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.
27
Overview
Petros is a pharmaceutical company focused on men's health therapeutics,
consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC
("Metuchen"), TIMM Medical, 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. 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).
Metuchen was founded by Joseph J. Krivulka, an experienced pharmaceutical
executive who held several key leadership positions at leading pharmaceutical
companies such as Mylan Laboratories Inc. and its subsidiary Bertek Inc., and
was also the co-founder of Reliant Pharmaceuticals, which was sold to
GlaxoSmithKline in 2007 for $1.65 billion. During the period from Metuchen's
inception in 2016 through 2018, the founder decided to outsource the sales and
marketing function to an affiliated contractor. The level of performance
expected from this affiliated contractor was not realized. In 2018, the founder
passed away which caused significant disruption to the business. In 2019,
Metuchen terminated this affiliate contractor and established its own internal
sales, marketing, and trade distribution functions for Stendra®. Also in 2019,
Metuchen deployed a specialized key account sales model augmented by a national
non-personal promotion campaign reaching nearly 30,000 healthcare professionals.
Metuchen also enhanced its digital campaigns designed to create awareness among
patients and its partners. Additionally, Metuchen engaged in a wide array of
specialty medical conferences including presentations at educational product
theaters and launched a national savings coupon for enhanced product access.
Metuchen believes that these activities have established a framework for growth
into 2021 and beyond. Following a year of internal management of marketing,
sales and trade distribution functions, we believe the Company is
well-positioned for a strong, multi-channel sales and marketing campaign in 2021
and beyond.
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.
Impact of COVID-19
In January 2020, the World Health Organization ("WHO") announced a global health
emergency because of a new strain of coronavirus originating in Wuhan, China
(the "COVID-19 outbreak") and the risks to the international community. In
March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the
rapid increase in exposure globally. As a result of the COVID-19 pandemic, which
continues to rapidly evolve, "shelter in place" orders and other public health
guidance measures were implemented across much of the United States, Europe and
Asia, including in the locations of the Company's offices, key vendors and
partners. The pandemic has significantly impacted the economic conditions in the
U.S. and globally as federal, state and local governments react to the public
health crisis, creating significant uncertainties in the economy. At this time,
the future trajectory of the COVID-19 outbreak remains uncertain, both in the
United States and in other markets. While the Company anticipates that the
currently available vaccines will be widely distributed in the future, the
timing and efficacy of such vaccines are uncertain. The Company cannot
reasonably estimate the length or severity of the impact that the COVID-19
outbreak 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 2021.
During 2020, government regulations and the voluntary business practices of the
Company and prescribing physicians have prevented in-person visits by sales
representatives to physicians' offices. The Company has 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 continues
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. The Company anticipates rehiring and/or assigning
representatives to cover sales territories as states reopen and physician access
resumes new normal levels. In response to the spread of SARS-CoV-2 and COVID-19,
in March 2020, the Company closed its administrative offices and as of
December 31, 2020, they remain closed, with the Company's employees continuing
their work outside of the Company's offices. The Company has selectively 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. However, the Company's ability to engage in personal
interactions with physicians and customers remains limited, and it is unknown
when the Company's offices will reopen, and these interactions will be fully
resumed.
28
Nature of Operations and Basis of Presentation
Petros Pharmaceuticals, Inc. ("Petros" or the "Company") 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 (the "Original 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"). On July 23, 2020, the
parties to the Merger Agreement entered into the First Amendment to the
Agreement and Plan of Merger and Reorganization (the "First Merger Agreement
Amendment") and on September 30, 2020, the parties to the Original Merger
Agreement entered into the Second Amendment to the Agreement and Plan of Merger
and Reorganization (the "Second Merger Agreement Amendment" and, together with
the Original Merger Agreement and the First Merger Agreement Amendment, the
"Merger Agreement"). 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"), a wholly-owned
subsidiary of Neurotrope 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.
29
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 the Vivus Supply Agreement on the effective date of the License Agreement.
As part of the License Agreement, the Company also acquired Vivus' Stendra®
avanafil product and sample inventories as of September 30, 2016, for an
additional $0.8 million. The Vivus Supply Agreement provides that Vivus will
test, supply and provide the product to the Company or its designee, directly or
through one or more third parties until September 30, 2021. During the term of
the Vivus Supply Agreement, the Company is required to purchase minimum annual
quantities from Vivus. Vivus, in turn, procures the product from a third-party
manufacturer.
In December of 2020, Vivus obtained approval of an in-court prepackaged plan of
reorganization, under which IEH Biopharma LLC ("IEH") obtained 100% ownership of
Vivus (the "Prepackaged Plan"), and IEH assumed VIVUS' contractual obligations
under the Supply Agreement. The license agreement between MTPC and Vivus ("MTPC
License") 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 is 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. The agreement remains in effect. In
August 2018, the Company entered into the Acerus Supply Agreement, pursuant to
which Acerus will purchase the product from the Company so long as the Acerus
Sublicense Agreement remains in effect.
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.
30
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 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 is 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.
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.
31
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 market.
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 Monte
Carlo Simulation approach. 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.
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 COVID-19 and related changes in economic
conditions, including changes to consumer spending resulting from the rapid rise
in local and national unemployment rates, are highly uncertain and, in many
instances, outside of our control. The duration and severity of the direct and
indirect effects of COVID-19 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 COVID-19 will affect our business, financial position and
operating results in the future cannot be predicted with certainty; however, any
such impact could be material. COVID-19 could also increase the degree to which
our results, including the results of our business segments, fluctuate in the
future.
32
Years ended December 31, 2020 and December 31, 2019
The following table sets forth a summary of our statements of operations for the
years ended December 31, 2020 and 2019:
For the Years Ended December 31,
2020 2019
Net sales $ 9,559,469 $ 15,577,166
Cost of sales 4,046,466 7,427,111
Gross profit 5,513,003 8,150,055
Operating expenses:
Selling, general and administrative 15,674,968 19,727,223
Research and development 459,636 -
Depreciation and amortization expense 6,660,438 5,291,107
Impairment loss - 2,443,930
Total operating expenses 22,795,042 27,462,260
Loss from operations (17,282,039 ) (19,312,205 )
Change in fair value of derivative liability (1,680,000 ) -
Interest expense, senior debt (1,323,424 ) (2,428,264 )
Interest expense, related party term loans (1,727,455 ) (11,416,697 )
Loss before income taxes (22,012,918 ) (33,157,166 )
Income tax benefit (1,426,993 ) (645,866 )
Net loss $ (20,585,925 ) $ (32,511,300 )
Net Sales
Net sales for the year ended December 31, 2020 were $9,559,469, composed of
$6,357,498 of net sales from Prescription Medicines and net sales of $3,201,971
from Medical Devices.
Net sales for the year ended December 31, 2019 were $15,577,166, composed of
$11,110,660 of net sales from Prescription Medicines and net sales of $4,466,506
from Medical Devices.
For the year ended December 31, 2020, gross sales to customers representing 10%
or more of the Company's total gross sales included one customer that
represented approximately 85% of total gross sales.
For the year ended December 31, 2019, gross sales from customers representing
10% or more of the Company's total gross sales included one customer that
represented approximately 86% of total gross sales.
Prescription Medicines sales consist of sales of Stendra® in the U.S. for the
treatment of male ED. Stendra® is primarily sold directly to the one customer
described above and resold through three main wholesalers, which collectively
accounted for approximately 85% of Stendra® net sales for the year ended
December 31, 2020. Individually, sales to the three main wholesalers either from
the one customer described above or directly, accounted for 42%, 30%, and 28% of
Stendra® net sales for the year ended December 31, 2020.
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"), PreBoost, VenoSeal,
penile injections (Rx), and urinary tract infection tests. Timm Medical
discontinued various co-promotion activities in 2019 and is currently selling
only VEDs and VenoSeal. The VEDs represent almost 100% of sales.
33
Net sales were 6,017,697, or 39% lower during year ended December 31, 2020 than
in the same period in 2019 consisting of a $4,753,162 decrease in the net sales
of Stendra® and a $1,264,535 decrease in Medical Device Sales. The decrease in
net sales in Stendra® was substantially due to lower wholesaler demand to reduce
inventory held by wholesalers for the potential effects of COVID-19. The
decrease in net sales for our Medical Devices segment was attributable to the
discontinuation of co-promotion activities and lower sales of certain products.
Cost of Sales
Cost of sales for the year ended December 31, 2020 were $4,046,466, composed of
$3,083,417 of cost of sales for our Prescription Medicines segment and $963,049
for our Medical Devices segment.
Cost of sales for the year ended December 31, 2019 were $7,427,111 composed of
$6,057,977 of cost of sales for our Prescription Medicines segment and
$1,369,134 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the year ended
December 31, 2020 consisted of 57% inventory obsolescence reserves, 27%
third-party product cost of sales, 10% royalty expenses, and 6% third-party
logistics provider order fulfillment and shipping costs.
Cost of sales for the Medical Device segment for the year ended December 31,
2020 consisted of 71% raw materials, 22% production labor and 7% other cost of
sales.
Cost of sales decreased by $3,380,645 or 46% during the year ended December 31,
2020 compared to the same period 2019. For the years ended December 31, 2020 and
2019, cost of sales as a percentage of net sales were 42% and 48%, respectively.
The decrease in cost of sales as a percentage of net sales was a result of less
write-offs for inventory obsolescence, decreased sales order fulfillment costs
(on a per unit basis), and decreased shipping expenses by the Company's
third-party logistics provider during the year ended December 31, 2020 due to
reduced sales volume.
Gross Profit
Gross profit for the year ended December 31, 2020 was $5,513,003 or 58%,
composed of $3,274,081 of gross profit from Prescription Medicines and
$2,238,922 from Medical Devices. Gross profit for the year ended December 31,
2019 was $8,150,055 or 52%, composed of $5,052,683 of gross profit from
Prescription Medicines and $3,097,372 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,
2020 were $15,674,968, composed of $8,784,716 of selling, general and
administrative expenses of our Prescription Medicines segment, $2,024,448 of
selling, general and administrative expenses of our Medical Devices segment and
$4,865,804 of general corporate expenses.
Selling, general and administrative expenses for the year ended December 31,
2019 were $19,727,223, composed of $13,873,200 of selling, general and
administrative expenses of our Prescription Medicines segment, $2,735,390 of
selling, general and administrative expenses of our Medical Devices segment and
$3,118,633 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.
34
Selling, general and administrative expenses decreased by $4,052,255 or 21%
during the year ended December 31, 2020 compared to the same period of 2019.
Decreased selling, general and administrative expenses were primarily driven by
lower payroll expenses and direct marketing expenses as management sought to
reduce expenses due to COVID-19; partially offset by increased accounting and
legal fees associated with the Merger and a settlement of a prior year
third-party liability of approximately $1.3 million no longer determined to be
required.
Research and development
Research and development expenses for the year ended December 31, 2020 were
$459,636, in our Prescription Medicines segment.
Research and development expenses for Prescription Medicines segment are
composed of $66,895 for consulting fees, $100,000 for upfront licensing fees,
$250,000 for licensing fee extension payments, and $42,741 for legal fees
related to the H100™ license acquired in March 2020.
There were no research and development expenses for the year ended December 31,
2019.
Depreciation and amortization
Depreciation and amortization expenses for the year ended December 31, 2020 were
$6,660,438, composed of $5,424,292 of depreciation and amortization expenses of
our Prescription Medicines segment and $1,236,146 of depreciation and
amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the year ended December 31, 2019 were
$5,291,107, composed of $4,145,833 of depreciation and amortization expenses of
our Prescription Medicines segment and $1,145,274 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.
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 $1,680,000 represents the
change in fair value of the derivative through December 31, 2020.
Interest expense, senior debt
Interest expense, senior debt for the year ended December 31, 2020 was
$1,323,424 consisting of interest payments on our senior debt, with a weighted
average balance of $9,574,020. Interest expense, senior debt for the year ended
December 31, 2019 was $2,428,264, consisting of interest payments on our senior
debt, with a weighted average balance of $15,514,168. The decrease of $1,104,840
or 45% was due to the pay down of $6.2 million of senior debt and decreased
weighted average interest rate subsequent to December 31, 2019.
Interest expense, subordinated related party term loans
Interest expense, subordinated related party term loans for the year ended
December 31, 2020 was $1,727,455, consisted of Paid-in-Kind ("PIK") interest. As
described under "Liquidity and Capital Resources - Debt - Subordinated Related
Party Term Loans" below, the subordinated related party term loans were
extinguished in an exchange transaction on September 16, 2019. During 2020, the
Company borrowed additional subordinated related party term loans in aggregate
principal amount of $15.5 million. The subordinated related party term loans
were converted into shares of the Company's common stock with the consummation
of the Mergers on December 1, 2020. Accordingly, the principal balance of the
subordinated related party term loans and accrued PIK interest was $0 as of
December 31, 2020.
35
Income tax benefit
Income tax benefit for the year ended December 31, 2020 was $1,426,993 compared
to income tax benefit of $645,866 for the year ended December 31, 2019. The
income tax benefit is primarily attributed to the operations of the Medical
Device segment, specifically Timm, which is now included in the Company's
consolidated group. The consolidated group is in a valuation allowance position,
as such, the legacy deferred tax liabilities recorded at Timm have been a source
of taxable income which reduced the overall valuation allowance as of
December 31, 2020.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $17,139,694 at December 31, 2020, compared to
$2,145,812 at December 31, 2019.
We have experienced net losses and negative cash flows from operations since our
inception. As of December 31, 2020, we had cash and cash equivalents of $17.1
million, negative working capital of approximately $16.0 million, including debt
of $7.2 million maturing in 2021, and sustained cumulative losses attributable
to common stockholders of $61.7 million. Our plans include, or may include,
utilizing our cash and cash equivalents on hand, negotiating an extension of our
debt arrangement and our liability due to Vivus as well as exploring additional
ways to raise capital in addition to increasing cash flows from operations.
While we are optimistic that we will be successful in our efforts to achieve our
plans, there can be no assurances that we will be successful in doing so. As
such, we obtained a continued support letter from our largest shareholder, JCP
III SM AIV, L.P., through May 17, 2022.
To date, our principal sources of capital used to fund our operations have been
the net proceeds we received from the Mergers, revenues from product sales,
private sales of equity securities and proceeds received from the issuance of
convertible debt, as described below.
We rely on McKesson to distribute our products to our customers. On March 27,
2020, the Company received notice of termination from McKesson. Such notice was
withdrawn on April 3, 2020, following the Company's payment of $1,915,144. As of
December 31, 2020, we had $6,119,834 in Gross Accounts Receivable due from
McKesson, partially offset by $1,178,521 in accrued chargebacks, cash discounts
and distribution service fees. Net amounts McKesson owed to the Company was
$4,941,313 as of December 31, 2020.
Our principal expenditures include payment for inventory of Stendra® from our
key supplier, Vivus, including purchases of inventory accrued in current
periods, but for which payment is due in future periods. We have significant
unpaid balances owed to Vivus and are currently in discussions with Vivus with
respect to amounts owed. We had an aggregate accrued unpaid balance owed to
Vivus of $20,724,188 as of December 31, 2020. While the Company is in
discussions with Vivus to convert a portion of the amounts owed into a
subordinated note, though there can be no assurance that we will be successful
in these discussions.
In March 2020, the Company acquired the exclusive license to 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 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.
36
On September 24, 2020, the Company and Hybrid amended the license agreement for
H100™ to extend the term of the license agreement for an additional six months
to March 24, 2021. In consideration for the amendment, the Company paid Hybrid
$50,000 in October 2020 and the Company paid Hybrid an additional $100,000 in
December 2020.
The Company also expects 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.
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
Senior Debt
On September 30, 2016, the Company entered into a loan agreement (the "Loan
Agreement") with Hercules Capital, Inc. ("Hercules"), for a $35 million term
loan with a stated interest rate of the greater of either (i) Prime (as defined
in the Loan Agreement) plus 7.25% or (ii) 10.75%. The Loan Agreement includes 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. We refer to the amounts available under the credit facility with
Hercules as Senior Debt.
On November 22, 2017, the Company entered into Amendment Number 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.
Monthly principal payments, including interest, commenced November 1, 2018 with
the outstanding balance under the Loan Agreement, as amended, due in full on
November 1, 2020. The end of term charge is being recognized as interest expense
and accreted over the term of the Loan Agreement, as amended, using the
effective interest method.
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 amended the Loan Agreement,
as previously amended, to extend the maturity date thereof to April 1, 2021,
subject to further extension to December 1, 2021 if the Company raises at least
$20 million through an equity or debt financing or other transaction. The
amendment was subject to the Company's receipt of at least $2 million of equity
or debt financing prior to the effectiveness of the amendment. The amendment
removed the minimum EBITDA and fixed charge coverage ratio covenants and replace
them with a covenant to raise at least $3 million of equity or debt financing by
April 30, 2020 and minimum cash covenants, the required levels of which are
dependent upon the Company's achievement of certain revenue, EBITDA and capital
raising milestones. Each of the $2 million minimum financing requirement prior
to closing of the amendment and the $3 million financing requirement prior to
April 30, 2020 were satisfied through the issuance of the $3 million April 2020
Second Subordinated Promissory Note described in "- Subordinated Related Party
Term Loans" below. All previously accrued PIK interest was added to accrued
principal, and no further PIK interest will accrue. The cash interest would
accrue 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 interest rate was
11.50% at December 31, 2020. The end of term charge of $1,068,750 will be
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 amendment.
37
Effective September 30, 2020, the Company and Hercules entered into the Third
Amendment to Loan and Security Agreement ("Third Amendment") to provide for
interest only payments commencing on October 1, 2020 and continuing through
December 22, 2020 unless the Company raises net cash proceeds of at least $25
million through an equity or debt financing or other transaction on or before
December 21, 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., 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 now has a maturity date of December 1, 2021.
Subordinated Related Party Term Loans
On September 30, 2016, the Company executed a Subordination Agreement with
Hercules, certain related parties, including JCP III SM AIV, L.P., an affiliate
of Juggernaut Capital Partners III, L.P. (the "JCP Investor," and together with
the related parties "the Related Holders"), wherein the Related Holders agreed
to subordinate outstanding indebtedness of the Company owed to the Related
Holders ("Sub Debt") to the indebtedness owed under the Loan Agreement. On
November 22, 2017, the Company and the Related Holders entered into an Amended
and Restated Subordination Agreement (the "Amended Agreement"). Under the terms
of the Amended Agreement, the principal balance of the Sub Debt was increased to
$30,579,496. The cash interest rate of the amended sub debt was 12%. Additional
PIK interest was 8% payable on the maturity date.
On December 10, 2018, JCP III CI AIV, L.P., an affiliate of the JCP Investor,
acquired from Krivulka Family LLC ("Krivulka") all of Krivulka's ownership
interest in Metuchen Therapeutics, LLC ("MT"), a holding company that owned 55%
of Metuchen, giving the JCP Investor a controlling interest in Metuchen (such
transaction, the "JCP Acquisition"). As part of the acquisition accounting for
the JCP Acquisition, the outstanding Sub Debt was determined to have a fair
value that was less than its carrying value. The fair value of the subordinated
related party term loans was $22,250,746 at December 10, 2018. A debt discount
of $15,506,463 was recognized and was being amortized to interest expense over
the term of the debt using the effective interest method.
On December 10, 2018, the Company signed a subordinated promissory note for an
additional $4,750,000 of Sub Debt from the JCP Investor. The proceeds were used
for the acquisition of the Medical Device Business. The principal, along with
PIK interest at an annual rate of 25%, was due on April 2, 2021.
On September 16, 2019, the Company entered into an Exchange Agreement ("Exchange
Agreement") with JCP III SM AIV, L.P. and L. Mazur Associates, JV to exchange
Preferred and Common Units for the Sub Debt. Upon consummation of the exchange,
the Preferred and Common Units issued were for the full satisfaction and
termination of the subordinated related party term loan.
Instrument Amount
Common Units, at fair value (2,434,551.28 Units) $ 29,117,232
Preferred Units, at fair value (1,373,820.51 Units) 17,500,000
Total fair value of Preferred and Common Units exchanged 46,617,232
Sub Debt principal balance 33,250,000
Add: PIK Interest 16,544,318
Less: Debt Discount 10,486,536
Total carrying value of Sub Debt exchanged 39,307,782
Excess of fair value of Preferred and Common Units exchanged over the
carrying value of Sub Debt $ (7,309,450 )
38
On January 31, 2020, the Company entered into a Subordinated Promissory Note
with the JCP Investor in the principal amount of $3.0 million (the "First
Subordinated Promissory Note"). The maturity date of the First Subordinated
Promissory Note was April 2, 2021 and had PIK interest that increases the
outstanding principal on a daily basis at an annual rate of 20%.
On April 1, 2020, the Company entered into a Subordinated Promissory Note with
the JCP Investor in the principal amount of $3.0 million (the "Second
Subordinated Promissory Note"). The maturity date of the Second Subordinated
Promissory Note was April 2, 2021 and had PIK interest that increases the
outstanding principal on a daily basis at an annual rate of 20%.
On April 22, 2020, the Company entered into a Subordinated Promissory Note with
the JCP Investor in the principal amount of $4.0 million (the "Third
Subordinated Promissory Note"). The maturity date of the Third Subordinated
Promissory Note was April 2, 2021 and had PIK interest that increases the
outstanding principal on a daily basis at an annual rate of 20%.
On July 31, 2020, the Company entered into a Subordinated Promissory Note with
the JCP Investor in the principal amount of $2.5 million (the "Fourth
Subordinated Promissory Note"). The maturity date of the Fourth Subordinated
Promissory Note was April 2, 2021 and had PIK interest that increases the
outstanding principal on a daily basis at an annual rate of 20%.
On August 31, 2020, the Company entered into a Subordinated Promissory Note with
the JCP Investor in the principal amount of $1.5 million (the "Fifth
Subordinated Promissory Note"). The maturity date of the Fifth Subordinated
Promissory Note was April 2, 2021 and had PIK interest that increases the
outstanding principal on a daily basis at an annual rate of 20%.
On October 1, 2020, the Company entered into a Subordinated Promissory Note with
the JCP Investor in the principal amount of $1.5 million (the "Sixth
Subordinated Promissory Note," and together with the First Subordinated
Promissory Note, Second Subordinated Promissory Note, Third Subordinated
Promissory Note, Fourth Subordinated Promissory Note, and Fifth Subordinated
Promissory Note, the "Subordinated Promissory Notes"). The maturity date of the
Sixth Subordinated Promissory Note was April 2, 2021 and had PIK interest that
increases the outstanding principal on a daily basis at an annual rate of 20%.
In connection with the entry into the Merger Agreement on May 17, 2020,
Juggernaut Capital Partners LLP, Neurotrope and Metuchen entered into a Note
Conversion and Loan Repayment Agreement pursuant to which, Juggernaut Capital
Partners LLP agreed to convert all of the above outstanding subordinated
promissory notes and accrued PIK interest of the Company held by Juggernaut
Capital Partners LLP and the JCP Investor, into Petros common stock in
connection with the consummation of the Mergers on December 1, 2020, and the
Subordinated Promissory Notes were terminated. Accordingly, the principal
balance of the subordinated promissory notes and accrued PIK interest was $0 as
of December 31, 2020.
Private Placement
On September 16, 2019, the Company consummated a Private Placement ("Private
Placement") with V4 Capital Partners, LLC ("Lead Investor") and other accredited
investors (collectively, the "Investors"). In connection with the Private
Placement, the Company agreed to issue and sell up to $3.5 million of the
Company's preferred units. Each preferred unit had an offering price of $12.7382
per unit. The Company issued 245,933 preferred units related to the Private
Placement and received aggregate net proceeds from the Private Placement of $2.7
million.
The preferred units maintained a 5% non-cumulative quarterly dividend, include
one vote per unit on all matters to be voted upon by common unit holders and
require a mandatory conversion upon the closing of a qualified public offering,
with the conversion price being subject to adjustment if the price per share in
the qualified public offering was less than $15.92275 per preferred unit.
Subject to adjustment, each preferred unit could be converted into one common
unit.
39
In connection with the Private Placement, the Lead Investor received warrants
("Lead Investor Warrants") to purchase an aggregate of 615,838.50 shares of the
Company's preferred units at an exercise price of $0.01 per preferred unit. The
Lead Investor Warrants had an expiration date of September 16, 2020. The Company
allocated the proceeds of $250,000 received from the Lead Investor for the
Preferred Units between the Lead Investor Warrants and the beneficial conversion
feature for the embedded conversion option. Of the proceeds received, the
relative fair value allocated to the Lead Investor Warrants was $223,500 and was
recorded in additional paid-in capital. In September 2020, the Company and the
Lead Investor warrant holders amended the warrants to purchase an aggregate of
2,055,114.66 shares of the Company's preferred units at an exercise price of
$0.01 per preferred unit. The amendment also extended the expiration date to
December 16, 2020. In November 2020, the Lead Investor warrant holders exercised
their right to purchase 2,055,114.66 of the Company's preferred units and the
Company received $20,551 in proceeds.
Also, in connection with the Private Placement, the placement agent received
warrants ("Placement Agent Warrants") to purchase an aggregate of 10,500 shares
of the Company's common stock at an exercise price of $12.7382 per share. The
Placement Agent Warrants contained an expiration date of September 16, 2024 and
were converted into shares of common stock of the Company upon consummation of
the Mergers. As of the date of issuance, the fair value of the Placement Agent
Warrants was estimated to be $135,800 and was recorded in additional paid-in
capital. The Placement Agent Warrants did not meet the criteria for liability
classification and will be classified within equity as they are indexed to the
Company's stock.
Cash Flows
The following table summarizes our cash flows for the years ended December 31,
2020 and 2019:
For the Years Ended December 31,
2020 2019
Net cash (used in) provided by operating activities $ (15,305,325 ) $ 2,532,479
Net cash used in investing activities
(4,633 ) (71,540 )
Net cash provided by (used in) financing activities 30,303,840 (3,109,252 )
Net (decrease) increase in cash $ 14,993,882 $ (648,313 )Cash Flows from Operating Activities
Net cash used in operating activities for the year ended December 31, 2020 was
$15,305,325, which primarily reflected our net loss of $20,585,925, partially
offset by cash adjustments to reconcile net loss to net cash used in operating
activities of $10,881,149 consisting primarily of depreciation and amortization,
non-cash paid-in-kind interest, inventory obsolescence reserves, changes in the
fair value of derivative liability, and changes in operating assets and
liabilities of $5,600,549.
Net cash provided by operating activities for the year ended December 31, 2019
was $2,532,479, which primarily reflected our net loss of $32,511,300, more than
offset by adjustments to reconcile net loss to net cash provided by operating
activities of $21,949,812 consisting primarily of depreciation and amortization,
non-cash paid-in-kind interest and amortization of deferred financing costs and
debt discount, and changes in operating assets and liabilities of $13,093,967.
Cash Flows from Investing Activities
Net cash used in investing activities was $4,633 and $71,540 for the years ended
December 31, 2020 and 2019, respectively, related to the acquisition of fixed
assets.
40
Cash Flows from Financing Activities
Net cash provided by financing activities was $30,303,840 for the year ended
December 31, 2020, consisting of net proceeds received from the Mergers in
December 2020 of $21,549,375 and the issuance of subordinated related party term
loans of $15,500,000, partially offset by payments on the senior debt of
$6,181,711 and a payment for the senior debt end-of-term fee of $534,375.
Net cash used in financing activities was $3,109,252 for the year ended
December 31, 2019, consisting of payments on the senior debt of $6,013,257,
partially offset by proceeds received from the private placement offering of
$2,904,005.
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.
41
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, 2020 and 2019.
For the Years Ended December 31,
2020 2019
Net loss $ (20,585,925 ) $ (32,511,300 )
Interest expense, senior debt 1,323,424 2,428,264
Interest expense, related party term loans 1,727,455 11,416,697
Income tax expense (benefit) (1,426,993 ) (645,866 )
Depreciation and amortization expense 6,660,438 5,291,107
EBITDA (12,301,601 ) (14,021,098 )
Change in fair value of derivative liability 1,680,000 -
API Inventory reserves 830,679 1,174,428
Impairment loss - 2,443,930
Adjusted EBITDA (9,790,922 ) (10,402,740 )
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 Sales
Gross sales 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 sales 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 sales 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 sales may not be comparable to similarly
titled measures reported by other companies.
Gross sales 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.
42
The Company defines gross sales 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 following table presents a reconciliation of Net sales to Gross sales for
the years ended December 31, 2020 and 2019.
For the Years Ended December 31
2020 2019
Net Sales $ 9,559,469 $ 15,577,166
Product Returns 1,177,473 8,726,460
Medicaid/Medicare Rebates - 900
Contract Rebates 3,772,001 4,328,588
Chargebacks 1,378,742 161,730
Cash Discounts 274,592 442,378
Distribution Service Fees 1,887,334 3,035,272
Coupon Redemptions 2,690,357 2,189,756
Gross Sales $ 20,739,968 $ 34,462,250Gross sales 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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PETROS PHARMACEUTICALS 
