
$1,740,280, composed of $1,541,714 for our Prescription Medicines segment and
$198,566 for our Medical Devices segment.
Research and development expenses for the year ended December 31, 2021 were
$1,788,491, composed of $1,788,491 for our Prescription Medicines segment and $0
for our Medical Devices segment. Research and development expenses for the
Prescription Medicines segment for the year ended December 31, 2022 are composed
of $900,864 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 $73,407 for
consulting fees related to the H100 license acquired in March 2020; and $178,104
related to the Company's technology transfer of its manufacturing process.
Research and development expenses for the Prescription Medicines segment for the
year ended December 31, 2021 are composed of $777,998 for consulting fees
related to the Company's Non-Prescription / Over-The-Counter ("OTC") Strategies
related to Stendra®, $950,000 for upfront licensing fees, and $60,493 for legal
fees related to the H100 license acquired in March 2020.
51
Table of Contents
Research and development expenses for the Medical Devices segment for the year
ended December 31, 2022 were composed of $198,566 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 year ended
December 31, 2021 were $0.
Research and development expenses decreased by $48,211 or 3% during the year
ended December 31, 2022, compared to the year ended December 31, 2021. Decreased
research and development expenses were primarily driven by decreased upfront
licensing fees related to the Hybrid License partially offset by increased
clinical development expenses related to the Hybrid License, increased license
fees related to the Company's Tissue-Specific Oxygenation Sensor Technology
Strategies, increased consulting fees related to the Company's OTC strategies
related to Stendra® and increased development expenses related to the Company's
technology transfer of its Stendra® manufacturing process.
Depreciation and amortization
Depreciation and amortization expenses for the year ended December 31, 2022 were
$5,598,884, composed of $4,442,922 of depreciation and amortization expenses of
our Prescription Medicines segment and $1,155,962 of depreciation and
amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the year ended December 31, 2021 were
$6,877,990, composed of $5,564,499 of depreciation and amortization expenses of
our Prescription Medicines segment and $1,313,491 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 year ended December 31, 2022, the Company noted that indicators of
impairment existed and prepared an undiscounted cash flow analysis, which
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. There was no impairment for the year ended December
31, 2021.
Change in Fair Value of Derivative Liability
In connection with the Mergers consummated on December 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 year ended December 31, 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. During
the year ended December 31, 2021, the fair value of the derivative liability
decreased by $9,430,000.
Interest Income
Interest income for the year ended December 31, 2022 was $14,194. There was no
interest income for the year ended December 31, 2021.
Interest Expense, Senior Debt
Interest expense, senior debt for the year ended December 31, 2021 was $368,660
consisting of interest payments on our senior debt, with a weighted average
balance of $3,066,505. The senior debt was repaid in 2021. There was no interest
expense, senior debt, for the year ended December 31, 2022.
52
Table of Contents
Interest Expense, Promissory Note
In January 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 year ended December 31,
2022, was $596,018. There was no interest expense, promissory note for the year
ended December 31, 2021.
Income Tax Expense (Benefit)
Income tax expense for the year ended December 31, 2022 was $0 compared to
income tax of $0 for the year ended December 31, 2021.
Liquidity and Capital Resources
General
Cash totaled $9,426,264 at December 31, 2022, compared to $23,847,572 at
December 31, 2021.
We have experienced net losses and negative cash flows from operations since our
inception. As of December 31, 2022, we had cash of $9.4 million, working capital
of $7.6 million, and an accumulated deficit of $90.7 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. In
January 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 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 audited
annual 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 Annual 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 H100 and possibly Stendra® OTC in order to extend its
cash resources. Thus far the Company has taken steps to reduce discretionary
expenditures and explored new sources of funding for our research initiatives,
such as sponsored research agreements and co-development initiatives. While we
are optimistic that we will be successful in our efforts to finance our
operations, there can be no assurances that we will be successful in doing so.
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.
In March 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 3-6% of any net sales.
53
Table of Contents
On September 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 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 Hybrid License) 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 second letter
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.
While the Company's primary priority remains the Stendra® Rx-to-OTC switch, we
expect to incur approximately $14 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 $10 million for
clinical trials and $4 million of other expenses. The Company anticipates
funding these future expenses through additional capital raises or issuance of
debt, until revenues become sufficient to cover these ongoing expenses.
October 2021 Financing
On October 13, 2021, we entered into a Securities Purchase Agreement (the
"October SPA") with certain accredited and institutional investors, pursuant to
which we sold 332,362 shares of our common stock in a registered direct offering
(the "October RD") at an offering price of $17.15 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 to an
aggregate of 332,362 shares of common stock at an exercise price of $17.15 per
share (the "October Warrants"). The October Warrants became exercisable
immediately upon the closing of the October Offering on October 18, 2021 and
will expire five years following that date. In connection with the October
Offering, the Company issued warrants to purchase 13,000 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).
November 2021 Financing
On November 29, 2021, we entered into a Securities Purchase Agreement (the
"November SPA") with certain accredited and institutional investors, pursuant to
which we sold 215,334 shares of our common stock in a registered direct offering
(the "November RD) at an offering price of $30.00 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) 118,000 unregistered shares
of the Company's common stock (the "November PIPE Shares) at an offering price
of $30.00 per share and associated November Warrant and (ii) the warrants to
purchase up to an aggregate of 250,000 shares of common stock at an exercise
price of $35.00 per share (the "November Warrants"). The November Warrants
became exercisable immediately upon the closing of the November Offering on
December 2, 2021 and will expire five years following that date. In connection
with the November Offering, the Company issued warrants to purchase 15,000
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).
54
Table of Contents
December 2021 Financing
On December 22, 2021, we entered into a Securities Purchase Agreement (the
"December SPA") with certain accredited and institutional investors, pursuant to
which we sold 154,519 shares of our common stock in a registered direct offering
(the "December RD) at an offering price of $34.30 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) 64,141 unregistered shares of
the Company's common stock (the "December PIPE Shares) at an offering price of
$34.30 per share and associated December Warrant and (ii) the warrants to
purchase up to an aggregate of 163,995 shares of common stock at an exercise
price of $35.00 per share (the "December Warrants"). The December Warrants
became exercisable immediately upon the closing of the December Offering on
December 27, 2021 and will expire five years following that date. In connection
with the December Offering, the Company issued warrants to purchase 11,000
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.
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.
Debt
Vivus Note
As noted above, in January 2022, the Company executed a promissory note in favor
of Vivus with a principal amount of $10,201,758 as part of the settlement. For
more information, see the section above titled "Vivus Settlement Agreement,
Promissory Note and the Security Agreement."
Senior Debt
On September 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.
On November 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, ending June 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.
55
Table of Contents
On August 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 of September 30, 2019 or the
occurrence of an event of default under the Loan Agreement, as amended.
Effective April 13, 2020, the Company and Hercules entered into Amendment No. 2
to the Loan Agreement, (the "Second Amendment"), to extend the maturity date to
December 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
the Wall 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 on October 1,
2020, and $534,375 due on February 1, 2021. The Company incurred a $50,000
amendment fee upon closing of the Second Amendment.
Effective September 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 on October 1, 2020 and continuing through December 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, and Wells 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 to Juggernaut 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 December 2020. As a result, the
Senior Debt had a maturity date of December 1, 2021.
On November 3, 2021, the Company repaid the remaining balance due on the Senior
Debt.
Cash Flows
The following table summarizes our cash flows for the years ended December 31,
2022 and 2021:
For the Years Ended
December 31,
2022 2021
Net cash used in operating activities $ (12,797,325) $ (11,862,031)
Net cash used in financing activities
(1,623,983) -
Net cash provided by financing activities - 18,569,909
Net increase in cash $ (14,421,308) $ 6,707,878Cash Flows from Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 was
$12,797,325, which primarily reflected our net loss of $20,037,573. Adjustments
to reconcile net loss to net cash provided by operating activities of
$10,542,319 consisting primarily of depreciation and amortization, intangible
asset impairment, gain on Vivus settlement, stock compensation and changes in
operating assets and liabilities of $3,302,071.
Net cash used in operating activities for the year ended December 31, 2021 was
$11,862,031, which primarily reflected our net loss of $8,986,676, in addition
to noncash adjustments to reconcile net loss to net cash used in operating
activities of $1,111,405 consisting primarily of depreciation and amortization,
changes in the fair value of derivative liability and stock compensation, and
changes in operating assets and liabilities of $1,736,950.
Cash Flows from Investing Activities
Net cash used in investing activities was $0 for both the years ended December
31, 2022 and 2021.
56
Table of Contents
Cash Flows from Financing Activities
Net cash used in financing activities was $1,623,983 for the year ended December
31, 2022, consisting of payments of the promissory note, including a prepayment
of $900,000.
Net cash provided by financing activities was $18,569,909 for the year ended
December 31, 2021, consisting of net proceeds from the issuance of common stock
of $21,745,003 and proceeds from the exercise of warrants of $4,012,435 offset
by payments of senior debt of $6,653,292 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 as Exhibit 99.1 to this Form 10-K.
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.
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.
57
Table of Contents
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 loss to Adjusted EBITDA for
the years ended December 31, 2022 and 2021.
For the Year Ended
December 31,
2022 2021
Net Loss $ (20,037,573) $ (8,986,676)
Interest income (14,194) -
Interest expense, senior debt - 368,660
Interest expense, promissory note 596,018 -
Income tax expense - -
Depreciation and amortization expense 5,598,884 6,877,990
EBITDA (13,856,865) (1,740,026)
Stock based compensation 1,195,076 1,305,150
Gain on settlement with Vivus (3,389,941) -
Intangible asset impairment 7,460,000 -
Change in fair value of derivative liability (460,000) (9,430,000)
Adjusted EBITDA
$ (9,051,730) $ (9,864,876)
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.
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.
58
Table of Contents
The following table presents a reconciliation of net sales to gross billings for
the years ended December 31, 2022 and 2021.
For the Year Ended
December 31,
2022 2021
Net Sales $ 5,992,054 $ 7,811,264
Product Returns 9,355,121 8,342,505
Contract Rebates 1,685,080 3,386,406
Chargebacks 164,577 304,301
Cash Discounts 319,630 438,515
Distribution Service Fees 1,721,238 2,023,768
Coupon Redemptions 5,324,829 7,910,032
Gross Billings $ 24,562,529 $ 30,216,791Gross 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.
© Edgar Online, source Glimpses
PETROS PHARMACEUTICALS 