UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2021September 30, 2023
Or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission File Number: 001-39752
Petros Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
| | |
Delaware |
| 85-1410058 |
(State of Incorporation) | | (I. R. S. Employer Identification No.) |
| | |
1185 Avenue of the Americas, 3rd Floor, New York, New York | | 10036 |
(Address of principal executive offices) | | (Zip Code) |
(973) 242-0005
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common stock, par value $0.0001 | | PTPI | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | Smaller reporting company | ☒ |
| | | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 10, 2021,November 14, 2023, there were 9,798,2612,201,069 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATIONSTATEMENTS
This Quarterly Report on Form 10-Q may contain or incorporate by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based upon management’s assumptions, expectations, projections, intentions and beliefs about future events. Except for historical information, the use of predictive, future-tense or forward-looking words such as “intend,” “plan,” “predict,” “may,” “will,” “project,” “target,” “strategy,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “forecast,” “should” and similar expressions, whether in the negative or affirmative, that reflect our current views with respect to future events and operational, economic and financial performance are intended to identify such forward-looking statements. Such forward-looking statements are only predictions, and actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of risks and uncertainties, including, without limitation, Petros’ ability to execute on its business strategy, including its plans to develop and commercialize its product candidates;Stendra(R) OTC; Petros’ ability to comply with obligations as a public reporting company; Petros’ ability to maintain compliance with the Nasdaq Stock Market’s listing standards; the ability of Petros to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002; the risk that the financial performance of Petros may not be as anticipated by the merger transactions that resulted in the Company’s creation; risks resulting from Petros’ status as an emerging growth company, including that reduced disclosure requirements may make shares of Petros common stock less attractive to investors; Petros’ ability to continue as a going concern; risks related to Petros’ history of incurring significant losses; risks related to Petros’ substantial dependence on the commercialization of a single product, Stendra®, and on a single distributor thereof; risks related to Petros’ commercial supply agreement with Vivus, including the risk that Petros may not be able to obtain sufficient quantities of Stendra® in a timely manner or on commercially viable terms;; risks related to Petros’ ability to obtain regulatory approvals for, or market acceptance of, any of its products or product candidates; and the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic, and the related responses of governments, consumers, customers, suppliers, employees and the Company, on our business, operations, employees, financial condition and results of operations.candidates. Additional factors that could cause actual results to differ materially from the results anticipated in these forward-looking statements are described in this Quarterly Report on Form 10-Q, in “Risk Factor Summary” and in Part I, Item 1A., “Risk Factors,” in Petros’ Annual Report on Form 10-K for the year ended December 31, 20202022 and in our other reports that we filefiled with the Securities and Exchange Commission (the “SEC”). We advise you to carefully review the reports and documents we file from time to time with the SEC, particularly our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Petros cautions readers that the forward-looking statements included in, or incorporated by reference into, this Quarterly Report on Form 10-Q represent our beliefs, expectations, estimates and assumptions only as of the date hereof and are not intended to give any assurance as to future results. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, Petros cannot assess the effect of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.
Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in, or incorporated by reference into, this Quarterly Report on Form 10-Q to reflect any new information or future events or circumstances or otherwise, except as required by the federal securities laws.
OTHER INFORMATION
All references to “Petros,” the “Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q refer to Petros Pharmaceuticals, Inc. and its subsidiaries.
TABLE OF CONTENTS
| | |
|
| Page |
| | |
| 4 | |
| | |
| 4 | |
| | |
| 4 | |
| | |
| 5 | |
| | |
| 6 | |
| | |
| 7 | |
| | |
| 8 | |
| | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
|
| | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | |
|
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
|
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, LLC)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | |
| | March 31, |
| | | |
| | 2021 | | December 31, | ||
|
| (Unaudited) |
| 2020 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash | | $ | 14,566,710 | | $ | 17,139,694 |
Accounts receivable, net | |
| 6,194,198 | |
| 5,152,969 |
Inventories | |
| 560,864 | |
| 760,530 |
Deposits with related party | |
| 4,576 | |
| 4,576 |
Prepaid expenses and other current assets | |
| 2,637,316 | |
| 2,847,284 |
| | | | | | |
Total current assets | |
| 23,963,664 | |
| 25,905,053 |
| | | | | | |
Fixed assets, net | |
| 57,062 | |
| 64,250 |
Intangible assets, net | |
| 30,434,646 | |
| 32,160,919 |
API purchase commitment | |
| 11,144,257 | |
| 11,144,257 |
Other assets | |
| 554,379 | |
| 579,535 |
Total assets | | $ | 66,154,008 | | $ | 69,854,014 |
| | | | | | |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Current portion of senior debt, net | | $ | 5,061,264 | | $ | 7,175,029 |
Accounts payable | |
| 5,276,283 | |
| 5,609,556 |
Accrued expenses | |
| 15,382,284 | |
| 14,683,786 |
Accrued inventory purchases | |
| 14,203,905 | |
| 14,203,905 |
Other current liabilities | |
| 296,620 | |
| 221,766 |
Total current liabilities | |
| 40,220,356 | |
| 41,894,042 |
| | | | | | |
Derivative liability | |
| 4,510,000 | |
| 9,890,000 |
Other long-term liabilities | |
| 500,512 | |
| 600,920 |
Total liabilities | |
| 45,230,868 | |
| 52,384,962 |
| | | | | | |
Stockholders’ Equity: | |
|
| |
|
|
Preferred stock (par value of $0.0001 per share, 50,000,000 shares authorized, 0 and 500 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively) | |
| — | |
| — |
Common stock (par value of $0.0001 per share, 150,000,000 shares authorized, 9,798,261 and 9,707,655 shares issued and outstanding as of March 31, 2021, and December 31, 2020, respectively) | |
| 980 | |
| 971 |
Additional paid-in capital | |
| 79,615,223 | |
| 79,170,225 |
Accumulated deficit | |
| (58,693,063) | |
| (61,702,144) |
Total Stockholders’ Equity | |
| 20,923,140 | |
| 17,469,052 |
Total Liabilities and Stockholders' Equity | | $ | 66,154,008 | | $ | 69,854,014 |
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash | | $ | 17,969,949 | | $ | 9,426,264 |
Accounts receivable, net | |
| 2,975,018 | |
| 2,110,246 |
Inventories | |
| 2,501,093 | |
| 1,815,113 |
Prepaid expenses and other current assets | |
| 987,120 | |
| 1,316,282 |
Total current assets | |
| 24,433,180 | |
| 14,667,905 |
| | | | | | |
Fixed assets, net | |
| 31,513 | |
| 39,177 |
Intangible assets, net | |
| 9,771,764 | |
| 12,244,484 |
API purchase commitment | |
| 4,416,862 | |
| 5,111,176 |
Right of use assets | |
| 260,849 | |
| 358,472 |
Total assets | | $ | 38,914,168 | | $ | 32,421,214 |
| | | | | | |
Liabilities, Convertible Redeemable Preferred Stock and Stockholders’ Equity | |
| | |
|
|
Current liabilities: | |
| | |
|
|
Current portion of promissory note | | $ | 1,139,458 | | $ | 1,089,683 |
Accounts payable | | | 1,355,060 | | | 1,806,399 |
Accrued expenses | |
| 3,869,027 | |
| 3,634,662 |
Accrued Series A Convertible Preferred payments payable | |
| 1,368,546 | |
| — |
Other current liabilities | |
| 349,972 | |
| 537,232 |
Total current liabilities | |
| 8,082,063 | |
| 7,067,976 |
| | | | | | |
Promissory note, net of current portion | | | 7,248,635 | | | 8,388,093 |
Derivative Liability | |
| 6,570,000 | |
| — |
Warrant Liability | | | 9,805,000 | | | — |
Other long-term liabilities | |
| 151,395 | |
| 262,678 |
Total liabilities | |
| 31,857,093 | |
| 15,718,747 |
| | | | | | |
Commitments and contingencies | | | | | | |
Series A convertible redeemable preferred stock (par value $0.0001 per share and $1,000 stated value), 15,000 and 0 shares authorized at September 30, 2023 and December 31, 2022, respectively; 13,846 and 0 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. Liquidation preference of $15,000,000 as of September 30, 2023 | | | 124,532 | | | — |
| | | | | | |
Stockholders’ Equity: | |
| | |
|
|
Common stock (par value $0.0001 per share, 250,000,000 and 150,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively; 2,119,620 and 2,079,387 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | |
| 211 | |
| 208 |
Additional paid-in capital | |
| 106,140,063 | |
| 107,428,652 |
Accumulated deficit | |
| (99,207,731) | |
| (90,726,393) |
Total Stockholders’ Equity | |
| 6,932,543 | |
| 16,702,467 |
| | | | | | |
Total Liabilities, Convertible Redeemable Preferred Stock and Stockholders’ Equity | | $ | 38,914,168 | | $ | 32,421,214 |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
4
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, LLC)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Net sales | | $ | 4,075,606 | | $ | 1,791,921 |
Cost of goods sold | |
| 643,386 | |
| 784,035 |
Gross profit | |
| 3,432,220 | |
| 1,007,886 |
Operating expenses: | |
|
| |
|
|
Selling, general and administrative | |
| 3,881,717 | |
| 4,816,463 |
Research and development expense | |
| 19,181 | |
| 139,385 |
Depreciation and amortization expense | |
| 1,728,829 | |
| 1,661,362 |
Total operating expenses | |
| 5,629,727 | |
| 6,617,210 |
Loss from operations | |
| (2,197,507) | |
| (5,609,324) |
Change in fair value of derivative liability | |
| 5,380,000 | |
| — |
Interest expense, senior debt | |
| (173,412) | |
| (427,584) |
Interest expense, subordinated related party term loans | |
| — | |
| (76,282) |
Income (loss) before income taxes | |
| 3,009,081 | |
| (6,113,190) |
Income tax benefit | |
| — | |
| (29,971) |
Net income (loss) | | $ | 3,009,081 | | $ | (6,083,219) |
Net income (loss) per common share | |
|
| |
|
|
Basic and Diluted | | $ | 0.31 | | $ | (1.23) |
Weighted average common shares outstanding | |
|
| |
|
|
Basic | |
| 9,753,086 | |
| 4,949,610 |
Effect of common share equivalents | |
| 1,600 | |
| — |
Diluted | |
| 9,754,686 | |
| 4,949,610 |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
5
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, LLC)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY / MEMBERS’ CAPITAL
(Unaudited)
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| For the Three Months Ended September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net sales | | $ | 6,186,638 | | $ | 5,193,953 | | $ | 1,674,657 | | $ | (1,457,732) |
Cost of goods sold | | | 1,473,073 | |
| 1,408,086 | | | 408,475 | | | 286,525 |
Gross profit | |
| 4,713,565 | |
| 3,785,867 | | | 1,266,182 | | | (1,744,257) |
Operating expenses: | |
| | |
| | | | | | | |
Selling, general and administrative | |
| 6,382,166 | |
| 9,285,317 | | | 2,001,935 | | | 2,170,975 |
Warrant issuance costs | | | 2,855,000 | | | — | | | 2,855,000 | | | — |
Gain on settlement with Vivus | | | — | | | (3,389,941) | | | — | | | — |
Research and development expense | |
| 1,574,760 | |
| 1,562,518 | | | 389,093 | | | 735,916 |
Depreciation and amortization expense | |
| 2,480,385 | |
| 4,682,610 | | | 826,795 | | | 1,560,870 |
Intangible asset impairment | | | — | | | 7,460,000 | | | — | | | 7,460,000 |
Total operating expenses | |
| 13,292,311 | | | 19,600,504 | | | 6,072,823 | | | 11,927,761 |
| | | | | | | | | | | | |
Loss from operations | |
| (8,578,746) | |
| (15,814,637) | | | (4,806,641) | | | (13,672,018) |
Change in fair value of derivative liability | |
| (430,000) | |
| 460,000 | | | (430,000) | | | — |
Change in fair value of warrant liability | | | 11,739,000 | | | — | | | 11,739,000 | | | — |
Interest income | |
| 287,722 | |
| — | | | 168,481 | | | — |
Interest expense, promissory note | | | (410,317) | | | (451,075) | | | (131,351) | | | (147,677) |
Loss on issuance of Series A Preferred Stock | |
| (11,088,997) | |
| — | | | (11,088,997) | | | — |
Loss before income taxes | |
| (8,481,338) | |
| (15,805,712) | | | (4,549,508) | | | (13,819,695) |
Income tax expense | |
| — | |
| 10,501 | | | — | | | 10,501 |
Net loss | | $ | (8,481,338) | | $ | (15,816,213) | | $ | (4,549,508) | | $ | (13,830,196) |
| | | | | | | | | | | | |
Preferred Stock dividends and cash premiums | | | (339,232) | | | — | | | (339,232) | | | — |
| | | | | | | | | | | | |
Net loss per common share | |
| (8,820,570) | |
| (15,816,213) | | | (4,888,740) | | | (13,830,196) |
Basic and Diluted | | $ | (4.18) | | $ | (7.65) | | $ | (2.31) | | $ | (6.69) |
Weighted average common shares outstanding | |
| | |
| | | | | | | |
Basic and Diluted | |
| 2,108,747 | |
| 2,068,472 | | | 2,119,620 | | | 2,068,472 |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
5
PETROS PHARMACEUTICALS, INC.
| | | | | | | | | | | | | | | | |
| | |
| Preferred |
| |
| Common |
| | |
| | | ||
| | Preferred | | Units | | Common | | Units | | Accumulated | | | | |||
|
| Units |
| Amount |
| Units |
| Amount |
| Deficit |
| Total | ||||
Balance, December 31, 2019 |
| 1,619,754 | | $ | 20,018,205 |
| 3,434,551 | | $ | 29,117,233 |
| $ | (41,116,219) | | $ | 8,019,219 |
Net loss |
| — | |
| — |
| — | |
| — |
|
| (6,083,219) | |
| (6,083,219) |
Balance, March 31, 2020 |
| 1,619,754 | | $ | 20,018,205 |
| 3,434,551 | | $ | 29,117,233 |
| $ | (47,199,438) | | $ | 1,936,000 |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | |
|
| |
| |
| Common |
| | |
| | |
| | | |
| | Preferred | | Common | | Stock | | Paid-in | | Accumulated | | | | |||
| | Stock | | Stock | | Amount | | Capital | | Deficit | | Total | ||||
Balance, December 31, 2020 |
| 500 | | 9,707,655 | | $ | 971 | | $ | 79,170,225 | | $ | (61,702,144) | | $ | 17,469,052 |
Conversion of Preferred Stock to Common Stock |
| (500) | | 60,606 | |
| 6 | |
| (6) | |
| — | |
| — |
Issuance of Common Stock for services |
| — | | 30,000 | |
| 3 | |
| 97,797 | |
| — | |
| 97,800 |
Stock-Based Compensation Expense |
| — | | — | |
| — | |
| 347,207 | |
| — | |
| 347,207 |
Net income |
| — | | — | |
| — | |
| — | |
| 3,009,081 | |
| 3,009,081 |
Balance, March 31, 2021 |
| — | | 9,798,261 | | $ | 980 | | $ | 79,615,223 | | $ | (58,693,063) | | $ | 20,923,140 |
| | | | | | | | | | | | | | | | | | | | |
| | | | Convertible | | | | | | | | | | | | | | | | |
|
| Convertible |
| Redeemable | | | |
| | |
| | |
| | |
| | | |
| | Redeemable | | Preferred | | | | | Common | | Additional | | | | | | | |||
| | Preferred | | Stock | | | Common | | Stock | | Paid-in | | Accumulated | | | | ||||
|
| Stock |
| Amount |
|
| Stock |
| Amount |
| Capital |
| Deficit |
| Total | |||||
Three Months Ended September 30, 2023 | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2023 | | — | | $ | — | | | 2,119,620 | | $ | 211 | | $ | 107,602,301 | | $ | (94,658,223) | | $ | 12,944,289 |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 30,840 | | | — | | | 30,840 |
Issuance of Series A Preferred Stock in private placement, net of discount and transaction costs $15,000,003 | | 15,000 | | | — | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | |
Series A Preferred Stock accretion | | — | | | 1,153,846 | | | — | | | — | | | (1,153,846) | | | — | | | (1,153,846) |
Series A Preferred Stock dividends | | — | | | 249,701 | | | — | | | — | | | (249,701) | | | — | | | (249,701) |
Preferred Stock redemption including cash premium | | (1,154) | | | (1,279,016) | | | — | | | — | | | (89,531) | | | — | | | (89,531) |
Net loss | | — | | | — | | | — | | | — | | | — | | | (4,549,508) | | | (4,549,508) |
Balance, September 30, 2023 | | 13,846 | | $ | 124,531 | | | 2,119,620 | | $ | 211 | | $ | 106,140,063 | | $ | (99,207,731) | | $ | 6,932,543 |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Convertible | | | |
| | |
| | |
| | |
| | | |
| | Convertible | | Redeemable | | | | | | | | | | | | | | | | |
| | Redeemable | | Preferred | | | | | Common | | Additional | | | | | | | |||
| | Preferred | | Stock | | | Common | | Stock | | Paid-in | | Accumulated | | | | ||||
|
| Stock |
| Amount |
|
| Stock |
| Amount |
| Capital |
| Deficit |
| Total | |||||
Nine Months Ended September 30, 2023 | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2022 | | — | | $ | — | | | 2,079,387 | | $ | 208 | | $ | 107,428,652 | | $ | (90,726,393) | | $ | 16,702,467 |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 204,492 | | | — | | | 204,492 |
Shares issued for vested RSU’s | | — | | | — | | | 40,233 | | | 3 | | | (3) | | | — | | | — |
Issuance of Series A Preferred Stock in private placement, net of discount and transaction costs $15,000,003 | | 15,000 | | | — | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | |
Series A Preferred Stock accretion | | — | | | 1,153,846 | | | — | | | — | | | (1,153,846) | | | — | | | (1,153,846) |
Series A Preferred Stock dividends | | — | | | 249,701 | | | — | | | — | | | (249,701) | | | — | | | (249,701) |
Preferred Stock redemption including cash premium | | (1,154) | | | (1,279,016) | | | — | | | — | | | (89,531) | | | — | | | (89,531) |
Net loss | | — | | | — | | | — | | | — | | | — | | | (8,481,338) | | | (8,481,338) |
Balance, September 30, 2023 | | 13,846 | | $ | 124,531 |
| | 2,119,620 | | $ | 211 | | $ | 106,140,063 | | $ | (99,207,731) | | $ | 6,932,543 |
| | | | | | | | | | | | | | |
|
| |
| Common |
| Additional |
| |
| | ||||
| | Common | | Stock | | Paid-in | | Accumulated | | | ||||
|
| Stock |
| Amount |
| Capital |
| Deficit |
| Total | ||||
Three Months Ended September 30, 2022 | | | | | | | | | | | | | | |
Balance, June 30, 2022 | | 2,068,472 | | $ | 207 | | $ | 106,891,670 | | $ | (72,674,836) | | $ | 34,217,041 |
Stock-based compensation expense | | — | | | — | | | 308,138 | | | — | | | 308,138 |
Non-employee exercise of restricted stock units | | 2,331 | | | — | | | — | | | — | | | — |
Net loss | | — | | | — | | | — | | | (13,830,196) | | | (13,830,196) |
Balance, September 30, 2022 | | 2,070,803 | | $ | 207 | | $ | 107,199,808 | | $ | (86,505,033) | | $ | 20,694,982 |
| | | | | | | | | | | | | | |
|
| |
| Common |
| Additional |
| |
| | ||||
| | Common | | Stock | | Paid-in | | Accumulated | | | ||||
|
| Stock |
| Amount |
| Capital |
| Deficit |
| Total | ||||
Nine Months Ended September 30, 2022 | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | 2,068,472 | | $ | 207 | | $ | 106,233,577 | | $ | (70,688,820) | | $ | 35,544,964 |
Stock-based compensation expense | | — | | | — | | | 966,231 | | | — | | | 966,231 |
Non-employee exercise of restricted stock units | | 2,331 | | | — | | | — | | | | | | — |
Net loss | | — | | | — | | | — | | | (15,816,213) | | | (15,816,213) |
Balance, September 30, 2022 | | 2,070,803 | | $ | 207 | | $ | 107,199,808 | | $ | (86,505,033) | | $ | 20,694,982 |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
6
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, LLC)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
|
| For the Three Months Ended March 31, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net income (loss) | | $ | 3,009,081 | | $ | (6,083,219) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 1,728,829 | |
| 1,661,362 |
Bad debt expense | |
| 2,984 | |
| — |
Inventory and sample inventory reserve | |
| 48,228 | |
| 113,207 |
Non-cash paid-in-kind interest | |
| — | |
| 116,299 |
Amortization of deferred financing costs and debt discount | |
| 12,500 | |
| — |
Accretion for end of term fee | |
| — | |
| 45,396 |
Deferred tax benefit | |
| — | |
| (29,971) |
Lease expense | |
| 25,156 | |
| 22,202 |
Derivative liability | |
| (5,380,000) | |
| — |
Stock based compensation | |
| 347,207 | |
| — |
Non-employee stock based compensation | | | 97,800 | | | — |
Changes in operating assets and liabilities: | |
|
| |
|
|
Accounts receivable | |
| (1,044,213) | |
| (1,479,722) |
Inventories | |
| 193,987 | |
| 225,510 |
Deposits | |
| — | |
| 2,326 |
Prepaid expenses and other current assets | |
| 172,051 | |
| 1,309,356 |
Accounts payable | |
| (333,273) | |
| 1,350,722 |
Accrued expenses | |
| 698,498 | |
| 531,107 |
Accrued inventory purchases | |
| — | |
| (250,000) |
Other current liabilities | |
| 74,992 | |
| 115,167 |
Long-term liabilities | |
| (100,408) | |
| (25,009) |
Net cash used in operating activities | |
| (446,581) | |
| (2,375,267) |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Acquisition of fixed assets | |
| — | |
| (4,429) |
Net cash used in investing activities | |
| — | |
| (4,429) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Payment of senior debt | |
| (1,592,028) | |
| (1,624,274) |
Payment of portion of senior debt end of term fee | |
| (534,375) | |
| — |
Proceeds from subordinated related party term loans | |
| — | |
| 3,000,000 |
Net cash (used in) provided by financing activities | |
| (2,126,403) | |
| 1,375,726 |
| | | | | | |
Net decrease in cash | |
| (2,572,984) | |
| (1,003,970) |
| | | | | | |
Cash, beginning of period | |
| 17,139,694 | |
| 2,145,815 |
Cash, end of period | |
| 14,566,710 | |
| 1,141,845 |
| | | | | | |
Supplemental cash flow information: | |
|
| |
|
|
Cash paid for interest during the period | | $ | 176,677 | | $ | 372,060 |
| | | | | | |
|
| For the Nine Months Ended September 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net loss | | $ | (8,481,338) | | $ | (15,816,213) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | |
| |
Depreciation and amortization | |
| 2,480,385 | |
| 4,682,610 |
Intangible asset impairment | | | — | | | 7,460,000 |
Bad debt expense (recoveries) | |
| 32,516 | |
| (103,650) |
Inventory and sample inventory reserve | |
| 41,195 | |
| (14,688) |
Lease expense | |
| 97,622 | |
| 86,477 |
Change in fair value of derivative liability | | | 430,000 | | | (460,000) |
Change in fair value of warrant liability | | | (11,739,000) | | | — |
Loss on issuance of Series A Preferred Stock | | | 11,088,997 | | | — |
Noncash Warrant expense | |
| 1,595,000 | |
| — |
Gain on settlement with Vivus | | | — | | | (3,389,941) |
Employee stock-based compensation | |
| 204,492 | |
| 966,231 |
| | | | | | |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (897,289) | |
| (1,174,106) |
Inventories | |
| (63,191) | |
| (1,619,694) |
Prepaid expenses and other current assets | |
| 359,492 | |
| 1,478,267 |
Accounts payable | |
| (451,338) | |
| (2,473,450) |
Accrued expenses | |
| 234,364 | |
| (954,607) |
Deferred revenue | | | (281,372) | | | 56,274 |
Other current liabilities | |
| 94,113 | |
| 154,370 |
Other long-term liabilities | |
| (111,283) | |
| (104,865) |
Net cash used in operating activities | |
| (5,366,635) | |
| (11,226,985) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Payment of promissory note | | | (1,089,683) | | | (1,438,925) |
Proceeds from Private Placement, net of transactions costs | |
| 15,000,003 | |
| — |
Net cash provided by (used in) financing activities | |
| 13,910,320 | |
| (1,438,925) |
| | | | | | |
Net increase (decrease) in cash | |
| 8,543,685 | |
| (12,665,910) |
| | | | | | |
Cash, beginning of period | |
| 9,426,264 | |
| 23,847,572 |
Cash, end of period | | $ | 17,969,949 | | $ | 11,181,662 |
| | | | | | |
Supplemental cash flow information: | |
| | |
| |
Cash paid for interest during the period | | $ | 410,317 | | $ | 451,075 |
| | | | | | |
Noncash Items: | | | | | | |
Noncash decrease in accrued expenses related to Vivus settlement | | $ | — | | $ | (6,520,283) |
Noncash decrease in accrued inventory purchases related to Vivus Settlement | | | — | | | (14,203,905) |
Noncash increase in promissory note related to Vivus settlement | | | — | | | 10,201,758 |
Noncash increase in inventory due to API reclass | | | (663,984) | | | — |
Noncash decrease in API purchase commitment | | | 694,314 | | | 6,232,489 |
Noncash decrease in other current assets: API purchase commitment | | | (30,330) | | | — |
Noncash issuance of common stock to non-employee | | | 3 | | | 3 |
Noncash initial fair value of warrant liability pursuant to private placement | | | 21,544,000 | | | — |
Noncash initial fair value of derivative liability pursuant to private placement | | | 6,140,000 | | | — |
Accrued Series A Convertible Preferred payments payable | | | 1,368,546 | | | — |
Accretion of Series A convertible preferred stock to redemption value | | | 1,250,000 | | | — |
Accrual of Series convertible preferred stock dividends | | | 339,232 | | | — |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
7
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Nature of Operations, Basis of Presentation, Liquidity and LiquidityGoing Concern
Nature of Operations and Basis of Presentation
Petros is a pharmaceutical company focused on expanding consumer access to medication through over-the-counter (OTC) drug development programs.Petros consists of wholly owned subsidiaries, Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”), Neurotrope, Inc., a Nevada corporation (“Neurotrope”), Timm Medical Technologies, Inc. (“Petros” or the “Company”Timm Medical”), and Pos-T-Vac, LLC (“PTV”). Petros was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting thecertain transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Metuchen, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiarycertain subsidiaries 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,(collectively the “Mergers”). As a result of theThe Mergers Metuchen and Neurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporationwere consummated 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 providedThe Company is engaged in the Merger Agreement,commercialization and alldevelopment of Stendra®, a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the operating assetstreatment of erectile dysfunction (“ED”), which the Company has licensed from Vivus, Inc. (“Vivus”). Petros also markets its own line of ED products in the form of vacuum erection device products through its subsidiaries, Timm Medical and liabilitiesPTV. In addition to ED products, we had an exclusive global license to develop and commercialize H100™, a novel and patented topical formulation candidate for the treatment of Neurotropeacute Peyronie’s disease, which license was terminated by the Company on May 11, 2023.
The Company manages its operations through two segments, Prescription Medications and Medical Devices, both of which 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™, prior to the license termination in May 2023, which was in the early stages of development and had not retained by Neurotropeyet sought FDA approval to begin Phase 1 clinical trials, were categorized under the Prescription Medications segment. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
The Company’s priority is the ability to sell Stendra® Over-The-Counter (“OTC”). The company has continued to progress in connectionits development program. Recently, the Company has conducted three engagements with the Mergers were contributedU.S. Food and Drug Administration (FDA) reviewing data and receiving guidance, launched a second pivotal Label Comprehension Study incorporating FDA feedback, and has begun to Synaptogenix, Inc. (formerly known as Neurotrope Bioscience, Inc.), a Delaware corporation (“Synaptogenix”),integrate supportive technology in response to recent FDA industry-wide guidance and a wholly-owned subsidiaryproposed rules.
Basis of Neurotrope.Presentation
The Mergers were accounted for as a reverse recapitalizationaccompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Metuchen was determined applicable to bea going concern, which contemplates the accounting acquirer based on an analysisrealization of assets and the criteria outlinedsatisfaction of liabilities in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) No. 805, Business Combinations (“ASC 805”) andnormal course of business. In the facts and circumstances specific to the Mergers, including: (1) Metuchen Securityholders owned approximately 51.0%opinion of the equity securities of Petros immediately following the closing of the transaction; (2) a majority of the board of directors of Petros 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 Petros. The net assets of Metuchen are stated at historical costs in the Company’s Condensed 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 Condensed Consolidated Financial Statements include Metuchen, Petros and Neurotrope, Inc, after the spin-off discussed above, from December 1, 2020, the date the reverse recapitalization was consummated.
8
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. In our opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which areconsidered necessary to present fairly our financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2020, has been derivedHowever, actual results could differ from audited financial statements as of that date.those estimates. The unaudited interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosuredisclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the United States Securities and Exchange Commission. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements areThis Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes previously distributed in our Annual Report on Form 10-K for the year ended December 31, 2020. Certain prior year amounts2022.
All transactions between the consolidated entities have been reclassified for consistency with current year presentation. These reclassifications had no effect on the reported results of operations.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of TIMM Medical, Inc. (“TIMM”), and Pos-T-Vac, LLC (“PTV”), subsidiaries of Metuchen, and Metuchen, a subsidiary of Petros. All intercompany accounts and transactions are eliminated in consolidation.
Liquidity and Going Concern
The Company hasWe have experienced net losses and negative cash flows from operations since itsour inception. As of March 31, 2021, the CompanySeptember 30, 2023, we had cash of $14.6approximately $18.0 million, negative working capital of approximately $16.3$16.4 million, includingand accumulated deficit of $99.2 million. 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
8
one year after the date that these interim condensed consolidated financial statements are issued. The accompanying condensed consolidated financial statements do not include any adjustments that might result from these uncertainties.
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 $5.1 million maturingthis Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in 2021,both public and sustained cumulative losses attributableprivate offerings. The Company also plans to common stockholders of $58.7 million. Our plans include, or may include, utilizing ourfinance near-term operations with its cash and cash equivalents on hand, negotiating an extensionincluding the gross proceeds of our debt arrangement$15 million raised in the Private Placement (see the section below titled “Liquidity and our liability due to VivusCapital Resources—July 2023 Private Placement”), as well as by exploring additional ways to raise capital in addition toand increasing cash flows from operations. WhileThe company intends to use the proceeds from the July 2023 capital raise to funds its OTC progress into 2024. 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 / OTC strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are optimistic that we will be successfulincorrect or if there are any other changes or differences in our effortscurrent assumptions that negatively impact our financing strategy, the Company may have to achieve our plan, there can be no assurances that we will be successfulfurther reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC in doing so. As such, we obtained a continued support letter from our largest shareholder, JCP III SM AIV, L.P., (“the JCP Investor”) through May 17, 2022.order to extend its cash resources.
2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods. Such estimates include the adequacy of accounts receivable reserves, return reserves, inventory reserves, and assessment of long-lived assets, including intangible asset impairment and the determination of the fair valuevaluation of the derivative liability, and the allocation of the purchase price in acquisitions, among others. Actual results could differ from these estimates and changes in these estimates are recorded when known.
Risks and Uncertainties
The Company is subject to risks common to companies in the pharmaceutical industry including, but not limited to, uncertainties related to commercialization of competitor products, regulatory approvals, dependence on key products, dependence on key customers and suppliers, Stendra(R) OTC approval, and protection of intellectual property rights.
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk includes cash. The Company maintains cash on deposit at U.S.-based banks in amounts which, at times, exceed insured limits.
Segment Reporting
Operating segments are components of a Company for which separate financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male erectile dysfunction. The Prescription Medications segment consists primarily of operations related to Stendra®, which is sold generally in the United States The Medical Devices segment consists primarily of operations related to vacuum erection devices, which are sold domestically and internationally. See Note 15 Segment Reporting.
9
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 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 its 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 physician access resumes new normal levels. In response to the spread of COVID-19, in March 2020, the Company closed its administrative offices and as of March 31, 2021, 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.
Revenue Recognition
Prescription Medication Sales
The Company’s prescription medication sales consist of sales of Stendra® in the U.S. for the treatment of male erectile dysfunction. Under ASCAccounting Standards Codification (“ASC”) Topic 606, Revenue Recognition (“Topic 606”), the Company recognizes revenue from prescription medication sales when its performance obligations with a customer has been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide Stendra® upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of Stendra®, which is typically upon delivery. The Company invoices its customers after Stendra® has been delivered and invoice payments are generally due within 30 to 75 days of invoice date.
In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers Stendra® to when the customers pay for the product is typically less than one year. The Company records prescription medication 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 of Stendra® 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.
10
As of March 31, 2021September 30, 2023 and December 31, 2020,2022, the reserves for sales deductions were $8.2$3.4 million and $8.6$3.0 million, respectively. The most significant sales deductions included in this reserve relate to returns, contract rebates, and distribution service (“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. The most significant sales deductions are further described below.
Product Returns
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 MarchSeptember 30, 2023, December 31, 20212022 and December 31, 2020,2021, the reserves for product returns were $7.0$2.9 million, $2.3 million and $7.1$3.8 million, respectively, and are included as a component of accrued expenses. During the nine months ended September 30, 2023 and 2022, respectively, the Company recorded $1.3 million and $7.6 million of returns as a reduction of gross revenue.
Contract Rebates, Coupon Redemptions and DSA Fees
The Company establishes contracts with wholesalers, chain stores, and indirect customers that provide for rebates, sales incentives, DSA fees and other allowances. Some customers receive rebates upon attaining established sales volumes. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us, including fees paid to wholesalers under our DSAs, as described below. Indirect rebates are rebates paid to indirect customers that have purchased our products from a wholesaler under a contract with us.
The Company has entered into DSAs with certain of our significant wholesaler customers that obligate the wholesalers, in exchange for fees paid by us, to: (i) manage the variability of their purchases and inventory levels within specified limits based on product demand and (ii) provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our pharmaceutical products held at their warehouse locations. See Note 3 Accounts Receivable, net for further discussion of these reserves. Accrued contracts were $49,499, $279,018 and $379,242 of September 30, 2023, December 31, 2022, and December 31, 2021, respectively.
10
Medical Device Sales
The Company’s medical device sales consist of domestic and international sales of men’s health products for the treatment of erectile dysfunction. The men’s health products do not require a prescription and include Vacuum Erection Devices, VenoSeal, and other related accessories.VenoSeal. Under Topic 606, the Company recognizes revenue from medical device sales 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 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 medical device, which is typically upon shipment. The Company invoices its customers after the medical devices have been shipped and invoice payments are generally due within 30 days of invoice date for domestic customers and 90 days for international customers.
In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers the medical devices to when the customers pay for the product is typically less than one year. The Company records medical device sales net of any variable consideration, including but not limited to returns. The Company uses the expected value method when estimating its variable consideration. The identified variable consideration is recorded as a reduction of revenue at the time revenues from the medical device 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.
11
Product Returns
Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return medical devices and receive credit for products within 90 days of the sale. The provision for returns is based upon the Company’s estimates for future product returns and historical experience. The Company has not made significant changes to the judgments made in applying Topic 606. As of MarchSeptember 30, 2023, December 31, 2021 and December 31, 2020,2022, the reserves for product returns for medical devices were not significant.
Contract Costs
In relation to customer contracts, the Company incurs costs to fulfill a contract but does not incur costs to obtain a contract. These costs to fulfill a contract do not meet the criteria for capitalization and are expensed as incurred. As such, the Company did not have any contract assets at March 31, 2021andSeptember 30, 2023, December 31, 2020.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under U.S. 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.
Financial instruments recognized at historical amounts in the condensed consolidated balance sheets consist of cash, accounts receivable, other current assets, accounts payable, accrued expenses, other current liabilities, and senior debt. The Company believes that the carrying value of cash, accounts receivable, other current assets, accounts payable, accrued expenses, and other current liabilities approximates their fair values due to the short-term nature of these instruments.
The carrying value of senior debt as of March 31, 2021 and December 31, 2020 approximated2022.
Contract Liabilities
Under Accounting Standards Codification Topic 606, Revenue Recognition, the Company recognizes revenue when its performance obligations with a customer has been satisfied. In the event it has not been satisfied, the Company records deferred revenue as a liability on the balance sheet. As of September 30, 2023, December 31, 2022, and December 31, 2021, deferred revenue was $0, $281,372 and $70,343 respectively.
Fair Value Measurements
In accordance with ASC 820 (Topic 820, Fair Value Measurements and Disclosures), we use a three-level hierarchy for fair value.value measurements of certain assets and liabilities for financial reporting purposes that distinguishes between market participant assumptions developed from market data obtained from outside sources (observable inputs) and our own assumptions about market participant assumptions developed from the best information available to us in the circumstances (unobservable inputs). The fair value hierarchy is divided into three levels based on the source of inputs as follows:
● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and |
● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Categorization within the senior debt was estimated by discountingvaluation hierarchy is based upon the lowest level of input that is significant to present value the scheduled coupon payments and principal repayment, using an appropriate fair market yield and is considered Level 3 in the fair value hierarchy.
In connection with the Mergers in December 2020, each security holder of Metuchen received an earnout consideration classified as a derivative liability to be paid in the form of Petros Common Stock. The Company estimated their fair value using a 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. The fair value of the derivative liability as March 31, 2021, and December 31, 2020 was $4.5 million and $9.9 million, respectively. See Note 10 Stockholders’ Equity.measurement.
1211
Stock-Based CompensationIntangible Assets
The Company accounts for stock-based awardsrecognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life which the assets are expected to employeescontribute 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 consultantsuseful lives of its intangible assets with definite lives whenever events or changes in accordance with applicable accounting principles,circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which requires compensation expense related to stock-based transactions, including employee stock options and consultant warrants, tothey should be measured andamortized 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 financial statements based onamount, 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 determinationrevision 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(R) product an impairment. The Company then prepared a discounted cash flow analysis resulting in an impairment of approximately $7.5 million.
Derivative Financial Instruments
The Company evaluates all its financial instruments to determine if such instruments contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, of the stock options or warrants. The grant datewith changes in fair value is determined usingrecognized in the Black-Scholes-Merton (“Black-Scholes”) pricing model. Employee stock option and consulting expensesstatement of operations each period. Bifurcated embedded derivatives are recognized over the employee’s or consultant’s requisite service period (generally the vesting period of the equity grant).
The Company’s option pricing model requires the input of highly subjective assumptions, including the volatility and expected term. Any changes in these highly subjective assumptions can significantly impact stock-based compensation expense. See Note 11 Stock Options.
Income Taxes
Prior to the consummation of the Mergers, Metuchen was a limited liability company (“LLC”) for federal income tax purposes and had elected to be treated as a Partnership for federal and state income tax purposes. PTV is a disregarded entity for federal income tax purposes. As such, all income tax consequences resultingclassified separately from the operations were reported on the member’s income tax return. In addition, Timm was includedrelated host contract in the Company’s structure where taxes were paid at the entity level.
Subsequent to the Mergers, Metuchen’s activity is included in the Company’s consolidated group. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with FASB ASC No. 740 Income Taxes (“ASC 740) on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying condensed consolidated statement of operations. As of March 31, 2021 and December 31, 2020 0 accrued interest or penalties are recorded in the condensed consolidated balance sheets.sheet.
13
Basic and Diluted Net Loss per Common Share
The Company computes basic net loss per common share by dividing net loss applicable to common stockholders by the weighted average number of shares of common sharesstocks outstanding during the period, excluding the dilutiveanti-dilutive effects of stock options and warrants to purchase common shares.stocks. The Company computes diluted net loss per common sharestock by dividing the net loss applicable to common sharestocks by the sum of the weighted-average number of common sharesstocks outstanding during the period plus the potential dilutive effects of its convertible preferred stocks, stock options and warrants to purchase common shares,stocks, but such items are excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between the Company’s basic and diluted net loss per share of common stock for the three and nine months ended March 31, 2020.September 30, 2023 and 2022. See Note 1312 Basic and Diluted Net Loss per Common Share.
Recent Accounting Pronouncements
Pending Adoption as of March 31, 2021
In June 2016, the FASBFinancial Accounting Standard Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments.Instruments. ASU 2016-13, together with a series of subsequently issued related ASUs, has been codified in Topic 326. Topic 326 establishes new requirements for companies to estimate expected credit losses when measuring certain financial assets, including accounts receivables. The Company adopted the new guidance with its fiscal year beginning January 1, 2023. The adoption of ASC 326 did not have a material effect on the Company’s financial statements.
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2022.2021 and should be applied on a full or modified retrospective basis. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluatingadopted ASU 2020-06 effective July 1, 2023. The adoption of ASU 2020-06 did not have a material impact on the effect that the new guidance will have on its condensed consolidatedCompany’s financial statements and related disclosures.statements.
12
3) Accounts Receivable, net
Accounts receivable, net is comprised of the following:
| | | | | | | | | | ||||||
| | | | | | | | September 30, | | December 31, | | December 31, | |||
|
| March 31, 2021 |
| December 31, 2020 |
| 2023 |
| 2022 |
| 2021 | |||||
Gross accounts receivables | | $ | 7,252,380 | | $ | 6,560,291 | | $ | 3,713,405 | | $ | 2,757,839 | | $ | 3,363,827 |
Distribution service fees |
| | (658,386) |
| | (972,652) |
| | (358,661) |
| | (339,094) |
| | (371,310) |
Chargebacks accrual |
| | (96,848) |
| | (121,269) |
| | (7,375) |
| | (1,960) |
| | — |
Cash discount allowances |
| | (71,164) |
| | (84,601) |
| | (132,967) |
| | (99,671) |
| | (159,446) |
Allowance for doubtful accounts |
| | (231,784) |
| | (228,800) |
| | (239,384) |
| | (206,868) |
| | (377,685) |
Total accounts receivable, net | | $ | 6,194,198 | | $ | 5,152,969 | | $ | 2,975,018 | | $ | 2,110,246 | | $ | 2,455,386 |
For the threenine months ended March 31, 2021September 30, 2023, gross billings to customers representing 10% or more of the Company’s total gross billings included three customers which represented approximately 23%, 19%, and 2020,17% of total gross salesbillings, respectively. For the nine months ended September 30, 2022, gross billing from customers representing 10% or more of the Company’s total gross salesbillings included one customerfour customers which represented approximately 88%27%, 22%, and 82%18% and 15% of total gross sales,billings, respectively. Receivables from customers representing 10% or more of the Company’s gross accounts receivable included one customerthree customers at March 31, 2021 and December 31, 2020September 30, 2023 equal to 93% for both periods,43%, 25%, and 14%, respectively. Receivables from customers representing 10% or more of the Company’s total gross accounts receivables.receivable included two customers at December 31, 2022 equal to 43% and 16%, respectively.
4) Inventories
Inventory is comprised of the following:
| | | | | | | | | | | | |
|
| March 31, 2021 |
| December 31, 2020 |
| September 30, 2023 |
| December 31, 2022 | ||||
Raw materials | | $ | 298,785 | | $ | 325,932 | ||||||
Raw Materials | | $ | 2,391,190 | | $ | 1,574,683 | ||||||
Finished goods | |
| 262,079 | |
| 434,598 | |
| 109,903 | |
| 240,430 |
Total inventory | | $ | 560,864 | | $ | 760,530 | | $ | 2,501,093 | | $ | 1,815,113 |
Finished goods are net of valuation reserves of $941,545$405,495 and $935,866$364,300 as of March 31, 2021September 30, 2023 and December 31, 2020,2022, respectively. Raw materials are net of valuation reserves of $2,872,977 as of both March 31, 2021September 30, 2023 and December 31, 2020, respectively,2022, which is related to bulk inventory that is fully reserved.inventory.
14
5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are comprised of the following:
| | | | | | | | | | | | |
|
| March 31, 2021 |
| December 31, 2020 |
| September 30, 2023 |
| December 31, 2022 | ||||
Prepaid samples | | $ | 5,645 | | $ | 58,483 | ||||||
Prepaid insurance | |
| 180,819 | |
| 149,452 | | $ | 169,588 | | $ | 109,414 |
Prepaid FDA fees | |
| 504,648 | |
| 756,972 | ||||||
Prepaid coupon fees | |
| 71,500 | |
| 71,500 | |
| — | |
| 71,500 |
API purchase commitment asset (see Note 14) | |
| 1,304,541 | |
| 1,304,541 | ||||||
API purchase commitment asset (see Note 13) | |
| 694,314 | |
| 663,984 | ||||||
Other prepaid expenses | |
| 473,080 | |
| 391,552 | |
| 65,655 | |
| 333,158 |
Other current assets | |
| 97,083 | |
| 114,784 | |
| 57,563 | |
| 138,226 |
Total prepaid expenses and other current assets | | $ | 2,637,316 | | $ | 2,847,284 | | $ | 987,120 | | $ | 1,316,282 |
Prepaid samples, which are presented net of reserves, are expensed when distributed to the sales force. The prepaid samples reserve amount was $393,773 and $351,224 at March 31, 2021, and December 31, 2020, respectively.
13
6) Intangible Assets
| | | | | | |
Balance at December 31, 2019 |
| $ | 38,811,137 | |||
Balance at December 31, 2021 |
| $ | 25,293,149 | |||
Amortization expense | |
| (6,650,218) | |
| (5,588,665) |
Balance at December 31, 2020 | | $ | 32,160,919 | |||
Intangible Impairment | | | (7,460,000) | |||
Balance at December 31, 2022 | |
| 12,244,484 | |||
Amortization expense | |
| (1,726,273) | | | (2,472,720) |
Balance at March 31, 2021 | | $ | 30,434,646 | |||
Balance at September 30, 2023 | | $ | 9,771,764 |
The future annual amortization related to the Company’s intangible assets is as follows:follows as of September 30, 2023:
| | | | | | |
2021 (remaining 9 months) |
| | 5,141,498 | |||
2022 |
| | 6,191,740 | |||
2023 |
| | 5,445,729 | |||
2023 (remaining 3 months) |
| $ | 800,027 | |||
2024 |
| | 4,650,787 |
| | 2,800,623 |
2025 |
| | 1,754,328 | |||
2026 |
| | 1,442,186 | |||
2027 | | | 1,212,871 | |||
Thereafter |
| | 9,004,892 |
| | 1,761,729 |
Total | | $ | 30,434,646 | | $ | 9,771,764 |
The intangible assets held by the Company are the Stendra® product, Timm Medical product, and PTV product and are being amortized over their estimated useful lives of 10 years, 12 years, and 12 years, respectively. The carrying value of the Stendra® product, Timm Medical product, and PTV product as of March 31, 2021September 30, 2023 are $23.2$5.5 million, $5.6$3.4 million and $1.6$0.9 million, respectively. The carrying value of the Stendra® product, Timm Medical product, and PTV product as of December 31, 2020 are $24.62022 were $7.2 million, $5.9$4.0 million and $1.6$1.1 million, respectively. During the three months ended September 30, 2022, the Company determined that the intangible asset related to the Stendra® product was impaired resulting in an impairment charge of approximately $7.5 million.
7) Accrued Expenses
Accrued expenses are comprised of the following:
| | | | | | |
|
| September 30, 2023 |
| December 31, 2022 | ||
Accrued product returns | | $ | 2,853,413 | | $ | 2,311,647 |
Accrued contract rebates | |
| 49,499 | |
| 279,018 |
Due to 3PL/Wholesalers | |
| 103,161 | |
| 155,081 |
Accrued bonuses | | | 421,523 | | | 427,500 |
Accrued professional fees | |
| — | |
| 51,620 |
Other accrued expenses | |
| 441,431 | |
| 409,796 |
Total accrued expenses | | $ | 3,869,027 | | $ | 3,634,662 |
8) Debt
Promissory Note
In connection with the Settlement Agreement entered into with Vivus (see Note 13), 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.
Under the terms of the Note, the original principal amount of $10,201,758 is payable in consecutive quarterly installments of principal and interest beginning on April 1, 2022 through January 1, 2027. Interest on the principal amount will accrue at a rate of 6% per year. 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). 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.
14
Future minimum principal payments of the promissory note are as follows:
| | | |
2024 | | | 1,530,729 |
2025 | | | 2,720,940 |
2026 | | | 3,264,351 |
2027 | | | 872,073 |
Total | | $ | 8,388,093 |
Less: current portion | | | (1,139,458) |
Promissory note, net of current portion | | $ | 7,248,635 |
9) Operating Leases
The Company has commitments under operating leases for office and warehouse space used in its operations. As of September 30, 2023 the Company’s leases have remaining lease terms ranging from .9 years to 3.3 years.
On November 30, 2021, the Company entered into a sublease with respect to its entire headquarters facility. The sublessee delivered a $14,000 security deposit to the Company on the lease commencement date and also agreed to pay $7,000 per month for the term beginning January 10, 2022 and continuing until the expiration of the head lease on August 30, 2024. The Company accounts for this sublease as an operating lease in accordance with the lessor accounting guidance within ASC 842.
The components of lease expense consisted entirely of fixed lease costs related to operating leases. These costs were $134,435 and $134,435 for the nine months ended September 30, 2023 and 2022, respectively, and were $44,812 and $44,812 for the three months ended September 30, 2023 and 2022, respectively. Fixed lease costs for the nine months ended September 30, 2023 were offset by sublease income of $63,000, and $21,000 for the three months ended September 30, 2023.
Supplemental balance sheet information related to leases was as follows:
| | | | | | |
|
| As of September 30, 2023 |
| As of December 31, 2022 | ||
Operating lease ROU asset: |
| |
|
| |
|
Other assets | | $ | 260,849 | | $ | 358,472 |
| | | | | | |
Operating lease liability: | |
| | |
| |
Other current liabilities | | | 148,758 | | | 142,340 |
Other long-term liabilities | |
| 151,395 | |
| 262,677 |
Total operating lease liability | | $ | 300,153 | | $ | 405,017 |
Supplemental lease term and discount rate information related to leases was as follows:
| | | | | |
|
| As of September 30, 2023 |
| As of December 31, 2022 | |
Weighted-average remaining lease terms - operating leases |
| 1.9 years |
| 2.7 years | |
Weighted-average discount rate - operating leases |
| 12.6 | % | 12.6 | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | |
| | For the Nine Months |
| For the Three Months | ||||||||
| | Ended September 30, | | Ended September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
| | |
|
| |
|
Operating cash flows from operating leases | | $ | 141,677 | | $ | 140,805 | | $ | 47,226 | | $ | 46,935 |
15
7) Accrued Expenses
Accrued expenses are comprised of the following:
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
Accrued price protection | | $ | 1,853,979 | | $ | 1,853,979 |
Accrued product returns | |
| 9,350,000 | |
| 9,452,248 |
Accrued contract rebates | |
| 415,043 | |
| 412,046 |
Due to Vivus (see Note 14) | |
| 2,267,523 | |
| 2,267,523 |
Due to third-party logistic provider | |
| 620,665 | |
| — |
Accrued severance | |
| 186,679 | |
| 519,609 |
Accrued professional fees | |
| 69,916 | |
| — |
Other accrued expenses | |
| 618,479 | |
| 178,381 |
Total accrued expenses | | $ | 15,382,284 | | $ | 14,683,786 |
As part of its acquisition of Stendra®, the Company provides the previous owner with price protection for certain Stendra® product returns that are processed by the previous owner. Some customer agreements require that product returns be credited at the current wholesale acquisition cost (“WAC”). If the Company subsequently raises the WAC, the Company will reimburse the previous owner for the difference between the current WAC and the original sale price for returns processed by the previous owner.
8) Debt
Senior Debt
The following is a summaryFuture minimum lease payments under non-cancelable leases as of the Company’s senior indebtedness at March 31, 2021, and December 31, 2020:September 30, 2023, were as follows:
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
Principal balance | | $ | 5,061,264 | | $ | 6,653,292 |
Plus: End of term fee | |
| — | |
| 534,237 |
Less: Debt issuance costs | |
| — | |
| (12,500) |
Total senior debt | | $ | 5,061,264 | | $ | 7,175,029 |
| | | |
Lease Liability Maturity Analysis |
| Operating Leases | |
2023 (remaining 3 months) |
| $ | 47,697 |
2024 |
| | 155,242 |
2025 |
| | 81,107 |
2026 | | | 82,324 |
Thereafter |
| | — |
Total lease payments |
| | 366,370 |
Less: Imputed Interest |
| | (66,217) |
Total | | $ | 300,153 |
OnFuture minimum sublease income under non-cancelable leases as of September 30, 2016, the Company entered into a loan agreement with Hercules, a third party, for a $35 million term loan (“Senior Debt”). The Senior Debt includes an additional Paid-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 is being recognized2023, were as interest expense and accreted over the term of the Senior Debt using the effective interest method.
On November 22, 2017, the Company amended its loan agreement with Hercules (“First Amendment”). The end of term charge was increased from $787,500 to $1,068,750
On April 13, 2020, the Company amended its loan agreement with Hercules. The amendment waived all financial covenant defaults for all periods since inception through the period ending March 31, 2020. The amendment also included the following changes:
16
The end of term charge of $1,068,750 was partially extended with $534,375 paid on October 1, 2020 and $534,375 paid on February 1, 2021.
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 raised 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, an affiliate of the JCP Investor., Hercules and Wells Fargo Bank, N.A. entered into an escrow agreement (the “Escrow Agreement”) to escrow funds amounting to approximately $1.5 million, an amount equal to the aggregate of certain principal payments due 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. As of March 31, 2021, the Company was in compliance with its covenants.
Interest expense on the Senior Debt was as follows for the periods indicated:follows:
| | | | | | | | | |
| | For the Three Months Ended | |||||||
| | March 31, | |||||||
|
| 2021 |
| 2020 | |||||
Interest expense for term loan | | $ | 160,912 | | $ | 387,566 | |||
Amortization of debt issuance costs | |
| 12,500 | |
| — | |||
PIK interest | |
| — | |
| 40,017 | |||
| | $ | 173,412 | | $ | 427,583 | |||
Sublease income | | Operating Leases | |||||||
2023 (remaining 3 months) | | | 21,000 | ||||||
2024 |
| | 56,000 | ||||||
Total | | $ | 77,000 |
Included in accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2021, and December 31, 2020 is $50,119 and $65,885, respectively, of accrued and unpaid interest.
Subordinated Related Party Term Loans
Subordinated Related Party Term Loans Entered into During 2020
During, 2020, the Company entered into Subordinated Promissory Notes with the JCP Investor in the principal amount of 15.5 million. The maturity date of the Subordinated Promissory Notes was April 2, 2021 and they 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, the JCP Investor, Neurotrope and Metuchen entered into a Note Conversion and Loan Repayment Agreement pursuant to which, the JCP Investor agreed to convert all of the above outstanding subordinated promissory notes and accrued PIK interest 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 both March 31, 2021, and December 31, 2020.
Interest expense on this debt was $76,282 comprised entirely of PIK interest, for the three months ended March 31, 2020.
17
9) Members’ Capital
(a) Capitalization
Prior to September 16, 2019, the Company authorized 100 units of Class A Common Units (the “Class A Units”) to be issued and outstanding. In addition, there were Restricted Member Units (“RMU’s”) that were designated as a class of incentive units (also known as “Class B Units”).
On September 16, 2019, the Company amended and restated its operating agreement creating the rights and preferences relating to the Preferred Units and Common Units mentioned in the Private Placement Offering below. The issued and outstanding Preferred Units and Common Units were exchanged for Common Stock of the Company in connection with the Mergers.
(b) Preferred Units
A holder of a Preferred Unit was entitled to vote on any matter requiring the approval of such units. In addition, the Preferred Unit holders were entitled to distributions, after adjustment for specific items, for each fiscal year.
The following actions required the prior consent of the holders of a majority of the outstanding Preferred Units: (a) amend, alter or repeal any provision of the amended and restated operating agreement (if such amendment would adversely affect any of the rights or preferences of the Preferred Units); (b) authorize or create membership interests that have a preference over the Preferred Units as to dividends or liquidation; (c) declare or pay any dividends or distributions; (d) dissolve or liquidate (in whole or in part), consolidate, merge, convey, lease, sell, or transfer all or substantially all of the assets of the Company; or purchase or otherwise acquire (directly or indirectly) all or substantially all of the assets or equity interest issued by another company; or file a petition for bankruptcy or receivership of the Company; (e) repurchase or redeem any Membership Interests; or (f) enter into any agreement, commitment or arrangement to do any of the foregoing. See also Note 12 Section (f) for further discussion of Preferred Units.
(c) Common Units (formerly known as Class A Units)
A holder of a Common Unit was entitled to vote on any matter requiring the approval of such units. In addition, the Common Unit holders were entitled to distributions, after adjustment for specific items, for each fiscal year.
Effective with the amended and restated operating agreement on August 26, 2019, each Class A Unit was exchanged for 10,000 Common Units. There was no change to the ownership percentages as a result of the exchange and the rights and privileges of Common Unit holders is consistent with that of the Class A Unit.
(d) Class B Units
As of September 16, 2019, NaN of the Class B Units had been issued. Effective with the amended and restated operating agreement on September 16, 2019, the Class B Units were no longer an authorized membership interest of the Company.
(e) Liquidation
Upon liquidation of30, 2023, the Company or upon any Company sale, the Company was required to pay, hold, or distribute, or cause to be paid, held or distributed, the proceeds thereof as follows: (a) first, to the holders of Preferred Units, pro rata in proportion to the number of Preferred Units held by such holders, until the holders of such Preferred Units receive in respect of each Preferred Unit held by them, the preferred liquidation preference amount; (b) second, to the holders of Common Units, pro rata in proportion to the number of Common Units held by such holders, the remaining proceeds available for distribution.
18
10) Stockholders’ Equity
Upon consummation of the Mergers, each outstanding Common Unit or Preferred Unit of Metuchen was exchanged for a number of shares of Petros common stock, par value $0.0001 per share (the “Petros Common Stock”), equal to 0.4968, which resulted in an aggregate of 4,949,610 shares of Petros Common Stock issued to the holders of Metuchen units in the Mergers. In addition, each holder of Neurotrope common stock, par value $0.0001 per share (the “Neurotrope Common Stock”) received 1 (1) share of Petros Common Stock for every 5 (5) shares of Neurotrope Common Stock held, and each holder of Neurotrope preferred stock, par value $0.001 per share (the “Neurotrope Preferred Stock”) received one (1) share of Petros preferred stock (the “Petros Preferred Stock”) for every one (1) share of Neurotrope Preferred Stock held. In addition, each holder of outstanding options to purchase Neurotrope Common Stock or outstanding warrants to purchase Neurotrope Common Stockhad no operating leases that werehad not previously exercised prior to the consummation of the Mergers was converted into equivalent options and warrants to purchase 1 (1) share of Petros Common Stock for every 5 (5) shares of Neurotrope Common Stock outstanding pursuant to such options or warrants.
As a result of the Mergers, the former Neurotrope shareholders collectively owned approximately 4,758,045 shares of Petros Common Stock and 500 shares of Petros Preferred Stock and the former Metuchen unit holders collectively owned 4,949,610 shares of Petros Common Stock. Accordingly, the former Metuchen unit holders collectively owned approximately 51% of Petros and the former Neurotrope shareholders collectively owned approximately 49% of Petros.
On January 26, 2021, 500 shares of the Company’s Preferred Stock were converted into 60,606 shares of the Company’s common stock.
Effective January 1, 2021, the Company entered into a Marketing and Consulting Agreement (the “Agreement”) with CorProminence, LLC (the “Consultant”) for certain shareholder information and relation services. The term of the Agreement is for one year with automatic consecutive one-year renewal terms. As consideration for the shareholder information and relation services, the Company will pay the Consultant a monthly retainer of $7,500 and issued 30,000 restricted shares of the Company’s common stock to the Consultant on March 24, 2021 (the “Grant Date”). The restricted shares vested immediately on the Grant Date.
Effective April 1, 2021, the Company entered into a Consulting and Advisory Agreement (the “Agreement”) with Tania King, an employee of Juggernaut Capital Partners LLP, for certain services. The term of the Agreement is indefinite but may be terminated by either party, with or without cause. As consideration for the consulting and advisory services, the Company will pay Ms. King a monthly fee of $4,000, an additional $12,000 payment included with the first monthly fee for services provided since January 1, 2021, and issue restricted stock units for shares of the Company’s common stock (“RSU’s”) with a cash value of $72,000 as of the date of the grant (the “Grant Date”). The RSU’s shall vest and settle in full on the one-year anniversary of the grant date.
Backstop Agreement
In connection with the entry into the Merger Agreement, Neurotrope and an affiliated entity of the JCP Investor entered into a Backstop Agreement pursuant to which Juggernaut agreed to contribute to Metuchen at the closing of the Mergers an amount equal to the Working Capital Shortfall Amount (as defined in the Merger Agreement), if any, as determined in accordance with the Merger Agreement, up to an aggregate amount not to exceed $6,000,000 (the “Commitment Cap”). Following the closing of the Mergers and until the one-year anniversary of the closing of the Mergers (the “Anniversary Date”), Juggernaut agreed to contribute, or cause an affiliate to contribute, to Petros an amount equal to the Commitment Cap less the Working Capital Shortfall Amount (the “Post-Closing Commitment”) on the Anniversary Date; provided, however, that, (a) in the event that, at any time between the closing of the Mergers and the Anniversary Date, the closing price per share of Petros’s Common Stock on The Nasdaq Capital Market or any other securities exchanges on which the Petros Common Stock is then traded equals or exceeds $2.175 for a period of 10 consecutive trading days, then the Post-Closing Commitment shall be reduced by fifty percent (50%) and (b) in the event that, at any time between the closing of the Mergers and the Anniversary Date, the closing price per share of Petros’s Common Stock on The Nasdaq Capital Market or any other securities exchanges on which the Petros Common Stock is then traded equals or exceeds $2.5375 for a period of 10 (10) consecutive trading days, then the Post-Closing Commitment shall be $0.
19
Pursuant to the Backstop Agreement and upon closing of the Mergers, Juggernaut paid the Company $2.6 million for the Working Capital Shortfall Amount, which was recorded in equity in relation to the net proceeds received from the reverse capitalization.
Contingent Consideration
Pursuant to the Merger Agreement, each security holder of Metuchen received a right to receive such security holder’s pro rata stock of an aggregate of 14,232,090 stocks of Petros Common Stock potentially issuable upon the achievement of certain milestones set forth in the Merger Agreement. The milestones are for the achievement of stock price and market capitalization, as defined over a two-year period.
Milestone Earnout Payments
In connection with the Mergers, each security holder of Metuchen received an equity classified earnout consideration to be paid in the form of Petros Common Stock if the Closing Price (as defined in the Merger Agreement) per share of stock of Petros’ Common Stock equals or exceeds certain milestones set forth in the Merger Agreement, as discussed below. Each milestone earnout payment is only achievable and payable one time and upon attainment of such milestone earnout payment. In no event will the sum of the milestone earnout payments be greater than 4,000,000 shares of Petros Common Stock. As of March 31, 2021, the milestones have not been achieved.
If at any time following the Closing (as defined in the Merger Agreement) and prior to the one-year anniversary of the Closing, the Closing Price per share of Petros Common Stock is, for a period of 20 (20) trading days during any 30 (30) consecutive trading day period, greater than or equal to:
If at any time within the twelve (12) month period following the one-year anniversary of the Closing, the Closing Price per share of Petros Common Stock is, for a period of 20 (20) trading days during any 30 (30) consecutive trading day period, greater than or equal to:
20
Market Capitalization/Gross Proceeds Earnout Payments
In connection with the Mergers, each security holder of Metuchen received the right to receive earnout consideration, which is liability classified, 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 that equals or exceeds certain milestones set forth in the Merger Agreement, as discussed below. Each milestone earnout payment is only achievable and payable one time and upon attainment of such milestone. In no event will the sum of the milestone earnout payments be greater than 10,232,090 shares of Petros Common Stock. As of March 31, 2021, the milestones have not been achieved. The fair value of the derivative liability was $4.5 million and $9.9 million as of March 31, 2021 and December 31, 2020, respectively.
Metuchen equity holders will have the opportunity to receive the following during the period ending on the second anniversary of the Closing:
21
yet commenced.
11)10) Stock Options and Restricted Stock Units (“RSU’s”)
The Company established the 2020 Omnibus Incentive Compensation plan (the “2020 Plan”) which provides for the grants of awards to our directors, officers, employees, and consultants. The 2020 Plan authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units and other stock-based awards and cash-based awards. On December 22, 2021, our stockholders approved the Second Amendment to the 2020 Plan to increase the total number of shares of common stock issuable under the 2020 Plan by 152,166 shares to a total of 260,000 shares of common stock. On September 14, 2023, our stockholders approved the Third Amendment to the 2020 Plan to increase the total number of shares of common stock issuable under the 2020 Plan by 2.5 million shares to a total of 2,760,000 shares of common stock. As of March 31, 2021September 30, 2023, there were 1,078,3462,760,000 shares authorized and 288,3462,507,369 shares available for issuance under the 2020 Plan.
Upon the consummation of the Mergers as disclosed in Note 1, Neurotrope options issued and outstanding as of December 1, 2020 were converted into equivalent options to purchase stocks of Petros common stock and were adjusted to give effect to the Exchange Ratio set forth in the Merger Agreement.
The following is a summary of stock options for the threenine months ended MarchSeptember 30, 2023 and for the year ended December 31, 2021:2022:
| | | | | | | | | | |
| | |
| | |
| Weighted-Average |
| | |
| | | | Weighted- | | Remaining | | Aggregate Intrinsic | ||
| | Number of | | Average | | Contractual | | Value | ||
|
| Shares |
| Exercise Price |
| Term (Years) |
| ($ in thousands) | ||
Options outstanding and exercisable at December 31, 2020 |
| 574,331 | | $ | 51.43 |
| 0.9 | | $ | — |
Options granted |
| 215,669 | |
| 3.74 |
| 9.9 | |
| — |
Less: options forfeited |
| — | |
| — |
| — | |
| — |
Less: options expired/cancelled |
| — | |
| — |
| — | |
| — |
Less: options exercised |
| — | |
| — |
| — | |
| — |
Options outstanding at March 31, 2021 |
| 790,000 | |
| 38.41 |
| 3.3 | |
| — |
Options exercisable at March 31, 2021 |
| 682,166 | |
| 43.89 |
| 2.3 | |
| — |
Upon the consummation of the Mergers as disclosed in Note 1, the vesting of former Neurotrope stock options in accordance with their terms was accelerated due to a change in control pursuant to the terms of the Neurotrope, Inc. 2013 Equity Incentive Plan and the Neurotrope, Inc. 2017 Equity Incentive Plan. Pursuant to the change in control, Neurotrope extended the period to exercise the stock options to be one-year from the closing of the Mergers. Accordingly, the Company did not record any stock-based compensation expense in connection with these stock options during the period from December 1, 2020 through December 31, 2020.
On February 19, 2021, Fady Boctor, the President and Chief Commercial Officer of the Company, was granted an option to purchase 215,669 shares of the Company’s common stock at an exercise price of $3.74 per share. The option vested 50% as of February 19, 2021, the date of grant, and the remainder shall vest in equal installments on the first and second anniversary thereof.
On April 8, 2021, in connection with the Directors’ appointment to the Board upon the Company becoming an independent publicly traded company on December 1, 2020, the Company awarded each of the 5 Directors an initial grant of options (the “Initial Grant”) to purchase 50,000 shares of common stock of the Company at an exercise price of $3.18 per share. The shares of common stock underlying the options vested 25% on the date of grant, 25% shall vest upon the six-month anniversary of the date of grant and the remainder shall vest in equal installments over the following four fiscal quarters. On April 23, 2021, Tania King, a JCP Investor affiliate, pursuant to her contract, received $72,000 of RSUs when the closing stock price was $3.09 per share, or 23,301 RUSs granted with cliff vesting of 100% in one year. In addition, additional RSUs, valued at $296,000, were granted to five directors on April 8, 2021 when the closing price was $3.18 per share, resulting in 93,082 RSUs issued. As of April 23, 2021, the 2020 Plan is short of shares to cover all the board grants and options by 78,037 shares.
| | | | | | | | | | |
| | |
| | |
| Weighted-Average |
| | |
| | | | Weighted- | | Remaining | | Aggregate Intrinsic | ||
| | Number of | | Average | | Contractual | | Value | ||
|
| Shares |
| Exercise Price |
| Term (Years) |
| ($ in thousands) | ||
Options outstanding at December 31, 2022 |
| 59,067 | | $ | 34.02 |
| 8.29 | | $ | — |
Options granted |
| 156,000 | |
| 0.99 |
| — | |
| 115.4 |
Less: options forfeited |
| — | |
| — |
| — | |
| — |
Less: options expired/cancelled |
| (5,000) | |
| 33.40 |
| — | |
| — |
Less: options exercised | | — | | | — | | — | | | — |
Options outstanding at September 30, 2023 |
| 210,067 | | $ | 9.51 |
| 8.99 | | $ | 115.4 |
Options exercisable at September 30, 2023 |
| 54,067 | | $ | 34.08 |
| 7.48 | | $ | — |
2216
12) Common Stock Warrants
Upon the consummation of the Merger as disclosed in Note 1, Neurotrope warrants issued and outstanding as of December 1, 2020 were converted into equivalent warrants to purchase common stock of Petros and were adjusted to give effect to the Exchange Ratio set forth in the Merger Agreement. The following is a summary of warrantsRSU’s for the threenine months ended MarchSeptember 30, 2023 and for the year ended December 31, 2021:2022:
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| | | | | | | |
| | | | | | | Weighted-Average |
| | | | Weighted- | | Remaining | |
| | Number of | | Average | | Contractual | |
| | Shares | | Fair Value at Grant Date | | Term (Years) | |
RSU’s outstanding at December 31, 2022 |
| 40,238 | | $ | 16.87 |
| 9.20 |
RSU’s granted |
| — | | | — |
| — |
Less: RSU’s forfeited |
| — | |
| — |
| — |
Less: RSU’s expired/cancelled |
| (5) | |
| 11.90 |
| — |
Less: RSU’s vested |
| (40,233) | |
| 16.88 |
| — |
RSU’s outstanding at September 30, 2023 |
| — | | $ | — |
| — |
AsOn January 4, 2022, pursuant to a consulting agreement, the Company awarded a grant of March 31, 2021,5,000 options to purchase shares of common stock of the Company’s warrants by expirationCompany at an exercise price of $33.40 per share. The shares of common stock underlying the options vested 100% upon issuance. These options were canceled pursuant to the cancellation of this consulting agreement, during April 2023.
On April 7, 2022, the Company awarded the four Directors grants of 24,876 total RSU’s with a stock price of $11.90 per share. The RSU’s shall vest 100% on the one-year anniversary of the date were as follows:
| | | | | |
Number of Warrants |
| Exercise Price |
| Expiration Date | |
76,569 | | $ | 32.00 | | November 17, 2021 |
131,344 | |
| 64.00 | | November 17, 2021 |
2,780 | |
| 1.60 | | August 23, 2023 |
18,000 | |
| 35.65 | | June 1, 2024 |
4,800 | |
| 35.60 | | June 5, 2024 |
74,864 | |
| 21.85 | | June 17, 2024 |
20,043 | |
| 31.25 | | June 19, 2024 |
22,800 | |
| 26.55 | | September 1, 2024 |
10,500 | |
| 12.7382 | | September 16, 2024 |
22,800 | |
| 4.30 | | December 1, 2024 |
28,000 | |
| 5.65 | | March 2, 2025 |
28,000 | |
| 7.30 | | June 1, 2025 |
28,000 | |
| 5.50 | | September 1, 2025 |
28,000 | |
| 4.71 | | December 1, 2025 |
2,221,829 | |
| 7.50 | | December 1, 2025 |
908,498 | |
| 17.50 | | December 1, 2025 |
623,303 | |
| 51.25 | | December 1, 2025 |
157,832 | |
| 125.00 | | December 1, 2025 |
4,407,962 | |
|
| |
|
of grant. Also on April 7, 2022, Tania King, an employee of Juggernaut Capital Partners LLP, pursuant to her contract, was granted 6,051 RSUs with a stock price of $11.90 per share. The RSU’s vested 100% on the one-year anniversary of the date of grant.
13) Basic and Diluted Net Loss per Common Share
UponOn April 10, 2023, the consummationCompany awarded each of the Mergers on December 1, 2020, the basic weighted average numberfour Directors a grant of 39,000 options to purchase shares of common stock of the Company at an exercise price of $0.99 per share. The shares outstandingof common stock underlying the options will vest 100% on the one-year anniversary of the date of grant.
Stock-based compensation expense recognized for the threenine months ended March 31, 2020 has been calculated using the number of common units outstanding of Metuchen from January 1, 2020 through the March 31, 2020 multiplied by the exchange ratio usedSeptember 30, 2023 and 2022 was $204,492 and $966,231, respectively, and is recorded in general and administrative expenses in the transaction.consolidated statements of operations.
2317
11) Common Stock Warrants
As of September 30, 2023, the Company’s warrants by expiration date were as follows:
| | | | | |
Number of Warrants |
| | Exercise Price (in Dollars) |
| Expiration Date |
278 | | $ | 16.00 | | August 23, 2023 |
2,279 | | | 356.50 | | June 1, 2024 |
7,492 | | | 218.50 | | June 17, 2024 |
1,997 | | | 312.50 | | June 19, 2024 |
2,279 | | | 265.50 | | September 1, 2024 |
1,050 | | | 127.40 | | September 16, 2024 |
2,279 | | | 43.00 | | December 1, 2024 |
2,800 | | | 56.50 | | March 2, 2025 |
2,800 | | | 73.00 | | June 1, 2025 |
2,800 | | | 55.00 | | September 1, 2025 |
2,800 | | | 47.05 | | December 1, 2025 |
222,189 | | | 75.00 | | December 1, 2025 |
90,880 | | | 175.00 | | December 1, 2025 |
62,429 | | | 512.50 | | December 1, 2025 |
15,856 | | | 1,250.00 | | December 1, 2025 |
175,132 | | | 17.15 | | October 18, 2026 |
233,775 | | | 35.00 | | December 12, 2026 |
175,000 | | | 35.00 | | December 27, 2026 |
7,200,002 | | | 2.25 | | July 17, 2028 |
8,204,117 | | |
| |
|
| | |
| Number of Warrants | |
Warrants outstanding - January 1, 2022 | 1,004,115 | |
Warrants issued in 2022 | — | |
Warrants outstanding - December 31, 2022 | 1,004,115 | |
Warrants issued - Nine Months ending September 30, 2023 | 7,200,002 | |
Warrants outstanding - September 30, 2023 | 8,204,117 |
On July 17, 2023, the Company issued warrants to purchase up to 7,200,002 shares of common stock in connection with the Private Placement (as defined below). The warrants have an initial exercise price of $2.25 per share of common stock and expire five years after the date of issuance. The exercise price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for common stock, at a price below the then-applicable exercise price (subject to certain exceptions). Upon any such price-based adjustment, the number of shares issuable upon exercise of the warrants will be increased proportionately.
The warrants were determined to be within the scope of ASC 480-10 as they are puttable to the Company at Holders’ election upon the occurrence of a Fundamental Transaction (as defined in the agreements). As such, the Company recorded the warrants as a liability at fair value with subsequent changes in fair value recognized in earnings. The Company utilized the Black Scholes Model to calculate the value of these warrants issued during the three months ended September 30, 2023. The fair value of the warrants of approximately $21.5 million was estimated at the date of issuance using the following weighted average assumptions: dividend yield 0%; expected term of 5.0 years; equity volatility of 110.0%; the closing stock price on July 13, 2023 of $3.54 and a risk-free interest rate of 3.93%.
Transaction costs incurred attributable to the issuance of the warrants of $2.9 million were immediately expensed in accordance with ASC 480.
18
During the three months ended September 30, 2023, the Company recorded a gain of approximately $11.7 million related to the change in fair value of the warrant liability which is recorded in other income (expense) on the Statements of Operations. The fair value of the warrants of approximately $9.8 million was estimated at September 30, 2023 utilizing the Black Scholes Model using the following weighted average assumptions: dividend yield 0%; remaining term of 4.79 years; equity volatility of 115.0%; the closing stock price on September 30, 2023 of $1.73 and a risk-free interest rate of 4.62%.
12) Basic and Diluted Net Loss per Common Share
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net loss per share:
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | For the Three Months Ended | ||||||||||||
| | March 31, | | September 30, | | September 30, | ||||||||||||
|
| 2021 |
| 2020 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Numerator |
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
Net income (loss) | | $ | 3,009,081 | | $ | (6,083,219) | ||||||||||||
Net loss per common | | $ | (8,820,570) | | $ | (15,816,213) | | $ | (4,888,740) | | $ | (13,830,196) | ||||||
Denominator | |
|
| |
|
| |
| | |
| | |
| | |
| |
Weighted-average common shares for basic net income (loss) per share | |
| 9,753,086 | |
| 4,949,610 | ||||||||||||
Effect of common share equivalents within common stock warrants | |
| 1,600 | |
| 0 | ||||||||||||
Weighted-average common shares for basic net income (loss) per share | |
| 9,754,686 | |
| 4,949,610 | ||||||||||||
Basic and diluted net income (loss) per common share | | $ | 0.31 | | $ | (1.23) | ||||||||||||
Weighted-average common shares for basic net loss per share | |
| 2,108,747 | |
| 2,068,472 | |
| 2,119,620 | |
| 2,068,472 | ||||||
Basic and diluted net loss per common share | | $ | (4.18) | | $ | (7.65) | | $ | (2.31) | | $ | (6.69) |
The following table summarizes the potentially dilutive securities convertible into common shares that were excluded from the calculation of diluted net loss per share because their inclusion would have been antidilutive:
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | For the Three Months Ended | ||||||
| | March 31, | | September 30, | | September 30, | ||||||
|
| 2021 | | 2020 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
Stock Options |
| 790,000 |
| — |
| 210,067 |
| 59,067 | | 210,067 |
| 59,067 |
RSUs | | — | | 42,564 | | — | | 42,564 | ||||
Series A Convertible Preferred stock | | 6,762,090 | | — | | 6,762,090 | | — | ||||
Warrants |
| 4,405,182 |
| 127,396 |
| 8,204,117 |
| 1,004,115 | | 8,204,117 |
| 1,004,115 |
Total |
| 5,195,182 |
| 127,396 |
| 15,176,274 |
| 1,105,746 | | 15,176,274 |
| 1,105,746 |
14)13) Marketing, Licensing and Distribution Agreements
(a) Vivus
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 exploitation of Stendra® for a one-time fee of $70 million, and for an additional $0.8 million, the Company also acquired the current Stendra® product and sample inventories as of September 30, 2016 that were owned by Vivus.million. The License Agreement gives the Company the right to sell Stendra® in the U.S and its territories, 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 Food and Drug Administration (“FDA”) in April 2012 to treat male erectile dysfunction.
TheUnder the License Agreement, the Company will pay MTPC a royalty of 5% on the first $500 million of net sales and 6% of net sales thereafter. In consideration for the trademark assignment and the use of the trademarks associated with the product 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 products 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 products in such territory. Thereafter, 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 $6 million milestone payment to be paid once $250 million in sales has been reached on the separate revenue stream of Stendra®. Should the $250 million of sales threshold be reached, the Company will be responsible for $3.2 million of the milestone payment.
24
In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on the effective date of the License Agreement. The Supply Agreement states that Vivus will initially manufacture, test, and supply the product to the Company or its designee, directly or through one or more third parties. The agreement iswas terminated, effective through December 31, 2021. On July 7, 2020, Vivus announced that it has completed the solicitation of an in-court prepackaged plan of reorganization, under which IEH Biopharma LLC will take 100% ownership of Vivus. The Company provided Vivus with notice of termination of the supply agreement on September 30, 2019, effective on September 30. 2021. The Company is required to make future minimum annual purchases
19
On January 18, 2022, Petros and Vivus entered into a Settlement Agreement as follows (based on current prices, however, subject(the “Vivus Settlement Agreement”) related to annual price increases). As of March 31, 2021, the minimum purchase obligation is estimatedrequirements 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 Active Pharmaceutical Ingredient (“API”) inventory under the Vivus Supply Agreement. In exchange for the API and reduction of current liabilities after prepayment of $900,000, Petros executed an interest-bearing promissory note (the “Note”) in favor of Vivus in the original principal amount of $10,201,758, which the Company believes approximates fair value (See Note 8).
In addition to the payments to be $4.1 millionmade in 2021.
Stendra® can be purchased by written purchase orders submittedaccordance with the Note, the Company further agreed in the Vivus Settlement Agreement to (i) grant to Vivus at least 125 daysa right of first refusal to provide certain types of debt and convertible equity (but not preferred equity) until the Note is paid in advancefull, 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 desired shipment date. For each quarter,obligations under the Company is required to submit purchase orders for at least 90% of the quantitiesNote in the forecast above.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 will have no obligation to supply Stendra® in excess of 120%released 100% of the quantity specified above but will use reasonable efforts.of bulk Stendra® tablets by the end of the first quarter 2022.
As a result of both March 31, 2021, and December 31, 2020,entering into the Vivus Settlement Agreement, the Company has $14.2decreased accrued expenses by $6.5 million ofand decreased accrued inventory purchases relatedby $14.2 million; which were partially offset by a decrease in API purchase commitments of $6.2 million and an increase to liabilities for the Company’s minimum purchase obligations with VivusNote of $10.2 million (which is net of the $0.9 million prepayment on the Note). As a result, the Company recorded a $3.4 million gain on settlement for raw material or API inventory. Asthe year ended December 31, 2022.
The Company has $1.0 million of API inventory which it has title to and is not a finished good,classified as raw materials inventory. The additional API inventory that the Company does not have title to the product and classifiesis classified as API Inventory in either other current assets or other assets, depending on whether the Company expects to take title to the product within one year from the date of the financial statements. As of both March 31, 2021,September 30, 2023 and December 31, 2020,2022, there was $1.3$0.7 million and $0.7 million respectively included in other current assets (see Note 5 Prepaid and Other Current Assets). As of both March 31, 2021,September 30, 2023 and December 31, 2020, $11.12022, there was $4.4 million and $5.1 million included inas other assets on the accompanying condensed consolidated balance sheets.sheets, respectively. The Company reviews its inventory levels and purchase commitments for excess amounts that it is required to purchase but projects it will not be able to sell prior to product expiry. DuringThe Company did not record any reserve for the three and nine months ended March 31, 2021September 30, 2023 and 2020, the Company has not recorded any additional reserve to reduce the cost of API inventory.2022.
During the threenine months ended March 31, 2021September 30, 2023 and 2020,2022, the Company incurred royalties to MTPC for StendraStendra® of $160,032$170,822 and $39,913,$135,816, respectively. Royalties incurred were included in cost of goods sold in the condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020,September 30, 2023, the Company had a payable for royalties of $168,760 and $8,728, respectively,$46,288, which is included in accrued expenses in the accompanying condensed consolidated balance sheets. Royalties incurred wereAs of December 31, 2022, the company had a receivable for royalties of $106,115, which are included in cost of goods sold in the condensed consolidated statements of operations.other current assets. (see Note 7 Accrued Expenses and Note 5 Prepaid and other Current Assets).
The license agreement between MTPC and Vivus (“MTPC License”) contains certain termination rights that would 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®Stendra®.
(b) Patheon
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.
20
(c) Hybrid
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, with an additional $900,000 payment due upon obtainment of orphan indication for H100™ and termination of Hybrid’s existing agreement with a compounding pharmacy, and additional annual payments of $125,000, $150,000 and $200,000 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 requiredterminated its exclusive license to make a $1,000,000 payment upon first commercial sale and a sliding scale of percentage paymentsH100™ from Hybrid 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. In addition, the Company may terminate at any time after first anniversary, without cause, upon ninety (90) days’ notice.
25
The initial license fee of $100,000 and an extension payment of $100,000 has been recorded in research and development during the year ended December 31, 2020. The Company has treated the acquisition as an asset acquisition and has concluded that the asset acquired and the upfront payment should be expensed as it was considered an IPR&D asset with no alternative future uses.May 11, 2023.
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 payable within seven calendar days of entering into the agreement.
15)14) Commitments and Contingencies
(a) Employment Agreements
The Company has employment agreements with certain executive officers and key employees that provide for, among other things, salary and performance bonuses.
In connection with entry into the Merger Agreement Amendment, Neurotrope, Neurotrope Bioscience, Inc. (a wholly-owned subsidiary of Neurotrope) and Metuchen entered into an Employee Lease Agreement pursuant to which Neurotrope and Neurotrope Bioscience, Inc. agreed to lease the services of Dr. Charles Ryan to Metuchen prior to the Closing. Dr. Ryan was required to devote no more than 75% of his working time performing services to Metuchen under the Employee Lease Agreement and Metuchen paid 75% of the costs associated with Dr. Ryan’s employment from the period beginning on June 1, 2020 through the Closing, including but not limited to, the costs for all compensation and benefits paid to, for or on behalf of Dr. Ryan (the “Fees”). Upon consummation of the Mergers, Metuchen paid approximately $0.2 million for the Fees pursuant to the Employee Lease Agreement, which reduced the amount of cash that Petros retained following the Closing.
In connection with the consummation of the Mergers, on December 24, 2020, the Company and Mr. Keith Lavan entered into a Separation Agreement (the “Separation Agreement”), pursuant to which Mr. Lavan resigned as Senior Vice President and Chief Financial Officer of the Company and agreed to serve as an advisor to the Company through December 31, 2020 (the “Separation Date”). Pursuant to the Separation Agreement, in addition to other benefits, Mr. Lavan received a stay-on bonus of $50,000 for continuing to remain employed by the Company through the Separation Date. For his services as an advisor, the Company agreed to pay Mr. Lavan an amount equal to 50% of his base salary as of immediately prior to the Separation Date. The Company paid 70% of such amount on January 15, 2021 and 30% of such amount in equal installments from the Separation Date through June 30, 2021. In addition, Mr. Lavan executed a general release of liabilities in favor of the Company.
(b) Legal Proceedings
On July 14, 2020, Greg Ford, the Chief Executive Officer of the Company, was terminated. On July 14, 2020, Mr. Ford, through his attorney, claimed that he was entitled to severance pay pursuant to an employment agreement following the termination of his employment on that same date. This claim is currently at an early stage where the Company is unable to determine the likelihood of any unfavorable outcome.
The Company is not currently involved in any other significant claims or legal actions that, in the opinion of management, will have a material adverse impact on the Company’s operations, financial position or cash flows.
(c) Operating Leases
The Company has commitments under operating leases for office and warehouse space used in its operations. The Company’s leases have remaining lease terms ranging from 3.4 years to 5.8 years.
26
The components of lease expense were as follows:
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Operating Lease Cost: |
| |
|
| |
|
Fixed lease cost | | $ | 44,812 | | $ | 44,812 |
Supplemental balance sheet information related to leases was as follows:
| | | | | | |
|
| As of March 31, 2021 |
| As of December 31, 2020 | ||
Operating lease ROU asset: |
| |
|
| |
|
Other assets | | $ | 554,379 | | $ | 579,535 |
| | | | | | |
Operating lease liability: | |
|
| |
|
|
Other current liabilities | | $ | 113,052 | | $ | 108,971 |
Other long-term liabilities | |
| 500,512 | |
| 530,597 |
Total operating lease liability | | $ | 613,564 | | $ | 639,568 |
Supplemental lease term and discount rate information related to leases was as follows:
| | | | | |
|
| As of March 31, 2021 | | As of December 31, 2020 | |
Weighted-average remaining lease terms - operating leases |
| 4.4 years |
| 4.7 years | |
Weighted-average discount rate - operating leases |
| 12.6 | % | 12.6 | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
|
Operating cash flows from operating leases | | $ | 45,942 | | $ | 45,660 |
Future minimum lease payments under non-cancelable leases as of March 31, 2021 were as follows:
| | | |
Lease Liability Maturity Analysis |
| Operating Leases | |
2021 (remaining 9 months) |
| | 138,297 |
2022 |
| | 187,739 |
2023 |
| | 189,374 |
2024 |
| | 155,242 |
Thereafter |
| | 163,433 |
Total lease payments |
| | 834,085 |
Less: Imputed Interest |
| | (220,521) |
Total | | $ | 613,564 |
As of March 31, 2021, the Company had 0 operating leases that had not yet commenced.
27
16)15) Segment Information
The Company manages its operations through 2two segments. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male erectile dysfunction. The Prescription Medications segment consists primarily of operations related to Stendra®, which is sold generally in the United States, and H100™ for the treatment of Peyronie’s disease.States. The Medical Devices segment consists primarily of operations related to vacuum erection devices, which are sold domestically and internationally. The Company separately presents the costs associated with certain corporate functions as Corporate, primarily consisting of unallocated operating expenses including costs that were not specific to a particular segment but are general to the group, expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other income (expense), net is also not allocated to the operating segments.
The Company’s results of operations by reportable segment for the threenine months ended March 31, 2021September 30, 2023 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | |
| Prescription |
| Medical |
| | |
| | | ||||
For the three months ended March 31, 2021 | | Medications | | Devices | | Corporate | | Consolidated | ||||||||||||||||
For the Nine Months Ended September 30, 2023 |
| Medications |
| Devices |
| Corporate |
| Consolidated | ||||||||||||||||
Net sales | | $ | 3,200,647 | | $ | 874,959 | | $ | — | | $ | 4,075,606 | | $ | 3,416,444 | | $ | 2,770,194 | | $ | — | | $ | 6,186,638 |
Cost of goods sold | |
| 389,281 | |
| 254,105 | |
| — | |
| 643,386 | |
| 343,109 | |
| 1,129,964 | |
| — | |
| 1,473,073 |
Selling, general and administrative expenses | |
| 1,734,333 | |
| 546,995 | |
| 1,600,389 | |
| 3,881,717 | |
| 1,006,666 | |
| 1,398,890 | |
| 3,976,610 | |
| 6,382,166 |
Warrant issuance costs | | | — | | | — | | | 2,855,000 | | | 2,855,000 | ||||||||||||
Research and development expenses | |
| 19,181 | |
| — | |
| — | |
| 19,181 | |
| 1,499,842 | |
| 74,918 | |
| — | |
| 1,574,760 |
Depreciation and amortization expense | |
| 1,398,270 | |
| 330,559 | |
| — | |
| 1,728,829 | |
| 1,726,409 | |
| 753,976 | |
| — | |
| 2,480,385 |
Change in fair value of derivative liability | |
| — | |
| — | |
| (5,380,000) | |
| (5,380,000) | | | — | | | — | | | 430,000 | | | 430,000 |
Change in fair value of warrant liability | |
| — | |
| — | |
| (11,739,000) | |
| (11,739,000) | ||||||||||||
Interest income | | | — | | | — | | | (287,722) | | | (287,722) | ||||||||||||
Interest expense | |
| — | |
| — | |
| 173,412 | |
| 173,412 | |
| — | |
| — | |
| 410,317 | |
| 410,317 |
Income tax benefit | |
| — | |
| — | |
| — | |
| — | ||||||||||||
Net (loss) income | | $ | (340,418) | | $ | (256,700) | | $ | 3,606,199 | | $ | 3,009,081 | ||||||||||||
Loss on issuance of Series A Preferred Stock | |
| — | |
| — | |
| 11,088,997 | |
| 11,088,997 | ||||||||||||
Net loss | | $ | (1,159,582) | | $ | (587,554) | | $ | (6,734,202) | | $ | (8,481,338) |
The Company’s results of operations by reportable segment for the three months ended March 31, 2020 are summarized as follows:
| | | | | | | | | | | | |
| | Prescription |
| Medical |
| | |
| | | ||
For the three months ended March 31, 2020 |
| Medications |
| Devices |
| Corporate |
| Consolidated | ||||
Net sales | | $ | 798,257 | | $ | 993,664 | | $ | — | | $ | 1,791,921 |
Cost of goods sold | |
| 501,418 | |
| 282,617 | |
| — | |
| 784,035 |
Selling, general and administrative expenses | |
| 3,130,414 | |
| 743,813 | |
| 942,236 | |
| 4,816,463 |
Research and development expense | |
| 139,385 | |
| — | |
| — | |
| 139,385 |
Depreciation and amortization expense | |
| 1,353,591 | |
| 307,771 | |
| — | |
| 1,661,362 |
Interest expense | |
| — | |
| — | |
| 503,866 | |
| 503,866 |
Income tax expense | |
| — | |
| 29,971 | |
| — | |
| 29,971 |
Net loss | | $ | (4,326,551) | | $ | (310,566) | | $ | (1,446,102) | | $ | (6,083,219) |
The following table reflects net sales by geographic region for the three months ended March 31, 2021 and 2020:
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
Net sales |
| 2021 |
| 2020 | ||
United States | | $ | 3,704,523 | | $ | 1,448,620 |
International | |
| 371,083 | |
| 343,301 |
| | $ | 4,075,606 | | $ | 1,791,921 |
No individual country other than the United States accounted for 10% of total sales for the three months ended March 31, 2021 and 2020.
2821
The Company’s results of operations by reportable segment for the nine months ended September 30, 2022 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the Nine Months Ended September 30, 2022 |
| Medications |
| Devices |
| Corporate |
| Consolidated | ||||
Net sales | | $ | 2,716,311 | | $ | 2,477,642 | | $ | — | | $ | 5,193,953 |
Cost of goods sold | |
| 525,073 | |
| 883,013 | |
| — | |
| 1,408,086 |
Selling, general and administrative expenses | |
| 3,933,295 | |
| 1,352,239 | |
| 3,999,783 | |
| 9,285,317 |
Gain on settlement of contingent liability | | | (3,389,941) | | | — | | | — | | | (3,389,941) |
Research and development expenses | |
| 1,428,848 | |
| 133,670 | |
| — | |
| 1,562,518 |
Depreciation and amortization expense | | | 3,808,991 | | | 873,619 | | | — | | | 4,682,610 |
Intangible asset impairment | |
| 7,460,000 | |
| — | |
| — | |
| 7,460,000 |
Change in fair value of derivative liability | |
| — | |
| — | |
| (460,000) | |
| (460,000) |
Interest expense | |
| 451,075 | |
| — | |
| — | |
| 451,075 |
Income tax expense | |
| — | |
| 10,501 | |
| — | |
| 10,501 |
Net loss | | $ | (11,501,030) | | $ | (775,400) | | $ | (3,539,783) | | $ | (15,816,213) |
The Company’s results of operations by reportable segment for the three months ended September 30, 2023 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the Three Months Ended September 30, 2023 | | Medications | | Devices | | Corporate | | Consolidated | ||||
Net sales | | $ | 925,759 | | $ | 748,898 | | $ | — | | $ | 1,674,657 |
Cost of goods sold |
| | 85,388 |
| | 323,087 |
| | — |
| | 408,475 |
Selling, general and administrative expenses |
| | 251,674 |
| | 493,447 |
| | 1,256,814 |
| | 2,001,935 |
Warrant issuance costs | | | — | | | — | | | 2,855,000 | | | 2,855,000 |
Research and development expenses |
| | 369,505 |
| | 19,588 |
| | — |
| | 389,093 |
Depreciation and amortization expense | | | 575,470 | | | 251,325 | | | — | | | 826,795 |
Change in fair value of derivative liability | | | — | | | — | | | 430,000 | | | 430,000 |
Change in fair value of warrant liability | | | — | | | — | | | (11,739,000) | | | (11,739,000) |
Interest income |
| | — |
| | — |
| | (168,481) |
| | (168,481) |
Interest expense |
| | — |
| | — |
| | 131,351 |
| | 131,351 |
Loss on issuance of Series A Preferred Stock |
| | — |
| | — |
| | 11,088,997 |
| | 11,088,997 |
Net loss | | $ | (356,278) | | $ | (338,549) | | $ | (3,854,681) | | $ | (4,549,508) |
The Company’s results of operations by reportable segment for the three months ended September 30, 2022 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the Three Months Ended September 30, 2022 | | Medications | | Devices | | Corporate | | Consolidated | ||||
Net sales | | $ | (2,140,629) | | $ | 682,897 | | $ | — | | $ | (1,457,732) |
Cost of goods sold |
| | 36,067 |
| | 250,458 |
| | — |
| | 286,525 |
Selling, general and administrative expenses |
| | 493,128 |
| | 467,700 |
| | 1,210,147 |
| | 2,170,975 |
Research and development expenses |
| | 678,552 |
| | 57,364 |
| | — |
| | 735,916 |
Depreciation and amortization expense |
| | 1,269,664 |
| | 291,206 |
| | — |
| | 1,560,870 |
Intangible asset impairment | | | 7,460,000 | | | — | | | — | | | 7,460,000 |
Interest expense |
| | 147,677 |
| | — |
| | — |
| | 147,677 |
Income tax expense |
| | — |
| | 10,501 |
| | — |
| | 10,501 |
Net loss | | $ | (12,225,717) | | $ | (394,332) | | $ | (1,210,147) | | $ | (13,830,196) |
The following table reflects net sales by geographic region for the three and nine months ended September 30, 2023 and 2022:
| | | | | | | | | | | | |
| | For the Nine Months Ended | | For the Three Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
Net sales |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
United States | | $ | 5,253,587 | | $ | 4,260,171 | | $ | 1,496,988 | | $ | (1,647,367) |
International | | | 933,051 | |
| 933,782 | | | 177,669 | | | 189,635 |
| | $ | 6,186,638 | | $ | 5,193,953 | | $ | 1,674,657 | | $ | (1,457,732) |
22
No individual country other than the United States accounted for 10% of total sales for the three and nine months ended September 30, 2023 and 2022.
The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of March 31, 2021September 30, 2023, are summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | Prescription |
| | |
| | | | Prescription |
| Medical |
| | | |||
|
| Medications |
| Medical Devices |
| Consolidated |
| Medications |
| Devices |
| Consolidated | ||||||
Intangible assets, net | | $ | 23,229,972 | | $ | 7,204,674 | | $ | 30,434,646 | | $ | 5,459,960 | | $ | 4,311,804 | | $ | 9,771,764 |
Total segment assets | | $ | 57,125,223 | | $ | 9,028,785 | | $ | 66,154,008 | | $ | 32,810,715 | | $ | 6,103,453 | | $ | 38,914,168 |
The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of December 31, 20202022, are summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | Prescription | | | | | | | | Prescription | | Medical | | | | |||
|
| Medications |
| Medical Devices |
| Consolidated |
| Medications |
| Devices |
| Consolidated | ||||||
Intangible assets, net | | $ | 24,625,686 | | $ | 7,535,233 | | $ | 32,160,919 | | $ | 7,178,704 | | $ | 5,065,780 | | $ | 12,244,484 |
Total segment assets | | $ | 60,725,191 | | $ | 9,128,823 | | $ | 69,854,014 | | $ | 25,831,048 | | $ | 6,590,166 | | $ | 32,421,214 |
16) Private Placement
On July 13, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which we agreed to sell in a private placement to the Investors (i) an aggregate of 15,000 shares of our newly-designated Series A Convertible Preferred Stock, with a par value of $0.0001 per share and a stated value of $1,000 per share (the “Series A Preferred Stock”), initially convertible into up to 6,666,668 shares of our common stock, par value $0.0001 per share (the “Common Stock”) at an initial conversion price of $2.25 per share (the “Series A Preferred Shares”), and (ii) warrants to acquire up to an aggregate of 6,666,668 shares of Common Stock (the “Warrants”) at an initial exercise price of $2.25 per share (collectively, the “Private Placement”). Pursuant to the terms of the Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”) and the Warrants, each of the Conversion Price (as defined below) and the exercise price and the number of shares underlying the Warrants is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions). As of September 30, 2023, the Conversion Price and the exercise price of the Warrants was equal to $2.25 per share.
The Private Placement was exempt from the registration requirements of the Securities Act pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. The closing of the Private Placement occurred on July 17, 2023. The aggregate gross proceeds from the Private Placement was approximately $15 million. We intend to use the net proceeds from the Private Placement for general corporate purposes.
We engaged Katalyst Securities LLC (the “Placement Agent”) to act as exclusive placement agent in connection with the Private Placement. Pursuant to an Engagement Letter with the Placement Agent, we paid to the Placement Agent or its designees (i) a cash fee equal to 8% of the gross proceeds of the Private Placement and (ii) warrants to acquire up to an aggregate of 533,334 shares of Common Stock on the same terms as the Warrants.
Series A Preferred Stock
The terms of the Series A Preferred Shares are as set forth in the form of Certificate of Designations. The Series A Preferred Shares will be convertible into shares of Common Stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $2.25 (the “Conversion Price”). The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions). We are required to redeem the Series A Preferred Shares in 13 equal monthly installments, commencing on November 1, 2023. The amortization payments due upon such redemptions are payable, at our election, in cash at 107% of the Installment Redemption Amount (as defined in the Certificate of Designations), or subject to certain limitations, in shares of common stock valued at the lower of (i) the Conversion Price then in effect and (ii) the greater of (A) 80% of the average of the three lowest closing prices of the Common
2923
Stock during the thirty trading day period immediately prior to the date the amortization payment is due or (B) the lower of $0.396, which is 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Nasdaq Stockholder Approval (as defined below) or such lower amount as permitted, from time to time, by the Nasdaq Stock Market, subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events. We may require holders to convert their Series A Preferred Shares into Conversion Shares if the closing price of the Common Stock exceeds $6.75 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds two million dollars ($2,000,000) per day during the same period and certain equity conditions described in the Certificate of Designations are satisfied.
The holders of the Series A Preferred Shares are entitled to dividends of 8% per annum, compounded monthly, which are payable, at our option, in cash or shares of Common Stock, or in a combination thereof, in accordance with the terms of the Certificate of Designations. On September 29, 2023, we filed an amendment to the Certificate of Designations with the Secretary of State for the State of Delaware, pursuant to which the terms of the Series A Preferred Stock were amended to permit certain additional procedures for the payment of redemptions and conversions Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Shares will accrue dividends at the rate of 15% per annum. In connection with a Triggering Event, each holder of Series A Preferred Shares will be able to require us to redeem in cash any or all of the holder’s Series A Preferred Shares at a premium set forth in the Certificate of Designations. Upon conversion or redemption, the holders of the Series A Preferred Shares are also entitled to receive a dividend make-whole payment. The holders of Series A Preferred Shares have no voting rights on account of the Series A Preferred Shares, other than with respect to certain matters affecting the rights of the Series A Preferred Shares.
The Series A Preferred Shares were determined to be more akin to a debt-like host than an equity-like host. The Company identified the following embedded features that are not clearly and closely related to the debt host instrument: 1) make-whole interest upon a contingent redemption event, 2) make-whole interest upon a conversion event, 3) an installment redemption upon an Equity Conditions Failure (as defined in the Certificate of Designation), and 4) variable share-settled installment conversion. These features were bundled together, assigned probabilities of being affected and measured at fair value. Subsequent changes in fair value of these features are recognized in the Condensed Consolidated Statements of Operations. The Company estimated the $6.1 million fair value of the bifurcated embedded derivative at issuance using a Monte Carlo simulation model, with the following inputs the fair value of our common stock of $3.54 on the issuance date, estimated equity volatility of 165.0%, estimated traded volume volatility of 790.0%, the time to maturity of 1.38 years, a discounted market interest rate of 8.1%, dividend rate of 8.0%, a penalty dividend rate of 15.0%, and probability of default of 9.7%. The fair value of the bifurcated derivative liability was estimated utilizing the with and without method which uses the probability weighted difference between the scenarios with the derivative and the plain vanilla maturity scenario without a derivative.
The discount to the fair value is included as a reduction to the carrying value of the Series A Preferred Shares. During the three months ended September 30, 2023, the Company recorded a total discount of approximately $15.0 million upon issuance of the Series A Preferred Shares, which was comprised of the issuance date fair value of the associated embedded derivative of approximately $6.1 million and the difference between the gross proceeds and the allocated residual fair value of the Series A Preferred Shares of approximately $8.9 million. When it is deemed probable that the Series A Preferred Shares will be redeemed, the Company will accrete the Series A Preferred Shares to redemption amount pursuant to ASC 480-10-S99-3A. As the fair value of the liabilities required to be subsequently measured at fair value exceeded the net proceeds received, the Company recognized the excess of the fair value over the net proceeds received as a loss upon issuance of preferred stock of $11.1 million which is included in other income (expense) in the Condensed Consolidated Statement of Operations.
During the three months ended September 30, 2023, the Company recorded a loss of approximately $0.4 million related to the change in fair value of the derivative liability which is recorded in other income (expense) on the Condensed Consolidated Statements of Operations. The Company estimated the $6.6 million fair value of the bifurcated embedded derivative at September 30, 2023 using a Monte Carlo simulation model, with the following inputs the fair value of our common stock of $1.73 on the valuation date, estimated equity volatility of 180.0%, estimated traded volume volatility of 890.0%, the time to maturity of 1.17 years, a discounted market interest rate of 7.8%, dividend rate of 8.0%, a penalty dividend rate of 15.0%, and probability of default of 10.4%.
On September 29, 2023, the Company notified the investors of its intention to redeem the first installment due November 1, 2023 (the “November Installment”) in cash. At that time, the Company established a liability of $1,368,547 representing the cash payable to investors which includes $1,153,846 of the stated value of the Series A Preferred Shares, $125,170 of accrued dividends payable, and $89,531 for the cash premium for the November Installment which was recognized as a deemed dividend. As of November 14, 2023, we have redeemed 1,154 Series A Preferred Shares for cash of $1,213,132 and issued 87,499 shares of Common Stock, elected pursuant
24
to the terms of the Certificate of Designations, worth $145,248 in relief of the First Installment liability. As of September 30, 2023, the Company has recognized $339,232 of preferred dividends which is comprised of $249,701 of preferred dividends at the stated dividend rate and $89,531 of deemed dividends for cash premium for the November Installment.
We are subject to certain affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends (other than dividends pursuant to the Certificate of Designations), distributions or redemptions, and the transfer of assets, among other matters.
There is no established public trading market for the Series A Preferred Shares and we do not intend to list the Series A Preferred Shares on any national securities exchange or nationally recognized trading system.
Warrants
The Warrants became exercisable for shares of Common Stock (the “Warrant Shares”) immediately upon issuance, at an initial exercise price of $2.25 per share (the “Exercise Price”) and expire five years from the date of issuance. The Exercise Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Exercise Price (subject to certain exceptions). Upon any such price-based adjustment, the number of Warrant Shares issuable upon exercise of the Warrants will be increased proportionately. There is no established public trading market for the Warrants and we do not intend to list the Warrants on any national securities exchange or nationally recognized trading system.
Registration Rights
In connection with the Private Placement, we entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”), pursuant to which we agreed to file a resale registration statement (the “Registration Statement”) with the SEC to register for resale 200% of the Conversion Shares and the Warrant Shares promptly following the Closing Date, but in no event later than 30 calendar days after the effective date of the Registration Rights Agreement, and to have such Registration Statement declared effective by the Effectiveness Date (as defined in the Registration Rights Agreement). We filed a registration statement on Form S-3 covering such securities, which registration statement, as amended, was declared effective on September 18, 2023. Under the Registration Rights Agreement, we are obligated to pay certain liquidated damages to the investors if we fail to file the Registration Statement when required, fails to file or cause the Registration Statement to be declared effective by the SEC when required, or fails to maintain the effectiveness of the Registration Statement.
Nasdaq Stockholder Approval
Our ability to issue Conversion Shares and Warrant Shares using shares of Common Stock is subject to certain limitations set forth in the Certificate of Designations. Prior to receiving the Nasdaq Stockholder Approval, such limitations included a limit on the number of shares that may be issued until the time, if any, that our stockholders have approved the issuance of more than 19.99% of our outstanding shares of Common Stock in accordance with the rules of the Nasdaq Stock Market (the “Nasdaq Stockholder Approval”). In the Purchase Agreement we agreed to seek the Nasdaq Stockholder Approval at a meeting of stockholders, and we received the Nasdaq Stockholder Approval at a special meeting of stockholders held on September 14, 2023. Our directors and officers, who held approximately 29% of issued and our outstanding Common Stock as of the date of the Purchase Agreement, were party to a voting agreement pursuant to which, among other things, each party agreed, solely in their capacity as a stockholder, to vote all of their shares of Common Stock in favor of the approval of the Nasdaq Stockholder Approval and against any actions that could adversely affect our ability to perform our obligations under the Purchase Agreement. The voting agreement also placed certain restrictions on the transfer of the shares of Common Stock held by the signatories thereto.
25
17) Fair Value Measurements
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the three months ended September 30, 2023. The carrying amounts of cash equivalents, accounts receivable, other current assets, other assets, accounts payable, and accrued expenses approximated their fair values as of September 30, 2023 due to their short-term nature. The fair value of the bifurcated embedded derivative related to the convertible preferred stock was estimated using a Monte Carlo simulation model, which uses as inputs the fair value of our common stock and estimates for the equity volatility and traded volume volatility of our common stock, the time to maturity of the convertible preferred stock, the risk-free interest rate for a period that approximates the time to maturity, dividend rate, a penalty dividend rate, and our probability of default. The fair value of the warrant liability was estimated using the Black Scholes Model which uses as inputs the following weighted average assumptions: dividend yield, expected term in years; equity volatility; the stock price and risk-free interest rate.
Fair Value on a Recurring Basis
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. The estimated fair value of the warrant liability and bifurcated embedded derivatives represent Level 3 measurements. The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis at September 30, 2023, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| | | | | |
|
| |
| September 30 | |
Description | | Level | | 2023 | |
Liabilities: |
|
|
| |
|
Warrant liability |
| 3 | | $ | 9,805,000 |
Bifurcated embedded derivative liability |
| 3 | | $ | 6,570,000 |
The following table sets forth a summary of the change in the fair value of the warrant liability that is measured at fair value on a recurring basis:
| | | |
|
| | |
Balance on December 31, 2022 | | $ | — |
Issuance of warrants reported at fair value | |
| 21,544,000 |
Change in fair value of warrant liability | |
| (11,739,000) |
Balance on September 30, 2023 | | $ | 9,805,000 |
The following table sets forth a summary of the change in the fair value of the bifurcated embedded derivative liability that is measured at fair value on a recurring basis:
| | | |
|
| | |
Balance on December 31, 2022 | | $ | — |
Issuance of convertible preferred stock with bifurcated embedded derivative | |
| 6,140,000 |
Change in fair value of bifurcated embedded derivative | |
| 430,000 |
Balance on September 30, 2023 | | $ | 6,570,000 |
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 Condensed Consolidated Financial Statements to direct the reader to a further detailed discussion. This section should be read in conjunction with the Condensed Consolidated Financial Statements and Supplementary Data included in this Quarterly Report on Form 10-Q. This MD&A contains forward-looking statements reflecting Petros’ current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2022.
Overview
Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) is a pharmaceutical company focused on men’s health therapeutics,expanding consumer access to medication through over-the-counter (OTC) drug development programs, consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC (“Metuchen”), TIMMTimm Medical Technologies, Inc. (“TIMMTimm Medical”), Neurotrope, Inc. (“Neurotrope”), 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 Petros is also currently conducting non-clinical consumer studies in connection with the co-foundercontemplated pursuit 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 functionsFDA approval for Stendra®. Also for Non-Prescription / Over-The-Counter (“OTC”) use in 2019, Metuchen deployed a specialized key account sales model augmented by a national non-personal promotion campaign reaching nearly 30,000 healthcare professionals. Metuchentreating ED.
In addition to Stendra®, Petros’ ED portfolio also enhanced its digital campaigns designed to create awareness among patientsincludes external penile rigidity devices, namely Vacuum Erection Devices (“VEDs”), which are sold domestically 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.
30
internationally. In addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health.In March 2020,
Going Concern
Petros acquired an exclusive global license (the “Hybrid License”) for the developmenthas experienced net losses and commercializationnegative cash flows from operations since our inception. As 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. On September 24, 2020,30, 2023, the Company had cash of approximately $18.0 million, positive working capital of $16.4 million, an accumulated deficit of approximately $99.2 million and Hybrid entered into a letter agreement, pursuant to whichused cash in operations during the termnine months ended September 30, 2023, 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 payable within seven calendar days of entering into the agreement.
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.approximately $5.4 million. The Company cannot reasonably estimatedoes not currently have sufficient available liquidity to fund its operations for at least the length or severity of the impact that the COVID-19 outbreak will have on its financial results,next 12 months. These conditions 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 physician access resumes new normal levels. In response to the spread of COVID-19, in March 2020, the Company closed its administrative offices and as of March 31, 2021, 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,events raise substantial doubt about the Company’s ability to engage in personal interactions with physicians and customers remains limited, and it is unknown whencontinue as a going concern within one year after the Company’s offices will reopen, anddate that these interactions will be fully resumed.consolidated financial statements are issued.
3127
In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, including the gross proceeds of $15 million raised in the Private Placement (see the section below titled “Liquidity and Capital Resources—July 2023 Private Placement”), as well as by exploring additional ways to raise capital and increasing cash flows from operations. The company intends to use the proceeds from the July 2023 capital raise to fund its OTC progress into 2024. 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; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC 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.
For more information, please see Part II, Item 1A “Risk Factors” included elsewhere within this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Nature of Operations and Basis of Presentation
Petros is a pharmaceutical company focused on expanding consumer access to medication through over-the-counter (OTC) drug development programs with a full range of commercial capabilities including sales, marketing, regulatory and medical affairs, finance, trade relations, pharmacovigilance, market access relations, manufacturing, and distribution.
Petros consists of wholly owned subsidiaries, Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”), Neurotrope, Inc., a Nevada corporation (“Neurotrope”), Timm Medical Technologies, Inc. (“Petros” or the “Company”Timm Medical”), and Pos-T-Vac, LLC (“PTV”). Petros was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting thecertain transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Metuchen, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiarycertain subsidiaries 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,(collectively the “Mergers”). As a result of theThe Mergers Metuchen and Neurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporationwere consummated 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 The Company is engaged in the Merger Agreement,commercialization and alldevelopment 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.)Stendra®, a Delaware corporationU.S. Food and Drug Administration (“Synaptogenix”FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”), a wholly-owned subsidiarywhich we have licensed from Vivus, Inc. (“Vivus”). Petros also markets its own line 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 outlinedED products in the FASB’s ASC No. 805, Business Combinations (“ASC 805”),form of vacuum erection device products through its subsidiaries, Timm Medical 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 Condensed 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 Condensed Consolidated Financial Statements include the results of Petros from December 1, 2020, the date the reverse recapitalization was consummated.PTV.
The Company manages its operations through two segments. The Company’s two segments, Prescription Medications and Medical Devices, both of which 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 iswas in the early stages of development and hashad not yet sought FDA approval to begin Phase 1 clinical trials, will be withinwere categorized under the Prescription Medications segment. We terminated the H100™ license in May 2023. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
Licensing and Distribution
The Company acquired the rights to Stendra® avanafil 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.
32
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
28
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 Vivusa Supply Agreement on theSeptember 30, 2016, which has since been terminated, 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 provide2021. Following the product to the Company or its designee, directly or through one or more third parties until September 30, 2021. During the termtermination 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 is requiredproviding pharmaceutical development and technology transfer services in order to purchase minimum annual quantities from Vivus. Vivus, in turn, procuresestablish and validate its ability to manufacture supply of the Company’s Stendra® product. Any commercial sale of product frommanufactured during the performance of the Agreement must be subject to a third-party manufacturer.subsequent commercial manufacturing services agreement (with associated quality agreement) between the parties before it can be offered for commercial sale.
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®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 iswas 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 the pathway required to address the deficiency noted by Health Canada. The agreement remains in effect. In August 2018,outcome of these negotiations is uncertain and depends on a variety of factors, including 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.result of Acerus’ ongoing dissolution proceedings.
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 Company terminated the Hybrid License on May 11, 2023.
Vivus Settlement Agreement, Promissory Note and $250,000 annual payments due thereafter. the Security Agreement
On September 24, 2020, the CompanyJanuary 18, 2022, Petros and HybridVivus entered into a letter agreement, pursuantSettlement Agreement (the “Vivus Settlement Agreement”) related to which the termminimum 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 license agreement was extended for an additional six monthsCompany’s Stendra® product that were delivered to March 24, 2021.the third-party retailer and later returned. In considerationconnection with the Vivus Settlement Agreement, Petros retained approximately $7.3 million of API inventory under the Vivus Supply Agreement. In exchange for the extension,API and reduction of current liabilities, Petros executed an interest-bearing promissory note (the “Note”) in favor of Vivus in 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,principal amount of $10,201,758, which approximate fair value. The parties also entered into a second letter agreement, pursuantSecurity Agreement to whichsecure Petros’ obligations under the partiesNote.
In addition to the payments to be made in accordance with the Note, the Company further agreed to extend the Second Period (as defined 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) for an additional six (6) months to September 24, 2021. Additionally,Agreement. On January 18, 2022, the Company agreed to pay Hybridmade a one-time, non-creditableprepayment of the obligations under the Note in the amount of $900,000, and non-refundablea payment of two hundred thousand U.S. Dollars ($200,000), which was payable within seven calendar days$1,542,904 with respect to a purchase order made in 2021 to Vivus. In consideration of entering intothese payments and upon the agreement.Company’s satisfaction of certain regulatory submissions, Vivus released 100% of the quantity of bulk Stendra® tablets under the Company’s existing open purchase order (the “Open Purchase Order”) being held by Vivus later during the first quarter of 2022.
3329
As a result of entering into the Vivus Settlement Agreement, the Company decreased its accrued expenses by $6.5 million and decreased accrued inventory purchases by $14.2 million; which were partially offset by a decrease in API purchase commitments of $6.2 million and an increase to liabilities for the Note of $10.2 million (which is net of the $0.9 million prepayment on the Note). As a result, the Company recorded a $3.4 million gain on settlement for the nine months ended September 30, 2022.
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 accrues 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 nine months ended September 30, 2023, the Company has paid Vivus $1,089,683. As of September 30, 2023, the principal balance on the Note is $8,388,093.
Critical Accounting Policies and Estimates
The preparation of the condensed 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 condensed 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 condensed consolidated financial statements as they occur. While our significant accounting policies are more fully described in “Part I; Item 1. Financial Statements and Supplementary Data; Notes to Condensed Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” and in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Condensed Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” in the Company’s Annualthis Quarterly Report on Form 10-K for the fiscal year ended December 31, 2021,10-Q, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our condensed 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.
30
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 isare 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 deviceStendra® and receive credit for product.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.
34
Table As of ContentsSeptember 30, 2023, December 31, 2022 and December 31, 2021, the reserves for product returns were $2.9 million, $2.3 million and $3.8 million, respectively, and are included as a component of accrued expenses. During the nine months ended September 30, 2023 and 2022, respectively, the Company recorded $1.3 million and $7.6 million of returns as a reduction of gross revenue.
Accounts Receivable
TheEffective January 1, 2023, the Company extends credit to its customers in the normal course of business. Accountsreports accounts receivable are recorded at the invoiced amount,and contract assets net of chargebacks, DSA fees, and cash discounts. Management determines eachan allowance basedfor expected credit losses in accordance with Accounting Standards Codification Topic 326, Financial Instruments Credit Losses ( ASC 326 ). The adoption of ASC 326 had no material impact on historical experience along with the present knowledge of potentially uncollectible accounts.Company’s financial results for any prior periods, therefore no cumulative adjustment to beginning retained earnings was recorded.
InventoryInventories
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 market.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.
31
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 PetrosPetros’ Common Stock. The Company estimated their fair value using athe Monte Carlo Simulation approach.approach as of June 30, 2022. 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.
Change in fair value of derivative liability
For the nine months ended September 30, 2023, the Company recorded a loss of $0.4 million for the change in fair value of the derivative liability compared to a gain of $0.5 million for the nine months ended September 30, 2022. The loss in 2023 related to the increase in the fair value of derivative liability established for certain bifurcated features of the Series A Preferred Stock issued in the July 2023 private placement.
The gain in 2022 represented the change in fair value of the derivative during the nine months ended September 30, 2022, primarily driven by the decline in the Company’s stock price as well as the passage of time, as it became less likely that the earnout associated with the Mergers consummated on December 1, 2020 would be met.
Change in fair value of warrant liability
For the nine months ended September 30, 2023, the Company recorded a gain of $11.7 million for the change in fair value of the warrant liability compared to $0 for the nine months ended September 30, 2022. The gain related to the decrease in the fair value of warrants issued in the July 2023 private placement which were classified as liabilities in accordance with ASC 480.
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.
35
Table During the year ended December 31, 2022, the Company noted that indicators of Contentsimpairment 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.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Results32
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.
ThreeNine Months Ended March 31, 2021September 30, 2023 and 20202022 (Unaudited)
The following table sets forth a summary of our statements of operations for the threenine months ended March 31, 2021September 30, 2023 and 2020:2022:
| | | | | | | ||||||
| | For the Three Months | | | | | | | ||||
| | Ended March 31, | | For the Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2023 |
| 2022 | ||||
Net sales | | $ | 4,075,606 | | $ | 1,791,921 | | $ | 6,186,638 | | $ | 5,193,953 |
Cost of sales | |
| 643,386 | |
| 784,035 | |
| 1,473,073 | |
| 1,408,086 |
Gross profit | |
| 3,432,220 | |
| 1,007,886 | |
| 4,713,565 | |
| 3,785,867 |
| | | | | | | | | | | | |
Operating expenses: | |
|
| |
|
| |
| | |
| |
Selling, general and administrative | |
| 3,881,717 | |
| 4,816,463 | |
| 6,382,166 | |
| 9,285,317 |
Warrant issuance costs | | | 2,855,000 | | | — | ||||||
Gain on settlement with Vivus | | | — | | | (3,389,941) | ||||||
Research and development | |
| 19,181 | |
| 139,385 | |
| 1,574,760 | |
| 1,562,518 |
Depreciation and amortization expense | |
| 1,728,829 | |
| 1,661,362 | |
| 2,480,385 | |
| 4,682,610 |
Intangible asset impairment | | | — | | | 7,460,000 | ||||||
Total operating expenses | |
| 5,629,727 | |
| 6,617,210 | |
| 13,292,311 | |
| 19,600,504 |
| | | | | | | | | | | | |
Loss from operations | |
| (2,197,507) | |
| (5,609,324) | |
| (8,578,746) | |
| (15,814,637) |
| | | | | | | | | | | | |
Change in fair value of derivative liability | |
| 5,380,000 | |
| — | |
| (430,000) | |
| 460,000 |
Interest expense, senior debt | |
| (173,412) | |
| (427,584) | ||||||
Interest expense, related party term loans | |
| — | |
| (76,282) | ||||||
Income (loss) before income taxes | |
| 3,009,081 | |
| (6,113,190) | ||||||
Change in fair value of warrant liability | |
| 11,739,000 | |
| — | ||||||
Interest income | | | 287,722 | | | — | ||||||
Interest expense, promissory note | | | (410,317) | | | (451,075) | ||||||
Loss on issuance of Series A Preferred Stock | |
| (11,088,997) | |
| — | ||||||
| | | | | | | | | | | | |
Income tax benefit | |
| — | |
| (29,971) | ||||||
Loss before income taxes | |
| (8,481,338) | |
| (15,805,712) | ||||||
| | | | | | | | | | | | |
Net income (loss) | | $ | 3,009,081 | | $ | (6,083,219) | ||||||
Income tax expense | |
| — | |
| 10,501 | ||||||
| | | | | | | ||||||
Net Loss | | $ | (8,481,338) | | $ | (15,816,213) |
Net Sales
Net sales for the threenine months ended March 31, 2021September 30, 2023 were $4,075,606,$6,186,638, composed of $3,200,647$3,416,444 of net sales from Prescription Medicines and net sales of $874,959$2,770,194 from Medical Devices.
Net sales for the threenine months ended March 31, 2020September 30, 2022, were $1,791,921,$5,193,953, composed of $798,257$2,716,311 of net sales from Prescription Medicines and net sales of $993,664$2,477,642 from Medical Devices.
36
For the threenine months ended March 31, 2021,September 30, 2023 gross salesbillings to customers representing 10% or more of the Company’s total gross salesbillings included one customerthree customers that represented approximately 88%23%, 19%, and 17% of total gross sales.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 threenine months ended March 31, 2020,September 30, 2022, gross sales frombillings to customers representing 10% or more of the Company’s total gross salesbillings included one customerfour customers that represented approximately 82%27%, 22%, 18%, and 15% of total gross sales.billings, respectively. 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 the one customerfour main customers, as described above, and resold through three main wholesalers, which collectively accounted for approximately 80%92% of Stendra® net sales for the threenine months ended March 31, 2021.September 30, 2023. Individually, sales to the threefour main wholesalers either from the one customer described above or directly,customers, accounted for 31%, 24%26%, 23%, and 25%12% of Stendra® net salesgross billings for the threenine months ended March 31, 2021.September 30, 2023.
33
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 2,283,685,$992,685 or 127%19% higher during threethe nine months ended March 31, 2021 than inSeptember 30, 2023 compared to the same period in 2020,2022 consisting of a $2,402,390$700,133 increase in the net sales of Stendra® and a $118,705 decrease$292,552 increase in Medical Device Sales. The increase in net sales inof Stendra® was substantially due to higher wholesaler demand as the market began to recover from the implications of the 2019 FDA warning letter that impacted the Company's ability to promote Stendra® in the 1st quarter of 2020 and the beginning of a recovery from the COVID-19 pandemic in the 1st quarter of 2021. This increased demand was also the result of timing of orders between March and April, as compared to the same period from the prior year.decreased related sales allowances. The decreaseincrease in net sales for our Medical Devices segment was attributable to the discontinuation of co-promotion activities and lowerincluded an increase in domestic sales of certain products.VED systems and no change in international sales of VED systems.
Cost of Sales
Cost of sales for the threenine months ended March 31, 2021September 30, 2023, were $643,386,$1,473,073, composed of $389,281$343,109 of cost of sales for our Prescription Medicines segment and $254,105$1,129,964 for our Medical Devices segment.
Cost of sales for the threenine months ended March 31, 2020September 30, 2022, were $784,035,$1,408,086, composed of $501,418$525,073 of cost of sales for our Prescription Medicines segment and $282,617$883,013 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the threenine months ended March 31, 2021September 30, 2023 consisted of 12% inventory obsolescence reserves, 37%50% royalty expenses, 38% third-party product cost of sales, 41% royalty expenses, and 10% third-party logistics provider order fulfillment and shipping costs.12% in inventory obsolescence reserves.
Cost of sales for the Medical Device segment for the threenine months ended March 31, 2021September 30, 2023 consisted of 85%83% raw materials 9%and 17% production labor and 6% other cost of sales.labor.
Cost of sales decreasedincreased by $140,649,$64,987 or 18%,5% during the threenine months ended March 31, 2021September 30, 2023 compared to the same period 2020.in 2022. For the threenine months ended March 31, 2021September 30, 2023 and 2020,2022, cost of sales as a percentage of net sales were 16%was 24% and 44%27%, respectively. The decrease in cost of sales as a percentage of net sales was a result of decreased sales order fulfillment costs (on a per unit basis), during the threenine months ended March 31, 2021, and decreased amortization expense dueSeptember 30, 2023 compared to the de-recognition of the 200mg inventory step-up assetsame period in September 2020.2022.
Gross Profit
Gross profit for the threenine months ended March 31, 2021September 30, 2023 was $3,432,220,$4,713,565, or 84%,76% of net sales, composed of $2,811,366$3,073,335 of gross profit from Prescription Medicines and $620,854$1,640,230 from Medical Devices. Gross profit for the threenine months ended March 31, 2020September 30, 2022 was $1,007,886,$3,785,867, or 56%,73% of net sales, composed of $296,839$2,191,238 of gross profit from Prescription Medicines and $711,047$1,594,629 from Medical Devices. The changesincrease in gross profit was driven by the factors notedchanges in net sales and cost of goods sold (“COGS”) per above.
37
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the threenine months ended March 31, 2021September 30, 2023, were $3,881,717,$6,382,166, composed of $1,734,333$1,006,666 of selling, general and administrative expenses of our Prescription Medicines segment, $546,995$1,398,890 of selling, general and administrative expenses of our Medical Devices segment and $1,600,389$3,976,610 of general corporate expenses.
Selling, general and administrative expenses for the threenine months ended March 31, 2020September 30, 2022, were $4,816,463,$9,285,317, composed of $3,130,414$3,933,295, of selling, general and administrative expenses of our Prescription Medicines segment, $743,813$1,352,239 of selling, general and administrative expenses of our Medical Devices segment and $942,236$3,999,783 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 $934,746,$2,903,151 or 19%,31% during the threenine months ended March 31, 2021September 30, 2023, compared to the compared to the same period of 2020.in 2022. Decreased selling general and administrative expenses were primarily driven by lowerdecreased direct selling and marketing expenses of $987,219, decreased stock based compensation expense of $761,737, decreased prescription data expenses of $460,064, decreased payroll expenses and direct marketingof $379,303 resulting from decreased headcount, decreased insurance expenses of $317,052, decreased professional service fees of $129,422 as management sought to reduce expenses due to COVID-19;improve operational efficiencies and decreased other operating expenses of $259,921 partially offset by a waiver of FY 23 PDUFA fees by the FDA resulting in a $277,060 increase in PDUFA expenses, and increased accounting and legal fees and other expensesfranchise taxes of $114,507.
Warrant issuance costs
For the nine months ended September 30, 2023, the Company recorded warrant issuance costs of $2.9 million associated with the Merger.July 2023 private placement.
Gain on settlement with Vivus
As a result of the Vivus Promissory Note, as discussed in Note 8 and Note 13, the Company’s total liabilities were decreased by $3,389,941 in the form of concession of customer returns, which were recognized as a gain on settlement during the nine months ended September 30, 2022. There was no such activity in the same period of 2023.
Research and development
Research and development expenses for the threenine months ended March 31, 2021September 30, 2023 were $19,181, in$1,574,760, composed of $1,499,842 for our Prescription Medicines segment. Researchsegment and development expenses$74,918 for Prescription Medicinesour Medical Devices segment, are composed entirely of consulting fees.respectively.
Research and development expenses for the threenine months ended March 31, 2020September 30, 2022 were $139,385, in$1,562,518, composed of $1,428,848 for our Prescription Medicines segment. segment and $133,670 for our Medical Devices segment, respectively.
Research and development expenses for the Prescription Medicines segment for the nine months ended September 30, 2023 are composed of $100,000$836,507 for clinical development and $436,222 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter (“OTC”) Strategies related to Stendra®; $200,000 for upfront licensing fees $26,732 ofand $24,620 for consulting fees related to the H100 license acquired in March 2020, which was later terminated during the second quarter of 2023, and $12,653$2,493 related to the Company’s tech transfer of legal fees.its manufacturing process. Research and development expenses for the Prescription Medicines segment for the nine months ended September 30, 2022 are composed of $793,542 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter (“OTC”) Strategies related to Stendra®; $150,000 for upfront licensing fees, $239,339 for clinical development expenses, and $67,863 for consulting fees related to the H100 license acquired in March 2020, which was later terminated during the second quarter of 2023; and $178,104 related to the Company’s tech transfer of its manufacturing process.
Research and development expenses decreasedfor the Medical Devices segment for the nine months ended September 30, 2023 are composed of $74,918 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the nine months ended September 30, 2022 are composed of $133,670 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies.
Research and development expenses increased by $120,204$12,243 or 86%1% during the threenine months ended March 31, 2021September 30, 2023, compared to the same period of 2020. Decreasedin 2022. Increased research and development expenses were primarily driven by $100,000 ofincreased clinical development expenses related to the Company’s OTC strategies related to Stendra® and increased upfront licensing fees forrelated to the three months endedH100 license acquired in March 31, 2020, that did not reoccurwhich was later terminated during the three months ended March 31, 2021.second quarter of 2023, partially offset by decreased consulting fees related to the Company’s OTC strategies related to Stendra® and decreased license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies.
Depreciation and amortization
Depreciation and amortization expenses for the threenine months ended March 31, 2021September 30, 2023, were $1,728,829,$2,480,385, composed of $1,398,270$1,726,409 of depreciation and amortization expenses of our Prescription Medicines segment and $330,559$753,976 of depreciation and amortization expenses of our Medical Devices segment.
35
Depreciation and amortization expenses for the threenine months ended March 31, 2020September 30, 2022, were $1,661,362,$4,682,610, composed of $1,353,591$3,808,991 of depreciation and amortization expenses of our Prescription Medicines segment and $307,771$873,619 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.years
38
Change in fair value of derivative liability
In connection withFor the Mergers consummated on December 1, 2020, each security holdernine months ended September 30, 2023, the Company recorded a loss of Metuchen received$0.4 million for the change in fair value of the derivative liability compared to a liability classified earnout considerationgain of $0.5 million for the nine months ended September 30, 2022. The loss in 2023 related to be paidthe increase in the formfair value of Petros Commonderivative liability established for certain bifurcated features of the Series A Preferred Stock if either Petros’ Market Capitalization (as definedissued in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forthJuly 2023 private placement.
The gain 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 $5,380,000 represents2022 represented the change in fair value of the derivative during the threenine months ended March 31, 2021,September 30, 2022, primarily driven by the decline in the Company’s stock price as well as the passage of time.time, as it became less likely that the earnout associated with the Mergers consummated on December 1, 2020 would be met.
Change in fair value of warrant liability
For the nine months ended September 30, 2023, the Company recorded a gain of $11.7 million for the change in fair value of the warrant liability compared to $0 for the nine months ended September 30, 2022. The gain related to the decrease in the fair value of warrants issued in the July 2023 private placement which were classified as liabilities in accordance with ASC 480.
Interest expense, senior debtincome
Interest income for the nine months ended September 30, 2023 was $287,722 on funds deposited in interest bearing money market accounts. There was no interest income for the nine months ended September 30, 2022.
Interest expense, senior debtpromissory 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 nine months ended September 30, 2023 and 2022 was $410,317 and $451,075, respectively.
36
Loss on issuance of Series A Preferred Stock
As the fair value of the liabilities required to be subsequently measured at fair value exceeded the net proceeds received, the Company recognized the excess of the fair value over the net proceeds received as a loss upon issuance of preferred stock of $11.1 million which is included in other income (expense) in the condensed consolidated statement of operations.
Three Months Ended September 30, 2023 and 2022 (Unaudited)
The following table sets forth a summary of our statements of operations for the three months ended March 31, 2021 was $173,412 consisting of interest payments on our senior debt, with a weighted average balance of $5,597,203. Interest expense, senior debtSeptember 30, 2023 and 2022:
| | | | | | |
|
| For the Three Months | ||||
| | Ended September 30, | ||||
| | 2023 |
| 2022 | ||
Net sales | | $ | 1,674,657 | | $ | (1,457,732) |
Cost of sales |
| | 408,475 |
| | 286,525 |
Gross profit |
| | 1,266,182 |
| | (1,744,257) |
| | | | | | |
Operating expenses: |
| | |
| |
|
Selling, general and administrative |
| | 2,001,935 |
| | 2,170,975 |
Warrant issuance costs | | | 2,855,000 | | | — |
Gain on settlement with Vivus |
| | — |
| | — |
Research and development | | | 389,093 | | | 735,916 |
Depreciation and amortization expense |
| | 826,795 |
| | 1,560,870 |
Intangible asset impairment |
| | — |
| | 7,460,000 |
Total operating expenses | | | 6,027,823 | | | 11,927,761 |
| | | | | | |
Loss from operations |
| | (4,806,641) |
| | (13,672,018) |
| | | | | | |
Change in fair value of derivative liability |
| | (430,000) |
| | — |
Change in fair value of warrant liability |
| | 11,739,000 |
| | — |
Interest income | | | 168,481 | | | — |
Interest expense, promissory note | | | (131,351) | | | (147,677) |
Loss on issuance of Series A Preferred Stock |
| | (11,088,997) |
| | |
Loss before income taxes | | | (4,549,508) | | | (13,819,695) |
| | | | | | |
Income tax expense | | | — | | | 10,501 |
| | | | | | |
Net Loss | | $ | (4,549,508) | | $ | (13,830,196) |
Net Sales
Net sales for the three months ended March 31, 2020 was $427,584, consistingSeptember 30, 2023 were $1,674,657, composed of interest payments on our senior debt, with a weighted average balance$925,759 of $11,740,995. The decreasenet sales from Prescription Medicines and net sales of $254,172 or 59% was due to the pay down of $5.0 million of senior debt and decreased weighted average interest rate subsequent to March 31, 2020.$748,898 from Medical Devices.
Interest expense, subordinated related party term loans
There was no interest expense, subordinated related party term loansNet sales for the three months ended March 31, 2021. During 2020,September 30, 2022, were $(1,457,732), composed of $(2,140,629) of net sales from Prescription Medicines and net sales of $682,897 from Medical Devices.
For 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 sharesthree months ended September 30, 2023 gross billings to customers representing 10% or more of the Company’s common stock withtotal gross billings included three customers that represented approximately 24%, 21%, and 18% of total gross billings. Gross billings is a non-GAAP financial measure. For a reconciliation of net sales to gross billings, see the consummationsection titled “Reconciliation of Non-GAAP Financial Measures” below.
For the three months ended September 30, 2022 gross billings to customers representing 10% or more of the Mergers on December 1, 2020. Accordingly,Company’s total gross billings included three customers that represented approximately 30%, 16%, and 15% of total gross billings. Gross billings is a non-
37
GAAP financial measure. For a reconciliation of net sales to gross billings, see the was no principal balancesection titled “Reconciliation of Non-GAAP Financial Measures” below.
Prescription Medicines sales consist of sales of Stendra® in the subordinated related party term loans or accrued PIK interestU.S. for the treatment of male ED. Stendra® is primarily sold directly to three main customers, as described above, which collectively accounted for approximately 86% of March 31, 2021.
Income tax benefit
There was no income tax benefit or expense recordedStendra® net sales for the three months ended March 31, 2021September 30, 2023. Individually, sales to the three main customers, accounted for 32%, 29%, and 25% of Stendra® gross billings for the three months ended March 31, 2020September 30, 2023.
Medical Device sales consist of domestic and international sales of men’s health products for the benefit was $29,971.treatment of ED. The income tax benefit was primarily attributedmen’s health products do not require a prescription and include Vacuum Erection Devices (“VEDs and related accessories”).
Net sales were $3,132,389 or 215% higher during the three months ended September 30, 2023 compared to the operationssame period in 2022 consisting of a $3,066,388 increase in the net sales of Stendra® and a $66,001 increase in Medical Device Sales. The increase in net sales of Stendra® was substantially due to a decrease in estimated reserves for product returns as the prior year period included a significant increase in estimated returns due to wholesaler returns related to the sale of short-dated product above our initial estimates. 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 three months ended September 30, 2023, were $408,475, composed of $85,388 of cost of sales for our Prescription Medicines segment and $323,087 for our Medical Devices segment.
Cost of sales for the three months ended September 30, 2022, were $286,525, composed of $36,067 of cost of sales for our Prescription Medicines segment and $250,458 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the three months ended September 30, 2023 consisted of 54% royalty expenses, 45% third-party product cost of sales and 1% 3PL order fulfillment and shipping expenses.
Cost of sales for the Medical Device segment specificallyfor the three months ended September 30, 2023 consisted of 80% raw materials and 20% production labor.
Cost of sales increased by $121,950 or 43% during the three months ended September 30, 2023 compared to the same period in 2022. For the three months ended September 30, 2023 and 2022, cost of sales as a percentage of net sales was 24% and -20%, respectively.
Gross Profit (loss)
Gross profit for the three months ended September 30, 2023 was $1,266,182, or 76% of net sales, composed of $840,371 of gross profit from Prescription Medicines and $425,811 from Medical Devices. Gross loss for the three months ended September 30, 2022, was $(1,744,257), composed of $(2,176,696) of gross loss from Prescription Medicines net of $432,439, from Medical Devices. The decrease in gross profit was driven by the changes in net sales and COGS per above.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the three months ended September 30, 2023, were $2,001,935, composed of $251,674 of selling, general and administrative expenses of our Prescription Medicines segment, $493,447 of selling, general and administrative expenses of our Medical Devices segment and $1,256,814 of general corporate expenses.
Selling, general and administrative expenses for the three months ended September 30, 2022, were $2,170,975, composed of $493,128 of selling, general and administrative expenses of our Prescription Medicines segment, $467,700 of selling, general and administrative expenses of our Medical Devices segment and $1,210,147 of general corporate expenses.
38
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 $169,040 or 8% during the three months ended September 30, 2023, compared to the compared to the same period in 2022. Decreased selling general and administrative expenses were primarily driven by decreased direct selling and marketing expenses of $321,183, decreased stock based compensation expense of $277,296, decreased payroll expenses of $110,883 resulting from decreased headcount and decreased other operating expenses of $362,606 partially offset by a waiver of FY 23 PDUFA fees by the FDA resulting in a $831,180 increase in PDUFA expenses and increased professional service fees of $71,748.
Warrant issuance costs
For the three months ended September 30, 2023, the Company recorded warrant issuance costs of $2.9 million associated with the July 2023 private placement.
Research and development
Research and development expenses for the three months ended September 30, 2023 were $389,093, composed of $369,505 for our Prescription Medicines segment and $19,588 for our Medical Devices segment, respectively.
Research and development expenses for the three months ended September 30, 2022, were $735,916, composed of $678,552 in our Prescription Medicines segment and $57,364 for our Medical Devices segment.
Research and development expenses for the Prescription Medicines segment for the three months ended September 30, 2023 are composed of $181,594 for consulting fees and $187,911 for clinical development related to the Company’s Non-Prescription / Over-The-Counter (“OTC”) Strategies related to Stendra®. The Company also reclassified $648,596 of expenses previously reported as consulting fees to clinical development expenses. Research and development expenses for the Prescription Medicines segment for the three months ended September 30, 2022 are composed of $403,085 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter Strategies related to Stendra®; $97,824 for clinical development expenses and $27,408 for consulting fees related to the H100 license acquired in March 2020, which was later terminated during the second quarter of 2023; and $150,235 related to the Company’s tech transfer of its manufacturing process.
Research and development expenses for the Medical Devices segment for the three months ended September 30, 2023 are composed of $19,588 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the three months ended September 30, 2022, are composed of $57,364 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies.
Research and development expenses decreased by $346,823 or 47% during the three months ended September 30, 2023, compared to the same period in 2022. Decreased research and development expenses were primarily driven by decreased consulting fees related to the Company’s OTC strategies related to Stendra® and decreased license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies.
Depreciation and amortization
Depreciation and amortization expenses for the three months ended September 30, 2023, were $826,795, composed of $575,470 of depreciation and amortization expenses of our Prescription Medicines segment and $251,325 of depreciation and amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the three months ended September 30, 2022, were $1,560,870, composed of $1,269,664 of depreciation and amortization expenses of our Prescription Medicines segment and $291,206 of depreciation and amortization expenses of our Medical Devices segment.
39
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
Change in fair value of derivative liability
For the three months ended September 30, 2023, the Company recorded a loss of $0.4 million for the change in fair value of the derivative liability compared to $0 for the three months ended September 30, 2022. The loss related to the increase in the fair value of derivative liability established for certain bifurcated features of the Series A Preferred Stock issued in the July 2023 private placement.
Change in fair value of warrant liability
For the three months ended September 30, 2023, the Company recorded a gain of $11.7 million for the change in fair value of the warrant liability compared to $0 for the three months ended September 30, 2022. The gain related to the decrease in the fair value of warrants issued in the July 2023 private placement which were classified as liabilities in accordance with ASC 480.
Interest Income
Interest income for the three months ended September 30, 2023 was $168,481 on funds deposited in interest bearing money market accounts. There was no interest income for the three months ended September 30, 2022.
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 three months ended September 30, 2023 and 2022 was $131,351 and $147,677, respectively.
Loss on issuance of Series A Preferred Stock
As the fair value of the liabilities required to be subsequently measured at fair value exceeded the net proceeds received, the Company recognized the excess of the fair value over the net proceeds received as a loss upon issuance of preferred stock of $11.1 million which is now included in other income (expense) in the Company’scondensed consolidated group. The consolidated group is in a valuation allowance position, as such, the legacy deferred tax liabilities recorded at Timm have been a sourcestatement of taxable income which reduced the overall valuation allowance as of December 31, 2020.operations.
Liquidity and Capital Resources
General
Cash on hand totaled $14,566,710$17,969,949 at March 31, 2021,September 30, 2023, compared to $17,139,694$9,426,264 at December 31, 2020.2022.
We have experienced net losses and negative cash flows from operations since our inception. As of March 31, 2021,September 30, 2023, we had cash of $14.6approximately $18.0 million, negative working capital of approximately $16.3$16.4 million, including debtand an accumulated deficit of $5.1 million maturing in 2021, and sustained cumulative losses attributable to common stockholders of $58.7$99.2 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 weIn 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 optimistic that we will be successfuldiscussed 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.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 net proceeds we received from the Mergers, revenues from product sales, private sales, registered offerings and private placements of equity securitiessecurities. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and proceeds received fromevents raise substantial doubt about the issuance of convertible debt,Company’s ability to continue as described below.a going concern within one year after the date that these unaudited interim consolidated financial statements are issued.
3940
We rely on McKessonIn response to distribute our products to our customers. On March 27, 2020,these conditions and events, the Company received notice of termination from McKesson. Such notice was withdrawn on April 3, 2020,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 Company’s paymentdate of $1,915,144. Asthis Quarterly Report. The potential sources of March 31, 2021, we had $6,752,920financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in Gross Accounts Receivable dueboth public and private offerings. The Company also plans to finance near-term operations with its cash on hand, including the gross proceeds of $15 million raised in the Private Placement (see the section below titled “Liquidity and Capital Resources—July 2023 Private Placement”), as well as by exploring additional ways to raise capital and increasing cash flows from McKesson, partially offset by $1,447,063 in accrued chargebacks,operations. The company intends to use the proceeds from the July 2023 capital raise to funds its OTC progress through the end of 2024. There is no assurance the Company will manage to raise additional capital or otherwise increase cash discounts, unbilled returns, and distribution service fees. Net amounts McKesson owedflows, if required. The sources of financing described above that could be available to the Company was $5,305,857 asand the timing and probability of March 31, 2021.
Our principal expenditures include payment for inventoryobtaining sufficient capital depend, in part, on expanding the use of Stendra® fromand continuing to invest in research and development pursuant to our key supplier, Vivus, including purchasesNon-Prescription / Over-The-Counter (“OTC”) strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future and future capital market conditions. If the Company’s current assumptions regarding timing of inventory accruedthese events are incorrect or if there are any other changes or differences in our 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 March 31, 2021. Whileassumptions that negatively impact our financing strategy, the Company ismay have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC in discussions with Vivusorder to convert a portionextend its cash resources. Thus far the Company has taken steps to reduce discretionary expenditures and explored new sources of the amounts owed into a subordinated note, though there can be no assurancefunding for our research initiatives, such as sponsored research agreements and co-development initiatives. While we are optimistic that we will be successful in these discussions.
In March 2020,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 acquired the exclusive licensebe unable to H100™ from Hybrid. H100™ iscontinue as 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.
On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the License Agreement) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of two hundred thousand U.S. Dollars ($200,000), which was payable within seven calendar days of entering into the agreement.
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.going concern.
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.
40
Debt
Senior DebtVivus Note
On September 30, 2016,As noted above, in January 2022, the Company entered intoexecuted a loan agreement (the “Loan Agreement”)promissory note in favor of Vivus with Hercules Capital, Inc. (“Hercules”), for a $35 million term loan. 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. 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.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”). The end of term charge was increased from $787,500 to $1,068,750.
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. 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 March 31, 2021. 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 amendment.
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., an affiliate of the 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 now has a maturity date of December 1, 2021.
Subordinated Related Party Term Loans
During 2020, the Company entered into Subordinated Promissory Notes with the JCP Investor in the principal amount of $15.5 million. The maturity date of the Subordinated Promissory Notes was April 2, 2021 and they 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, the JCP Investor, Neurotrope and Metuchen entered into a Note Conversion and Loan Repayment Agreement pursuant to which, the JCP Investor 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$10,201,758 in connection with the consummation ofVivus Settlement Agreement. For more information, see the Mergers on December 1, 2020,section above titled “—Vivus Settlement Agreement, Promissory Note and the Subordinated Promissory Notes were terminated. Accordingly, the principal balance of the Subordinated Promissory Notes and accrued PIK interest was $0 as of March 31, 2021.Security Agreement.”
41
Cash Flows
The following table summarizes our cash flows for the threenine months ended March 31, 2021September 30, 2023 and 2020:2022:
| | | | | | | ||||||
| | For the Three Months | | | | | | | ||||
| | Ended March 31, | | For the Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2023 |
| 2022 | ||||
Net cash used in operating activities | | $ | (446,581) | | $ | (2,375,267) | | $ | (5,366,635) | | $ | (11,226,985) |
Net cash used in investing activities | |
| — | |
| (4,429) | ||||||
Net cash (used in) provided by financing activities | |
| (2,126,403) | |
| 1,375,726 | ||||||
Net decrease in cash | | $ | (2,572,984) | | $ | (1,003,970) | ||||||
Net cash provided by (used in) financing activities | |
| 13,910,320 | |
| (1,438,925) | ||||||
Net increase (decrease) in cash | | $ | 8,543,685 | | $ | (12,665,910) |
Cash Flows from Operating Activities
Net cash used in operating activities for the threenine months ended March 31, 2021September 30, 2023 was $446,581,$5,366,635 which primarily reflected our net incomeloss of $3,009,081, more than offset by cash$8,481,338, in addition to noncash adjustments to reconcile net incomeloss to net cash used in operating activities of $3,117,296 $4,231,207
41
consisting primarily of depreciation and amortization, inventory obsolescence reserves, changes incosts associated with the fair value of derivative liability,Private Placement, and changes in operating assets and liabilities of $338,366.$1,116,504.
Net cash used in operating activities for the threenine months ended March 31, 2020September 30, 2022 was $2,375,267,$11,226,985, which primarily reflected our net loss of $6,083,219, partially offset by$15,816,213, in addition to noncash adjustments to reconcile net loss to net cash provided byused in operating activities of $1,928,495$9,288,313 consisting primarily of depreciation and amortization, non-cash paid-in-kind interestthe gain on the Vivus settlement, changes in the fair value of derivative liability, intangible asset impairment and amortization of deferred financing costs and debt discount,stock compensation, and changes in operating assets and liabilities of $1,779,457.$4,694,085.
Cash Flows from Investing Activities
Net cash used in investing activities was $4,429 for the three months ended March 31, 2020, respectively, related to the acquisition of fixed assets. No cash was used in investing activities for the three months ended March 31, 2021.
Cash Flows from Financing Activities
Net cash provided by financing activities was $13,910,320 for the nine months ended September 30, 2023 consisted of the gross proceeds of the Private Placement, offset by payments of the promissory note.
Net cash used in financing activities was $2,126,403$1,438,925 for the threenine months ended March 31, 2021,September 30, 2022, consisting of paymentsprepayments of senior debtthe promissory note, including a prepayment of $1,592,028 and a payment for the senior debt end-of-term fee of $534,375.$900,000.
Net cash provided by financing activities was $1,375,726 for the three months ended March 31, 2020, consisting of payments on the senior debt of $1,624,274, more than offset by proceeds received from subordinated debt of $3,000,000.
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 toin this Form 10-Q. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
42
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.
July 2023 Private Placement
On July 13, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which we agreed to sell in a private placement to the Investors (i) an aggregate of 15,000 shares of our newly-designated Series A Convertible Preferred Stock, with a par value of $0.0001 per share and a stated value of $1,000 per share (the “Series A Preferred Stock”), initially convertible into up to 6,666,668 shares of our common stock, par value $0.0001 per share (the “Common Stock”) at an initial conversion price of $2.25 per share (the “Series A Preferred Shares”), and (ii) warrants to acquire up to an aggregate of 6,666,668 shares of Common Stock (the “Warrants”) at an initial exercise price of $2.25 per share (collectively, the “Private Placement”). Pursuant to the terms of the Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”) and the Warrants, each of the Conversion Price (as defined below) and the exercise price and the number of shares underlying the Warrants is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions). As of September 30, 203, the Conversion Price and the exercise price of the Warrants was equal to $2.25 per share
42
The Private Placement was exempt from the registration requirements of the Securities Act pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. The closing of the Private Placement occurred on July 17, 2023. The aggregate gross proceeds from the Private Placement was approximately $15 million. We intend to use the net proceeds from the Private Placement for general corporate purposes.
We engaged Katalyst Securities LLC (the “Placement Agent”) to act as exclusive placement agent in connection with the Private Placement. Pursuant to an Engagement Letter with the Placement Agent, we paid to the Placement Agent or its designees (i) a cash fee equal to 8% of the gross proceeds of the Private Placement and (ii) warrants to acquire up to an aggregate of 533,334 shares of Common Stock on the same term as the Warrants.
Series A Preferred Stock
The terms of the Series A Preferred Shares are as set forth in the form of Certificate of Designations. The Series A Preferred Shares will be convertible into shares of Common Stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $2.25 (the “Conversion Price”). The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions). We are required to redeem the Series A Preferred Shares in 13 equal monthly installments, commencing on November 1, 2023. The amortization payments due upon such redemptions are payable, at our election, in cash at 107% of the Installment Redemption Amount (as defined in the Certificate of Designations), or subject to certain limitations, in shares of common stock valued at the lower of (i) the Conversion Price then in effect and (ii) the greater of (A) 80% of the average of the three lowest closing prices of the Common Stock during the thirty trading day period immediately prior to the date the amortization payment is due or (B) the lower of $0.396, which is 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Nasdaq Stockholder Approval (as defined below) or such lower amount as permitted, from time to time, by the Nasdaq Stock Market, subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events. We may require holders to convert their Series A Preferred Shares into Conversion Shares if the closing price of the Common Stock exceeds $6.75 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds two million dollars ($2,000,000) per day during the same period and certain equity conditions described in the Certificate of Designations are satisfied.
The holders of the Series A Preferred Shares are entitled to dividends of 8% per annum, compounded monthly, which are payable, at our option, in cash or shares of Common Stock, or in a combination thereof, in accordance with the terms of the Certificate of Designations. On September 29, 2023, we filed an amendment to the Certificate of Designations with the Secretary of State for the State of Delaware, pursuant to which the terms of the Series A Preferred Stock were amended to permit certain additional procedures for the payment of redemptions and conversions Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Shares will accrue dividends at the rate of 15% per annum. In connection with a Triggering Event, each holder of Series A Preferred Shares will be able to require us to redeem in cash any or all of the holder’s Series A Preferred Shares at a premium set forth in the Certificate of Designations. Upon conversion or redemption, the holders of the Series A Preferred Shares are also entitled to receive a dividend make-whole payment. The holders of Series A Preferred Shares have no voting rights on account of the Series A Preferred Shares, other than with respect to certain matters affecting the rights of the Series A Preferred Shares.
As of November 14, 2023, we have redeemed 1,154 Series A Preferred Shares and issued 87,499 shares of Common Stock pursuant to the terms of the Certificate of Designations.
We are subject to certain affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends (other than dividends pursuant to the Certificate of Designations), distributions or redemptions, and the transfer of assets, among other matters.
There is no established public trading market for the Series A Preferred Shares and we do not intend to list the Series A Preferred Shares on any national securities exchange or nationally recognized trading system.
Warrants
43
The Warrants became exercisable for shares of Common Stock (the “Warrant Shares”) immediately upon issuance, at an initial exercise price of $2.25 per share (the “Exercise Price”) and expire five years from the date of issuance. The Exercise Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Exercise Price (subject to certain exceptions). Upon any such price-based adjustment, the number of Warrant Shares issuable upon exercise of the Warrants will be increased proportionately. There is no established public trading market for the Warrants and we do not intend to list the Warrants on any national securities exchange or nationally recognized trading system.
Registration Rights
In connection with the Private Placement, we entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”), pursuant to which we agreed to file a resale registration statement (the “Registration Statement”) with the SEC to register for resale 200% of the Conversion Shares and the Warrant Shares promptly following the Closing Date, but in no event later than 30 calendar days after the effective date of the Registration Rights Agreement, and to have such Registration Statement declared effective by the Effectiveness Date (as defined in the Registration Rights Agreement). We filed a registration statement on Form S-3 covering such securities, which registration statement, as amended, was declared effective on September 18, 2023. Under the Registration Rights Agreement, we are obligated to pay certain liquidated damages to the investors if we fail to file the Registration Statement when required, fails to file or cause the Registration Statement to be declared effective by the SEC when required, or fails to maintain the effectiveness of the Registration Statement.
Nasdaq Stockholder Approval
Our ability to issue Conversion Shares and Warrant Shares using shares of Common Stock is subject to certain limitations set forth in the Certificate of Designations. Prior to receiving the Nasdaq Stockholder Approval, such limitations included a limit on the number of shares that may be issued until the time, if any, that our stockholders have approved the issuance of more than 19.99% of our outstanding shares of Common Stock in accordance with the rules of the Nasdaq Stock Market (the “Nasdaq Stockholder Approval”). In the Purchase Agreement we agreed to seek the Nasdaq Stockholder Approval at a meeting of stockholders, and we received the Nasdaq Stockholder Approval at a special meeting of stockholders held on September 14, 2023. Our directors and officers, who held approximately 29% of issued and our outstanding Common Stock as of the date of the Purchase Agreement, were party to a voting agreement pursuant to which, among other things, each party agreed, solely in their capacity as a stockholder, to vote all of their shares of Common Stock in favor of the approval of the Nasdaq Stockholder Approval and against any actions that could adversely affect our ability to perform our obligations under the Purchase Agreement. The voting agreement also placed certain restrictions on the transfer of the shares of Common Stock held by the signatories thereto.
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 incomeloss 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.
44
The Company defines Adjusted EBITDA as net income (loss)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. |
43
The following table presents a reconciliation of Net income (loss)net loss to Adjusted EBITDA for the three and nine months ended March 31, 2021September 30, 2023 and 2020.2022:
| | | | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months Ended | | For the Three Months Ended | ||||||||||||
| | Ended March 31, | | September 30, | | September 30, | ||||||||||||
|
| 2021 |
| 2020 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net income (loss) | | $ | 3,009,081 | | $ | (6,083,219) | ||||||||||||
Interest expense, senior debt | |
| 173,412 | |
| 427,584 | ||||||||||||
Interest expense, related party term loans | |
| — | |
| 76,282 | ||||||||||||
Income tax expense (benefit) | |
| — | |
| (29,971) | ||||||||||||
Net Loss | | $ | (8,481,338) | | $ | (15,816,213) | | $ | (4,549,508) | | $ | (13,830,196) | ||||||
Interest income | |
| (287,722) | |
| — | | | (168,481) | | | — | ||||||
Interest expense, promissory note | |
| 410,317 | |
| 451,075 | | | 131,351 | | | 147,677 | ||||||
Income tax expense | |
| — | |
| 10,501 | | | — | | | 10,501 | ||||||
Depreciation and amortization expense | |
| 1,728,829 | |
| 1,661,362 | |
| 2,480,385 | |
| 4,682,610 | | | 826,795 | | | 1,560,870 |
EBITDA | |
| 4,911,322 | |
| (3,947,962) | |
| (5,878,358) | |
| (10,672,027) | | | (3,759,843) | | | (12,111,148) |
Stock based compensation | | | 204,492 | | | 966,231 | | | 30,840 | | | 308,136 | ||||||
Gain on settlement with Vivus | | | — | | | (3,389,941) | | | — | | | — | ||||||
Intangible asset impairment | | | — | | | 7,460,000 | | | — | | | 7,460,000 | ||||||
Change in fair value of derivative liability | |
| (5,380,000) | |
| — | | | 430,000 | | | (460,000) | | | 430,000 | | | — |
Change in fair value of warrant liability | | | (11,739,000) | | | — | | | (11,739,000) | | | — | ||||||
Loss on issuance of Series A Preferred Stock | |
| 11,088,997 | |
| — | | | 11,088,997 | | | — | ||||||
Adjusted EBITDA | | $ | (468,678) | | $ | (3,947,962) | | $ | (5,893,869) | | $ | (6,095,737) | | $ | (3,949,006) | | $ | (4,343,012) |
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 Grossgross 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.
45
The following table presents a reconciliation of Netnet sales to Grossgross billings for the three and nine months ended March 31, 2021September 30, 2023 and 2020.2022:
| | | | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months Ended | | For the Three Months Ended | ||||||||||||
| | Ended March 31 | | September 30, | | September 30, | ||||||||||||
|
| 2021 |
| 2020 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net Sales | | $ | 4,075,606 | | $ | 1,791,921 | | $ | 6,186,638 | | $ | 5,193,953 | | $ | 1,674,657 | | $ | (1,457,732) |
Product Returns | |
| 609,705 | |
| 1,111,593 | | | 1,290,465 | |
| 7,644,368 | | | 516,440 | | | 3,280,289 |
Contract Rebates | |
| 871,734 | |
| 1,041,636 | | | 1,037,271 | |
| 1,175,073 | | | 225,085 | | | 416,633 |
Chargebacks | |
| 237,148 | |
| 81,883 | | | 118,490 | |
| 122,927 | | | 42,190 | | | 53,334 |
Cash Discounts | |
| 199,874 | |
| 83,886 | | | 125,679 | |
| 265,701 | | | 36,266 | | | 38,298 |
Distribution Service Fees | |
| 595,278 | |
| 539,499 | | | 678,857 | |
| 1,402,763 | | | 216,234 | | | 98,474 |
Coupon Redemptions | |
| 946,378 | |
| 798,147 | | | 1,176,562 | |
| 4,419,128 | | | 146,626 | | | 1,009,138 |
Gross Billings | | $ | 7,535,723 | | $ | 5,448,565 | | $ | 10,613,962 | | $ | 20,223,913 | | $ | 2,857,498 | | $ | 3,438,434 |
Gross billings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.
44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
46
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in Part II Item 9A.9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2022, we identified a material weaknesses in internal control related to (1) Petros has an insufficient level of monitoring and oversight controls and does not enforce the implementation of key controls reflected on its internal control process matrices; (2) the sizes of Petros’ accounting and IT departments make it impracticable to achieve an appropriate segregation of duties; and (3) Petros does not have appropriate IT access related controls.
A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management plans to expand the scope of its remediation of its internal controls over financial reporting at the consolidated level and has developed a plan to address the remediation of the foregoing deficienciesdeficiencies. The Company has continued to utilize an external consultant to assist in 2021.the remediation of the deficiencies.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting other than as noted above.
4547
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.
The information set forth in Note 15,14 Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference herein.
ITEM 1A. RISK FACTORS.
The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 31, 2023. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in our annual report, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price.
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
Cyberattacks and other data security breaches could compromise our proprietary and confidential information, which could harm our business and reputation or cause us to incur increased expenses to address any such breaches.
In the ordinary course of our business, Petros generates, collects and stores proprietary information, including intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. If a cyber incident, such as a phishing or ransomware attack, business email compromise attack, virus, malware installation, server malfunction, software or hardware failure, impairment of data integrity, loss of data or other computer assets, adware or other similar issue, impairs, shuts down, or penetrates our computer systems, our proprietary and confidential information, including e-mails and other electronic communications, may be misappropriated. In addition an employee, contractor, or other third party with whom we do business may attempt to obtain such information and may purposefully or inadvertently cause a breach involving such information. As a result, our information technology networks and infrastructure may be vulnerable to unpermitted access by hackers or other breaches, or employee error or malfeasance, and our business, financial condition, and results of operations could be materially and adversely affected.
We rely on third parties to perform services necessary for the operation of our business, and they may fail to adequately secure our proprietary and confidential information. We have in the past been subject to low-threat cyber, phishing, social engineering and business email compromise attacks, none of which individually or in the aggregate has led to costs or consequences that have materially impacted our business, results of operations or financial condition, however, we and our third-party vendors may be subject to such attacks and other cybersecurity incidents in the future. If we or our third-party vendors were to suffer an attack or breach in the future, for example, that resulted in the unauthorized access to or use or disclosure of proprietary and confidential information, we may be required to notify government authorities, be subject to investigations, civil penalties, administrative and enforcement actions, and litigation, any of which could harm our business, financial results and reputation.
Attacks upon information technology systems are a smaller reporting company as defined by Rule 12b-2increasing in their frequency, levels of the Exchange Actpersistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. Because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not requiredrecognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.
48
Any such compromise of our data security and access to, or public disclosure or loss of, confidential business or proprietary information could disrupt our operations, damage our reputation, provide theour competitors with valuable information required under this item.and subject us to additional costs, which could adversely affect our business. We may also incur significant remediation costs, including liability for stolen customer or employee information, repairing system damage or providing benefits to affected customers or employees.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS.PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
Issuance of Unregistered Securities
Effective January 1, 2021, the Company entered into a Marketing and Consulting Agreement (the “Agreement”) with CorProminence, LLC (the “Consultant”) for certain shareholder information and relation services. The term of the Agreement is for one year with automatic consecutive one-year renewal terms. As consideration for the shareholder information and relation services, the Company will pay the Consultant a monthly retainer of $7,500 and issued 30,000 restricted sharesThere were no unregistered sales of the Company’s common stock toequity securities during the Consultantthree months ended September 30, 2023, other than those previously reported in a Current Report on March 24, 2021 (the “Grant Date”). The restricted shares vested immediately on the Grant Date.
This issuance of shares was issued in reliance upon an exemption from registration pursuant to Section 4(a)(2) under the Securities Act. This issuance was not a “public offering” because no more than 35 non-accredited investors received securities of the Company, the Company did not engage in general solicitation or advertising with regard to the issuance of shares of common stock of the Company and the Company did not make a public offering in connection with the issuance or sale of shares of common stock of the Company.Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
4649
ITEM 6. EXHIBITS.
|
|
|
Exhibit No. |
| Description |
| | |
3.2 | | |
3.3 | | |
3.4 | | |
4.1 | | |
10.1 | | |
10.2 | | |
10.3† | | |
| | |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer. |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer. |
32** | | Section 1350 Certification – Principal Executive Officer and Principal Financial Officer. |
| | The following materials from Petros Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
| | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* | Filed herewith. |
** | Furnished herewith. |
† | Management contract or compensatory plan or arrangement. |
4750
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
| Petros Pharmaceuticals, Inc. | |
| | |
Date: | By: | /s/ Fady Boctor |
| | Fady Boctor |
| | Chief Commercial Officer and Principal Executive Officer |
| | |
Date: | By: | /s/ Mitchell Arnold |
| | Mitchell Arnold |
| | Vice President of Finance and Principal Financial Officer |
4851