Petros Pharmaceuticals, Inc 10-Q for FY2021 Q3
Petros Pharmaceuticals, Inc. (PTPI)
About this 10-Q
Petros Pharmaceuticals, Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.15M
- down 38.1% from $3.46M a year earlier
- Net loss
- $1.7M
- compared with a net loss of $3.3M a year earlier
- Diluted EPS
- -$0.17
- compared with -$0.96 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
for the quarterly period ended
Or
for the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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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.
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).
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 | ☐ |
☒ | | 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
As of November 11, 2021, there were
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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; Petros’ ability to comply with obligations as a public reporting company; 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; risks related to Petros’ history of incurring significant losses; risks related to Petros’ dependence on the commercialization of a single product, Stendra®, and on a single distributor thereof; risks related to the termination of 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, including the emergence of new variants, such as the Delta variant, and the related responses of governments, consumers, customers, suppliers, employees and the Company, on our business, operations, employees, financial condition and results of operations. 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, 2020 and in our other reports filed 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
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Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 | | 4 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | | 30 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk. | | 48 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | | 51 |
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETROS PHARMACEUTICALS, INC.
(formerly Metuchen Pharmaceuticals, LLC)
CONDENSED CONSOLIDATED BALANCE SHEETS
| | September 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
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| (Audited) | ||
Assets |
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Current assets: |
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Cash | | $ | | | $ | |
Accounts receivable, net | |
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Inventories | |
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Deposits with related party | |
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Prepaid expenses and other current assets | |
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Total current assets | |
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Fixed assets, net | |
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Intangible assets, net | |
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API purchase commitment | |
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Other assets | |
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Total assets | | $ | | | $ | |
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Liabilities and Stockholders’ Equity | |
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Current liabilities: | |
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Current portion of senior debt, net | | $ | | | $ | |
Accounts payable | |
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Accrued expenses | |
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Accrued inventory purchases | |
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Other current liabilities | |
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Total current liabilities | |
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Derivative liability | |
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Other long-term liabilities | |
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Total liabilities | |
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Stockholders’ Equity: | |
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Preferred stock (par value of $ | |
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Common stock (par value of $ | |
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Additional paid-in capital | |
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Accumulated deficit | |
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Total Stockholders’ Equity | |
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Total Liabilities and Stockholders' Equity | | $ | | | $ | |
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 |
| For the Nine Months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net sales | | $ | | | $ | | | $ | | | $ | |
Cost of goods sold | | | | |
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Gross profit | |
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Operating expenses: | |
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Selling, general and administrative | |
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Research and development expense | |
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Depreciation and amortization expense | |
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Total operating expenses | |
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Loss from operations | |
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Change in fair value of derivative liability | |
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Interest expense, senior debt | |
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Interest expense, subordinated related party term loans | |
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Loss before income taxes | |
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Income tax expense (benefit) | |
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Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Net loss per common share | |
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Basic and Diluted | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Weighted average common shares outstanding | |
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Basic and Diluted | |
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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)
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| | Preferred | | Units | | Common | | Units | | Preferred | | Common | | Stock | | Paid-in | | Accumulated | | | | |||||
| | Units | | Amount | | Units | | Amount | | Stock | | Stock | | Amount | | Capital | | Deficit | | Total | ||||||
Three Months Ended September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 |
| — | | $ | — |
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Stock-based Compensation Expense |
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Net Loss |
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Balance, September 30, 2021 |
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Three Months Ended September 30, 2020 |
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Balance, June 30, 2020 | | | | $ | | | | | $ | | | — | | — | | $ | — | | $ | — | | $ | ( | | $ | ( |
Net income | | — | | | — | | — | | | — | | — | | — | | | — | | | — | | | ( | | | ( |
Balance, September 30, 2020 | | | | $ | | | | | $ | | | — | | — | | $ | — | | $ | — | | $ | ( | | $ | ( |
Nine Months Ended September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | | — | | $ | — | | — | | $ | — | | | | | | $ | | | $ | | | $ | ( | | $ | |
Conversion of Preferred Stock to Common Stock | | — | | | — | | — | | | — | | ( | | | | | | | | ( | | | — | | | — |
Non-employee stock-based compensation | | — | | | — | | — | | | — | | — | | | | | | | | | | | — | | | |
Stock-based Compensation Expense | | — | | | — | | — | | | — | | — | | — | | | — | | | | | | — | | | |
Net loss | | — | | | — | | — | | | — | | — | | — | | | — | | | — | | | ( | | | ( |
Balance, September 30, 2021 | | — | | $ | — | | — | | $ | — | | — | | | $ | | | $ | | | $ | ( | | $ | ||
Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2019 | | | | $ | | | | | $ | | | — | | — | | | — | | | — | | $ | ( | | $ | |
Net loss | | — | | | — | | — | | | — | | — | | — | | | — | | | | | | ( | | | ( |
Balance, September 30, 2020 | | | | $ | | | | | $ | | | — | | — | | $ | — | | $ | — | | $ | ( | | $ | ( |
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)
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| For the Nine Months Ended September 30, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities: |
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Net loss | | $ | ( | | $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: | |
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Depreciation and amortization | |
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Bad debt expense | |
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Inventory and sample inventory reserve | |
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Non-cash paid-in-kind interest | |
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Amortization of deferred financing costs and debt discount | |
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Accretion for end of term fee | |
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Deferred tax benefit | |
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Lease expense | |
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Derivative liability | |
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Deferred revenue | | | | | | — |
Employee stock-based compensation | |
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Non-employee stock-based compensation | | | | | | — |
Changes in operating assets and liabilities: | |
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Accounts receivable | |
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Inventories | |
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Deposits | |
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Prepaid expenses and other current assets | |
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Accounts payable | |
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Accrued expenses | |
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Accrued inventory purchases | |
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Other current liabilities | |
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Long-term liabilities | |
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Net cash used in operating activities | |
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Cash flows from investing activities: | |
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Acquisition of fixed assets | |
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Net cash used in investing activities | |
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Cash flows from financing activities: | |
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Payment of senior debt | |
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Payment of portion of senior debt end of term fee | |
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Proceeds from subordinated related party term loans | |
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Debt issuance costs | |
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Net cash (used in) provided by financing activities | |
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Net decrease in cash | |
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Cash, beginning of period | |
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Cash, end of period | | $ | | | $ | |
Supplemental cash flow information: | |
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Cash paid for interest during the period | | $ | | | $ | |
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Noncash Items: | | | | | | |
Accrued Merger Transaction Costs | | $ | — | | $ | |
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, and Liquidity
Nature of Operations
Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) was incorporated in Delaware on May 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Petros (“Merger Sub 1”), PN Merger Sub 2, Inc., a Delaware corporation and a wholly-owned subsidiary of Petros (“Merger Sub 2”), and Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”). On July 23, 2020, the parties to the Merger Agreement entered into the First Amendment to the Agreement and Plan of Merger and Reorganization (the “First Merger Agreement Amendment”) and on September 30, 2020, the parties to the Original Merger Agreement entered into the Second Amendment to the Agreement and Plan of Merger and Reorganization (the “Second Merger Agreement Amendment” and, together with the Original Merger Agreement and the First Merger Agreement Amendment, the “Merger Agreement”). The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly owned subsidiary of Petros (the “Metuchen Merger”) and (2) the merger of Merger Sub 2 with and into Neurotrope, with Neurotrope surviving as a wholly owned subsidiary of Petros (the “Neurotrope Merger” and together with the Metuchen Merger, the “Mergers”). As a result of the Mergers, Metuchen and Neurotrope became wholly owned subsidiaries of Petros, and Petros became a publicly traded corporation on December 1, 2020. On December 7, 2020, Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of $
The Mergers were accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Metuchen was determined to be the accounting acquirer based on an analysis of the criteria outlined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) No. 805, Business Combinations (“ASC 805”) and the facts and circumstances specific to the Mergers, including: (1) Metuchen Securityholders owned approximately
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly our financial position, results of operations and cash flows. However, actual results could differ from those estimates. The condensed consolidated balance sheet at December 31, 2020, has been derived from audited financial statements as of that date. 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 disclosures 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. This 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 amounts have been reclassified for consistency with current year presentation. These reclassifications had no effect on the reported results of operations.
8
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of TIMM Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”), subsidiaries of Metuchen, as well as the accounts of Metuchen and Neurotrope, subsidiaries of Petros. All intercompany accounts and transactions are eliminated in consolidation.
Liquidity
The Company has experienced net losses and negative cash flows from operations since its inception. As of September 30, 2021, the Company had cash of $
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 value of the derivative liability, 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, and protection of intellectual property rights.
In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China ( “COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020, and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic, and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. The Company cannot reasonably estimate the length or severity of the impact that the COVID-19 pandemic 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 and thereafter.
9
During 2020, government regulations and the voluntary business practices of the Company and prescribing physicians had prevented in-person visits by sales representatives to physicians’ offices. The Company had taken steps to mitigate the negative impact on its businesses of such restrictions. In March 2020, the Company reduced its sales representative head count to reflect the lack of in-person visits. The Company had maintained a core sales team which continued to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company’s key opinion leaders to other physicians and pharmacists. In response to the spread of COVID-19, in March 2020, the Company closed its administrative offices and as of September 30, 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 ASC Topic 606, Revenue Recognition (“Topic 606”), the Company recognizes revenue from prescription medication sales when its performance obligations with a customer have 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
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.
As of September 30, 2021, and December 31, 2020, the reserves for sales deductions were $
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
10
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.
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. 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
In determining the transaction price, a significant 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.
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
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 an observable market.
11
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 September 30, 2021, and December 31, 2020, approximated fair value. The fair value of the senior debt was estimated by discounting 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 of September 30, 2021, and December 31, 2020, was $
Stock-Based Compensation
The Company accounts for stock-based awards to employees and consultants in accordance with applicable accounting principles, which requires compensation expense related to stock-based transactions, including employee stock options and consultant warrants, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options or warrants. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. Employee stock option and consulting expenses 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 resulting from the operations were reported on the member’s income tax return. In addition, Timm Medical was included 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.
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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 September 30, 2021, and December 31, 2020,
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 common shares outstanding during the period, excluding the dilutive effects of stock options and warrants to purchase common shares. The Company computes diluted net loss per common share by dividing the net loss applicable to common share by the sum of the weighted-average number of common shares outstanding during the period plus the potential dilutive effects of its convertible preferred stocks, stock options and warrants to purchase common shares, but such items are excluded if their effect is anti-dilutive. See Note 13 Basic and Diluted Net Loss per Common Share.
Recent Accounting Pronouncements
Pending Adoption as of September 30, 2021
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial 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 new guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect that the new guidance will have on its condensed consolidated financial statements and related disclosures.
3) Accounts Receivable, net
Accounts receivable, net is comprised of the following:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
Gross accounts receivables | | $ | | | $ | |
Distribution service fees |
| | ( |
| | ( |
Chargebacks accrual |
| | — |
| | ( |
Cash discount allowances |
| | ( |
| | ( |
Allowance for doubtful accounts |
| | ( |
| | ( |
Total accounts receivable, net | | $ | | | $ | |
For the nine months ended September 30, 2021 and 2020, gross sales from customers representing 10% or more of the Company’s total gross sales included
Receivables from customers representing 10% or more of the Company’s gross accounts receivable included
13
4) Inventories
Inventory is comprised of the following:
|
| September 30, 2021 |
| December 31, 2020 | ||
Raw materials | | $ | | | $ | |
Finished goods | |
| | |
| |
Total inventory | | $ | | | $ | |
Finished goods are net of valuation reserves of $
5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are comprised of the following:
|
| September 30, 2021 |
| December 31, 2020 | ||
Prepaid samples | | $ | — | | $ | |
Prepaid insurance | |
| | |
| |
Prepaid FDA fees | |
| — | |
| |
Prepaid coupon fees | |
| | |
| |
API purchase commitment asset (see Note 14) | |
| | |
| |
Other prepaid expenses | |
| | |
| |
Other current assets | |
| | |
| |
Total prepaid expenses and other current assets | | $ | | | $ | |
Prepaid samples, which are presented net of reserves, are expensed when distributed to the sales force. The prepaid samples reserve amount was $
6) Intangible Assets
Balance at December 31, 2019 |
| $ | |
Amortization expense | |
| ( |
Balance at December 31, 2020 | | | |
Amortization expense | |
| ( |
Balance at September 30, 2021 | | $ | |
The future annual amortization related to the Company’s intangible assets is as follows as of September 30, 2021:
2021 (remaining 3 months) |
| | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | | $ | |
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
14
7) Accrued Expenses
Accrued expenses are comprised of the following:
|
| September 30, 2021 |
| December 31, 2020 | ||
Accrued price protection | | $ | | | $ | |
Accrued product returns | |
| | |
| |
Accrued contract rebates | |
| | |
| |
Due to Vivus (see Note 14) | |
| | |
| |
Accrued severance | |
| | |
| |
Accrued professional fees | |
| | |
| — |
Accrued marketing | |
| | |
| — |
Other accrued expenses | |
| | |
| |
Total accrued expenses | | $ | | | $ | |
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 in accordance with the Company's returned goods policy. 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 summary of the Company’s senior indebtedness at September 30, 2021, and December 31, 2020:
| | | | | | |
|
| September 30, 2021 |
| December 31, 2020 | ||
Principal balance | | $ | | | $ | |
Plus: End of term fee | |
| — | |
| |
Less: Debt issuance costs | |
| — | |
| ( |
Total senior debt | | $ | | | $ | |
On September 30, 2016, the Company entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”), a third party, for a $
On November 22, 2017, the Company and Hercules entered into Amendment No. 1 to the Senior Debt (the “First Amendment”). A covenant was added, in which the Company may achieve a certain minimum EBITDA, as defined in the First Amendment, target for the trailing twelve-month period, ending June 30, 2018. The end of term charge was increased from $
On April 13, 2020, the Company and Hercules entered into Amendment No. 2 to the Senior Debt (the “Second Amendment”). The Second Amendment waived all financial covenant defaults for all periods since inception through the period ending March 31, 2020. The Second Amendment also included the following changes:
| ● | Extended the maturity date from October 1, 2020, to April 2021, which can be further extendable to December 1, 2021, upon achieving the Financing Milestone, as defined in the agreement. |
| ● | Increased the cash interest rate from the greater of (a) |
15
| ● | Removed the PIK interest rate. |
| ● | Removed the prepayment penalty. |
The end of term charge of $
Effective September 30, 2020, the Company and Hercules entered into the Third Amendment to the Senior Debt Loan and Security Agreement (the “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 $
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 September 30, 2021, the Company was in compliance with its covenants.
On November 3, 2021, the Company repaid $
Interest expense on the Senior Debt was as follows for the periods indicated:
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest expense for term loan | | $ | | | $ | | | $ | | | $ | |
Amortization of debt issuance costs | |
| — | |
| | |
| | |
| |
PIK interest | |
| — | |
| — | |
| — | |
| |
| | $ | | | $ | | | $ | | | $ | |
Included in accrued expenses in the accompanying condensed consolidated balance sheets as of September 30, 2021, and December 31, 2020, is $
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 $
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 $
Interest expense on this debt was $
16
9) Members’ Capital
(a) Capitalization
Prior to September 16, 2019, the Company authorized
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.
(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
(d) Class B Units
As of September 16, 2019,
(e) Liquidation
Upon liquidation of 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.
17
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 $
As a result of the Mergers, the former Neurotrope shareholders collectively owned approximately
On January 26, 2021,
Effective January 1, 2021, the Company entered into a Marketing and Consulting Agreement (the “CorIRAgreement”) with CorProminence, LLC (the “Consultant”) for certain shareholder information and relation services. The term of the CorIRAgreement is for
Effective April 1, 2021, the Company entered into a Consulting and Advisory Agreement (the “King Agreement”) with Tania King, an employee of Juggernaut Capital Partners LLP, for certain services. The term of the King 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 $
Effective June 4, 2021, the Company entered into a Service Agreement (the “IRTH Agreement”) with IRTH Communications, LLC (“ITRH”) for certain investor relations services. The term of the IRTH is for
18
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 $
Pursuant to the Backstop Agreement and upon closing of the Mergers, Juggernaut paid the Company $
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
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
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
| ● | $ |
| ● | $ |
| ● | $ |
| ● | $ |
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
| ● | $ |
19
| ● | $ |
| ● | $ |
| ● | $ |
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
Metuchen equity holders will have the opportunity to receive the following during the period ending on the second anniversary of the Closing:
| a. | The Earnout Payment shall be equal to |
| i. | Petros’ Market Capitalization (as defined in the Merger Agreement) is greater than or equal to $ |
| ii. | Petros receives aggregate gross proceeds of at least $ |
| b. | The Earnout Payment shall be equal to |
| i. | Petros’ Market Capitalization is greater than or equal to $ |
| ii. | Petros receives aggregate gross proceeds of at least $ |
| c. | The Earnout Payment shall be equal to |
| i. | Petros’ Market Capitalization is greater than or equal to $ |
| ii. | Petros receives aggregate gross proceeds of at least $ |
| d. | The Earnout Payment shall be equal to |
| i. | Petros’ Market Capitalization is greater than or equal to $ |
20
| ii. | Petros receives aggregate gross proceeds of at least $ |
11) 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, restricted stock units and other stock-based awards and cash-based awards. As of September 30, 2021, there were
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 restricted stock units 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 nine months ended September 30, 2021:
| | |
| | |
| Weighted-Average |
| | |
| | | | Weighted- | | Remaining | | Aggregate Intrinsic | ||
| | Number of | | Average | | Contractual | | Value | ||
|
| Shares |
| Exercise Price |
| Term (Years) |
| ($ in thousands) | ||
Options outstanding and exercisable on December 31, 2020 |
| | | $ | |
| | $ | — | |
Options granted |
| | |
| |
| |
| — | |
Less: options and RSU’s forfeited |
| — | |
| — |
| — | |
| — |
Less: options and RSU’s expired/cancelled |
| — | |
| — |
| — | |
| — |
Less: options and RSU’s exercised |
| — | |
| — |
| — | |
| — |
Options and RSU’s outstanding at September 30, 2021 |
| | |
| |
| |
| — | |
Options and RSU’s exercisable at September 30, 2021 |
| | |
| |
| |
| — | |
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
On February 19, 2021, Fady Boctor, the President and Chief Commercial Officer of the Company, was granted an option to purchase
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
On May 11, 2021, the Company granted to certain officers of the Company options to purchase
21
and the grantees have agreed to not exercise such options until the Company notifies them there are shares available to cover such option exercises.
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 warrants for the three months ended September 30, 2021:
|
| Number of Shares |
Warrants outstanding at December 31, 2020 |
| |
Warrants issued |
| |
Warrants exercised |
| |
Warrants outstanding at September 30, 2021 |
| |
As of September 30, 2021, the Company’s warrants by expiration date were as follows:
Number of Warrants |
| Exercise Price |
| Expiration Date | |
| $ | | | November 17, 2021 | |
|
| | | November 17, 2021 | |
|
| | | August 23, 2023 | |
|
| | | June 1, 2024 | |
|
| | | June 5, 2024 | |
|
| | | June 17, 2024 | |
|
| | | June 19, 2024 | |
|
| | | September 1, 2024 | |
|
| | | September 16, 2024 | |
|
| | | December 1, 2024 | |
|
| | | March 2, 2025 | |
|
| | | June 1, 2025 | |
|
| | | September 1, 2025 | |
|
| | | December 1, 2025 | |
|
| | | December 1, 2025 | |
|
| | | December 1, 2025 | |
|
| | | December 1, 2025 | |
|
| | | December 1, 2025 | |
|
|
| |
| |
13) Basic and Diluted Net Loss per Common Share
Upon the consummation of the Mergers on December 1, 2020, the basic weighted average number of common shares outstanding for the three and nine months ended September 30, 2020, has been calculated using the number of common units outstanding of Metuchen from January 1, 2020, through September 30, 2020, multiplied by the exchange ratio used in the transaction.
22
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 | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Numerator |
| |
|
| |
| | |
|
| |
|
Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Denominator | |
|
| |
|
| |
|
| |
|
|
Weighted-average common shares for basic net loss per share | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Basic and diluted net loss per common share | | ( | | ( | | ( | | $ | ( | |||
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 | ||||
| September 30, | | September 30, | |||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
Stock Options |
| |
| — | | |
| — |
Warrants |
| |
| | | |
| |
Total |
| |
| | | |
| |
14) 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 $
The Company will pay MTPC a royalty of
In addition, the Company will be responsible for a pro-rata portion of a $
23
In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on the effective date of the License Agreement, which has since been terminated, effective as of September 30, 2021. The Supply Agreement stated that Vivus would initially manufacture, test, and supply the product to the Company or its designee, directly or through one or more third parties. In connection with the Supply Agreement , we and Vivus have been in negotiations to determine the amounts ultimately owed to Vivus, but we may be responsible for payments of approximately $
The Company is currently negotiating with multiple contract manufacturers to manufacture and supply Stendra® and serve as potential replacements for Vivus. The Company intends to enter into a new supply agreement with one or more of these candidates in the near future and hopes to have an agreement in place by the end of the year. However, these negotiations are ongoing and there is no assurance that we will be able to enter into any new supply agreement with such potential vendors or that we will be able to do so at terms favorable to us in a timely manner. As of November 15, 2021, we believe that we have sufficient supplies of Stendra® to meet demand for the next 10 months.
Stendra® can be purchased by written purchase orders submitted to Vivus at least
As of both September 30, 2021, and December 31, 2020, the Company had $
During the nine months ended September 30, 2021 and 2020, the Company incurred royalties to MTPC for Stendra® of $
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®.
(b) Hybrid
In March 2020, the Company acquired the exclusive license to H100™ from Hybrid (the “Hybrid License”). 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 $
The initial license fee of $
24
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
15) 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 First 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
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 $
(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.
25
(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
The components of lease expense were consisted entirely of fixed lease costs related to operating leases. These costs were $
Supplemental balance sheet information related to leases was as follows:
| | | | | | |
|
| As of September 30, 2021 |
| As of December 31, 2020 | ||
Operating lease ROU asset: |
| |
|
| |
|
| $ | | | $ | | |
| | | | | | |
Operating lease liability: | |
|
| |
|
|
| $ | | | $ | | |
|
| | |
| | |
Total operating lease liability | | $ | | | $ | |
Supplemental lease term and discount rate information related to leases was as follows:
|
| As of September 30, 2021 | | As of December 31, 2020 | |
Weighted-average remaining lease terms - operating leases |
|
| | ||
Weighted-average discount rate - operating leases |
| | % | | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | |
| | For the Three Months |
| For the Nine Months | ||||||||
| | Ended September 30, |
| Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
| | |
|
| |
|
Operating cash flows from operating leases | | $ | | | $ | | | $ | | | $ | |
Future minimum lease payments under non-cancelable leases as of September 30, 2021, were as follows:
Lease Liability Maturity Analysis |
| Operating Leases | |
2021 (remaining 3 months) |
| | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 | | | |
Thereafter |
| | |
Total lease payments |
| | |
Less: Imputed Interest |
| | ( |
Total | | $ | |
As of September 30, 2021, the Company had
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16) Segment Information
The Company manages its operations through
The Company’s results of operations by reportable segment for the three months ended September 30, 2021 are summarized as follows:
|
| Prescription |
| Medical |
| | |
| | | ||
For the three months ended September 30, 2021 | | Medications | | Devices | | Corporate | | Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold | |
| | |
| | |
| — | |
| |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| |
Research and development expenses | |
| | |
| — | |
| — | |
| |
Depreciation and amortization expense | |
| | |
| | |
| — | |
| |
Change in fair value of derivative liability | |
| — | |
| — | |
| ( | |
| ( |
Interest expense | |
| — | |
| — | |
| | |
| |
Income tax expense | |
| — | |
| ( | |
| — | |
| ( |
Net income (loss) | | $ | ( | | $ | ( | | $ | | | $ | ( |
The Company’s results of operations by reportable segment for the three months ended September 30, 2020 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the three months ended September 30, 2020 | | Medications |
| Devices |
| Corporate |
| Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold | |
| | |
| | |
| — | |
| |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| |
Research and development expense | |
| | |
| — | |
| — | |
| |
Depreciation and amortization expense | |
| | |
| | |
| — | |
| |
Interest expense | |
| — | |
| — | |
| | |
| |
Income tax benefit | |
| — | |
| | |
| — | |
| |
Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
The Company’s results of operations by reportable segment for the nine months ended September 30, 2021 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the nine months ended September 30, 2021 | | Medications | | Devices | | Corporate | | Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold | |
| | |
| | |
| — | |
| |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| |
Research and development expenses | |
| | |
| — | |
| — | |
| |
Depreciation and amortization expense | |
| | |
| | |
| — | |
| |
Change in fair value of derivative liability | |
| — | |
| — | |
| ( | |
| ( |
Interest expense | |
| — | |
| — | |
| | |
| |
Income tax expense | |
| — | |
| ( | |
| — | |
| ( |
Net income (loss) | | $ | ( | | $ | ( | | $ | | | $ | ( |
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The Company’s results of operations by reportable segment for the nine months ended September 30, 2020 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the nine months ended September 30, 2020 | | Medications | | Devices | | Corporate | | Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold |
| | |
| | |
| | — |
| | |
Selling, general and administrative expenses |
| | |
| | |
| | |
| | |
Research and development expense |
| | |
| | — |
| | — |
| | |
Depreciation and amortization expense |
| | |
| | |
| | — |
| | |
Interest expense |
| | — |
| | — |
| | |
| | |
Income tax benefit |
| | — |
| | |
| | — |
| | |
Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
The following table reflects net sales by geographic region for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
Net sales |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
United States | | $ | | | $ | | | $ | | | $ | |
International | |
| | |
| | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
No individual country other than the United States accounted for 10% of total sales for the three or nine months ended September 30, 2021 and 2020.
The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of September 30, 2021, are summarized as follows:
| | | | | | | | | |
| | Prescription |
| | |
| | | |
|
| Medications |
| Medical Devices |
| Consolidated | |||
Intangible assets, net | | $ | | | $ | | | $ | |
Total segment assets | | $ | | | $ | | | $ | |
The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of December 31, 2020, are summarized as follows:
| | | | | | | | | |
| | Prescription | | | | | | | |
|
| Medications |
| Medical Devices |
| Consolidated | |||
Intangible assets, net | | $ | | | $ | | | $ | |
Total segment assets | | $ | | | $ | | | $ | |
17) Subsequent Events
On October 13, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited and institutional investors (the “Purchasers”). Pursuant to the Purchase Agreement, the Company sold in a registered direct offering (the “Registered Direct Offering”)
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The Company received net proceeds from the sale of the Shares, after deducting fees and other offering expenses payable by the Company, of approximately $
Katalyst Securities LLC (“Katalyst”) served as a financial advisor to the company pursuant to an advisory consulting agreement (the “Katalyst Agreement”) entered into by the Company and Katalyst on October 13, 2021. Pursuant to the Katalyst Agreement, the Company paid Katalyst an advisory fee and legal expenses totaling $
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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, 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.
Overview
Petros is a pharmaceutical company focused on men’s health therapeutics, consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC (“Metuchen”), TIMM Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”). On September 30, 2016, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Vivus, Inc (“Vivus”) to purchase and receive the license for the commercialization and development of Stendra® for a one-time fee of $70 million. The License Agreement gives the Company the right to sell Stendra® in the U.S and its territories, Canada, South America, and India. Stendra® is a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”) and is the only patent protected PDE-5 inhibitor on the market. Stendra® offers the ED therapeutic landscape a valuable addition as an oral ED therapy that may be taken as early as approximately 15 minutes prior to sexual engagement, with or without food when using the 100mg or 200mg dosing (does not apply to 50mg dosing).
Metuchen was founded by Joseph J. Krivulka, an experienced pharmaceutical executive who held several key leadership positions at leading pharmaceutical companies such as Mylan Laboratories Inc. and its subsidiary Bertek Inc., and was also the co-founder of Reliant Pharmaceuticals, which was sold to GlaxoSmithKline in 2007 for $1.65 billion. During the period from Metuchen’s inception in 2016 through 2018, the founder decided to outsource the sales and marketing function to an affiliated contractor. The level of performance expected from this affiliated contractor was not realized. In 2018, the founder passed away which caused significant disruption to the business. In 2019, Metuchen terminated the relationship with this affiliate contractor and established its own internal sales, marketing, and trade distribution functions for Stendra®. Also in 2019, Metuchen deployed a specialized key account sales model augmented by a national non-personal promotion campaign reaching nearly 30,000 healthcare professionals. Metuchen also enhanced its digital campaigns designed to create awareness among patients and its partners. Additionally, Metuchen engaged in a wide array of specialty medical conferences including presentations at educational product theaters and launched a national savings coupon for enhanced product access. Metuchen believes that these activities have established a framework for growth. 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 addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health. In March 2020, Petros acquired an exclusive global license (the “Hybrid License”) for the development and commercialization of H100™ from Hybrid Medical LLC (“Hybrid”). H100™ is a novel and patented topical formulation candidate for the treatment of acute Peyronie’s disease. Peyronie’s disease is a condition that occurs upon penile tissue disruption often caused by sexual activity or injury, healing into collagen-based scars that may ultimately harden and cause penile deformity. On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of $200,000, which was paid within seven calendar days of entering into the agreement. On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid $150,000 on October 1, 2021, $200,000 on October 31, 2021, and agreed to pay two (2) additional payments of $200,000 by December 1, 2021, and December 31, 2021.
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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 (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020, and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic, and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. The Company cannot reasonably estimate the length or severity of the impact that the COVID-19 pandemic, including the emergence of any new variants, such as the Delta variant, 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 and thereafter.
During 2020, government regulations and the voluntary business practices of the Company and prescribing physicians had prevented in-person visits by sales representatives to physicians’ offices. The Company had taken steps to mitigate the negative impact on its businesses of such restrictions. In March 2020, the Company reduced its sales representative head count to reflect the lack of in-person visits. The Company has maintained a core sales team which continued to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company’s key opinion leaders to other physicians and pharmacists. In response to the spread of COVID-19, in March 2020, the Company closed its administrative offices and as of September 30, 2021, they remain closed, with the Company’s employees continuing their work remotely. 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.
Nature of Operations and Basis of Presentation
Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Petros (“Merger Sub 1”), PN Merger Sub 2, Inc., a Delaware corporation and a wholly owned subsidiary of Petros (“Merger Sub 2”), and Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”). On July 23, 2020, the parties to the Merger Agreement entered into the First Amendment to the Agreement and Plan of Merger and Reorganization (the “First Merger Agreement Amendment”) and on September 30, 2020, the parties to the Original Merger Agreement entered into the Second Amendment to the Agreement and Plan of Merger and Reorganization (the “Second Merger Agreement Amendment” and, together with the Original Merger Agreement and the First Merger Agreement Amendment, the “Merger Agreement”). The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly owned subsidiary of Petros (the “Metuchen Merger”) and (2) the merger of Merger Sub 2 with and into Neurotrope, with Neurotrope surviving as a wholly owned subsidiary of Petros (the “Neurotrope Merger” and together with the Metuchen Merger, the “Mergers”). As a result of the Mergers, Metuchen and Neurotrope became wholly owned subsidiaries of Petros, and Petros became a publicly traded corporation on December 1, 2020.
On December 7, 2020, Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of $20,000,000, subject to adjustment as provided in the Merger Agreement, and all of the operating assets and liabilities of Neurotrope not retained by Neurotrope in connection with the Mergers were contributed to Synaptogenix, Inc. (formerly known as Neurotrope Bioscience, Inc. and a wholly owned subsidiary of Neurotrope prior to the spin-off), a Delaware corporation (“Synaptogenix”) 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.
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The Mergers were accounted for as a reverse recapitalization in accordance with U.S. GAAP. Metuchen was determined to be the accounting acquirer based on an analysis of the criteria outlined in the FASB’s ASC No. 805, Business Combinations (“ASC 805”), and the facts and circumstances specific to the Mergers, including: (1) Metuchen Securityholders owned approximately 51.0% of Neurotrope and Metuchen at closing of the equity securities of the combined company immediately following the closing of the transaction; (2) a majority of the board of directors of the combined company are composed of directors designated by Metuchen under the terms of the Mergers; and (3) a majority of the existing members of Metuchen’s management are the management of the combined company. The net assets of Metuchen are stated at historical costs in the Company’s 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. These Condensed Consolidated Financial Statements include the results of Petros from December 1, 2020, the date the reverse recapitalization was consummated.
The Company manages its operations through two segments. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male ED. The Prescription Medications segment consists primarily of Stendra®, which is sold generally in the United States. Expenses related to the development of H100™, which is in the early stages of development and has not yet sought FDA approval to begin Phase 1 clinical trials, will be within the Prescription Medications segment. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
Licensing and Distribution
The Company acquired the rights to Stendra® avanafil on September 30, 2016, when it entered into the License Agreement with Vivus to purchase and receive the license for the commercialization and exploitation of Stendra® avanafil for a one-time fee of $70 million. The License Agreement gives the Company the exclusive right to sell avanafil in the U.S. and its territories, as well as Canada, South America, and India. In December 2000, Vivus originally was granted the license from Mitsubishi Tanabe Pharma Corporation (“MTPC”) to develop, market, and manufacture Stendra®. Stendra® was approved by the FDA in April 2012 to treat male ED.
The Company will pay MTPC a royalty of 5% on the first $500 million of net sales and 6% of net sales thereafter until the expiration of the applicable patent in a particular country. The last scheduled patent expiration is in April 2025. In consideration for the trademark assignment and the use of the trademarks associated with Stendra® and the Vivus technology, the Company shall (a) during the first, second, and third years following the expiration of the royalty period in a particular country in the Company’s territory, pay to Vivus a royalty equal to 2% of the net sales of Stendra® in such territory; and (b) following the fourth and fifth years following the end of the royalty period in such territory, pay to Vivus a royalty equal to 1% of the net sales of Stendra® in such territory. After the royalty period, no further royalties shall be owed with respect to net sales of Stendra® in such territory. In addition, the Company will be responsible for a pro-rata portion of a one-time $6 million milestone payment to be paid once $250 million in sales has been reached on the separate revenue stream of Stendra® during any calendar year.
In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on the effective date of the License Agreement, which has since been terminated, effective as of September 30, 2021. The Supply Agreement stated that Vivus would initially manufacture, test, and supply the product to the Company or its designee, directly or through one or more third parties. In connection with the Supply Agreement, we and Vivus have been in negotiations to determine the amounts ultimately owed to Vivus, but we may be responsible for payments of approximately $20.7 million. The Company provided Vivus with notice of termination of the Supply Agreement on September 30, 2019, which became effective on September 30, 2021.
The Company is currently negotiating with multiple contract manufacturers to manufacture and supply Stendra® and serve as potential replacements for Vivus. The Company intends to enter into a new supply agreement with one or more of these candidates in the near future and hopes to have an agreement in place by the end of the year. However, these negotiations are ongoing and there is no assurance that we will be able to enter into any new supply agreement with such potential vendors or that we will be able to do so at terms favorable to us in a timely manner. As of November 15, 2021, we believe that we have sufficient supplies of Stendra® to meet demand for the next 10 months.
In December 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 (the “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
32
bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach, the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra®.
On March 27, 2018, the Company entered into a Sublicense Agreement with Acerus Pharmaceuticals Corporation (“Acerus”) whereby the Company granted to Acerus an exclusive sublicense in Canada for, among other things, the development and commercialization of Stendra® avanafil for a one-time fee of $100,000. The Company is entitled to receive an additional fee of $400,000 if Stendra® is approved by Canadian regulators, as well as commercial milestone payments and royalty fees of 12% of net sales. The agreement remains in effect. In August 2018, the Company entered into the Acerus Supply Agreement, pursuant to which Acerus will purchase the product from the Company so long as the Acerus Sublicense Agreement remains in effect.
In March 2020, we entered into the Hybrid License for the development and commercialization of H100™ from Hybrid. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of $100,000 and additional payments of $250,000, with additional annual milestone payments of $125,000, $150,000, and $200,000 on each of the first, second and third anniversaries of the entry into the Hybrid License and $250,000 annual payments due thereafter. On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the License Agreement) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of two hundred thousand U.S. Dollars ($200,000), which was paid within seven calendar days of entering into the agreement. On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid $150,000 on October 1, 2021, $200,000 on October 31, 2021, and agreed to pay two (2) additional payments of $200,000 by December 1, 2021, and December 31, 2021.
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” in this Quarterly Report on Form 10-Q, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our 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
33
distribution fees. The Company uses the expected value method when estimating its variable consideration unless terms are specified within contracts. The identified variable consideration is recorded as a reduction of revenue at the time revenues from sales are recognized. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.
The most significant sales deductions relate to returns, contract rebates, coupon redemptions, and distribution service fees (“DSA fees”). Our estimates are based on factors such as our direct and indirect customers’ buying patterns and the estimated resulting contractual deduction rates, historical experience, specific known market events and estimated future trends, current contractual and statutory requirements, industry data, estimated customer inventory levels, current contract sales terms with our direct and indirect customers, and other competitive factors. Significant judgment and estimation are required in developing the foregoing and other relevant assumptions.
Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return either the prescription medication or medical device and receive credit for product. The provision for returns is based upon the Company’s estimates for future returns and historical experience. The provision of returns is part of the variable consideration recorded at the time revenue is recognized.
Accounts Receivable
The Company extends credit to its customers in the normal course of business. Accounts receivable are recorded at the invoiced amount, net of chargebacks, DSA fees, and cash discounts. Management determines each allowance based on historical experience along with the present knowledge of potentially uncollectible accounts.
Inventory
Inventories consist of finished goods held for sale and raw materials. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Inventories are adjusted for excess and obsolescence. Evaluation of excess inventory includes such factors as expiry date, inventory turnover, and management’s assessment of current product demand.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by an observable market.
Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
In connection with the Mergers in December 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock. The Company estimated their fair value using 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.
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Intangibles
The Company accounts for recognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. The Company reviews the carrying value and useful lives of its intangible assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which they should be amortized has changed. When indicators of impairment exist, the Company determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The Company evaluates the remaining useful life of each intangible asset that is being amortized during each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
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Results of Operations
The impact on our results of operations of the COVID-19 pandemic 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 the pandemic continue to evolve and in ways that are difficult to anticipate. There are numerous uncertainties related to the COVID-19 pandemic that have impacted our ability to forecast our future operations as a company. The extent to which the COVID-19 pandemic, and the emergence of any new variants, will affect our business, financial position and operating results in the future cannot be predicted with certainty; however, any such impact could be material. The COVID-19 pandemic could also increase the degree to which our results, including the results of our business segments, fluctuate in the future.
Three Months Ended September 30, 2021 and 2020 (unaudited)
The following table sets forth a summary of our statements of operations for the three months ended September 30, 2021 and 2020:
| | For the Three Months | ||||
| | Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Net sales | | $ | 2,145,169 | | $ | 3,464,695 |
Cost of sales | |
| 319,158 | |
| 981,903 |
Gross profit | |
| 1,826,011 | |
| 2,482,792 |
| | | | | | |
Operating expenses: | |
|
| |
|
|
Selling, general and administrative | |
| 3,413,223 | |
| 3,121,023 |
Research and development | |
| 280,576 | |
| 36,828 |
Depreciation and amortization expense | |
| 1,728,829 | |
| 1,661,362 |
Total operating expenses | |
| 5,422,628 | |
| 4,819,213 |
| | | | | | |
Loss from operations | |
| (3,596,617) | |
| (2,336,421) |
| | | | | | |
Change in fair value of derivative liability | |
| 1,970,000 | |
| — |
Interest expense, senior debt | |
| (67,936) | |
| (300,355) |
Interest expense, related party term loans | |
| — | |
| (669,730) |
Loss before income taxes | |
| (1,694,553) | |
| (3,306,506) |
| | | | | | |
Income tax expense (benefit) | |
| 2,345 | |
| (6,143) |
| | | | | | |
Net loss | | $ | (1,696,898) | | $ | (3,300,363) |
Net Sales
Net sales for the three months ended September 30, 2021, were $2,145,169, composed of $1,377,291 of net sales from Prescription Medicines and net sales of $767,878 from Medical Devices.
Net sales for the three months ended September 30, 2020, were $3,464,695, composed of $2,590,151 of net sales from Prescription Medicines and net sales of $874,544 from Medical Devices.
For the three months ended September 30, 2021, gross sales to customers representing 10% or more of the Company’s total gross sales included four customers that represented approximately 42%, 17%, 15%, and 14% of total gross sales.
For the three months ended September 30, 2020, gross sales from customers representing 10% or more of the Company’s total gross sales included one customer that represented approximately 82% of total gross sales.
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Prescription Medicines sales consist of sales of Stendra® in the U.S. for the treatment of male ED. Stendra® was primarily sold directly to four main customers, which collectively accounted for approximately 98% of Stendra® gross sales for the three months ended September 30, 2021. Individually, sales to the four main customers accounted for 47%, 19%, 16%, and 16% of Stendra® gross sales for the three months ended September 30, 2021.
Medical Device sales consist of domestic and international sales of men’s health products for the treatment of ED. The men’s health products do not require a prescription and include Vacuum Erection Devices (“VEDs and related accessories”).
Net sales were $1,319,526 or 38% lower during the three months ended September 30, 2021, then in the same period in 2020 consisting of a $1,212,860 decrease in the net sales of Stendra® and a $106,666 decrease in Medical Device Sales. The decrease in net sales of Stendra® was substantially the result of increased sales allowances to promote sales of the 50mg Stendra® due to the manufacturing delays of the 100mg Stendra®. This situation is expected to be resolved in the fourth quarter of 2021. The decrease in net sales for our Medical Devices segment was attributable to decreased demand in domestic sales and international sales of VED systems.
Cost of Sales
Cost of sales for the three months ended September 30, 2021, were $319,158, composed of $45,254 of cost of sales for our Prescription Medicines segment and $273,904 for our Medical Devices segment.
Cost of sales for the three months ended September 30, 2020, were $981,903 composed of $749,575 of cost of sales for our Prescription Medicines segment and $232,328 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the three months ended September 30, 2021, consisted of 152% royalty expenses, which was partially offset by a net 32% favorable adjustment to the costs of Stendra® sales and inventory obsolescence reserves and a 20% favorable adjustment to the 3PL order fulfillment and shipping expenses.
Cost of sales for the Medical Device segment for the three months September 30, 2021, consisted of 86% raw materials and 14% production labor.
Cost of sales decreased by $662,745 or 68% during the three months ended September 30, 2021, compared to the same period in 2020. For the three months ended September 30, 2021, and 2020, cost of sales as a percentage of net sales was 15% and 28%, 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 three months ended September 30, 2021, and decreased amortization expense due to the inventory step-up asset being fully amortized in September 2020.
Gross Profit
Gross profit for the three months ended September 30, 2021, was $1,826,011 or 85%, composed of $1,332,036 of gross profit from Prescription Medicines and $493,974 from Medical Devices. Gross profit for the three months ended September 30, 2020, was $2,482,792 or 72%, composed of $1,840,576 of gross profit from Prescription Medicines and $642,216 from Medical Devices. The changes in gross profit were driven by the factors noted above.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the three months ended September 30, 2021, were $3,413,223, composed of $1,318,610 of selling, general and administrative expenses of our Prescription Medicines segment, $722,998 of selling, general and administrative expenses of our Medical Devices segment and $1,371,615 of general corporate expenses.
Selling, general and administrative expenses for the three months ended September 30, 2020, were $3,121,023, composed of $1,837,864 of selling, general and administrative expenses of our Prescription Medicines segment, $566,666 of selling, general and administrative expenses of our Medical Devices segment and $716,493 of general corporate expenses.
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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 increased by $292,200 or 9.4% during the three months ended September 30, 2021, compared to the same period in 2020. Increased selling general and administrative expenses were primarily driven by increased expenses associated with accounting, advisory, insurance, and investor relation services, which the Company did not incur in the prior period as a private company, partially offset by lower payroll expenses and direct marketing expenses as management sought to reduce expenses to improve operational efficiencies.
Research and development
Research and development expenses for the three months ended September 30, 2021, were $280,576 in our Prescription Medicines segment.
Research and development expenses for Prescription Medicines segment are composed of $232,076 for consulting fees related to the Company's Non-Prescription / Over-The-Counter ("OTC") Strategies and $48,500 for legal fees related to the H100 license acquired in March 2020.
Research and development expenses for the three months ended September 30, 2020, were $36,828, in our Prescription Medicines segment. Research and development expenses for Prescription Medicines segment are composed of $7,790 for consulting fees and $29, 038 for legal fees related to the H100 license acquired in March 2020.
Research and development expenses increased by $243,748 or 662% during the three months ended September 30, 2021, compared to the same period in 2020. Increased research and development expenses were primarily driven by increased consulting fees related to the Company's Non-Prescription / Over-The-Counter ("OTC") Strategies and increased legal fees related to the H100 license acquired in March 2020 partially offset by decreased consulting fees related to the H100 license acquired in March 2020.
Depreciation and amortization
Depreciation and amortization expenses for the three months ended September 30, 2021, were $1,728,829, composed of $1,398,270 of depreciation and amortization expenses of our Prescription Medicines segment and $330,559 of depreciation and amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the three months ended September 30, 2020, were $1,661,362, composed of $1,353,591 of depreciation and amortization expenses of our Prescription Medicines segment and $307,771 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.
Change in fair value of derivative liability
In connection with the Mergers consummated on December 1, 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the $1,970,000 represents the change in fair value of the derivative during the three months ended September 30, 2021, primarily driven by the decline in the Company’s stock price as well as the passage of time.
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Interest expense, senior debt
Interest expense, senior debt for the three months ended September 30, 2021, was $67,936, consisting of interest payments on our senior debt, with a weighted average balance of $2,305,470. Interest expense, senior debt for the three months ended September 30, 2020, was $300,355, consisting of interest payments on our senior debt, with a weighted average balance of $8,696,030. The decrease of $232,419 or 77% was due to the pay down of $6.4 million of senior debt and unchanged weighted average interest rate subsequent to September 30, 2020.
Interest expense, subordinated related party term loans
There was no interest expense, subordinated related party term loans for the three months ended September 30, 2021. During 2020, the Company borrowed additional subordinated related party term loans in aggregate principal amount of $15.5 million. The subordinated related party term loans were converted into shares of the Company’s common stock with the consummation of the Mergers on December 1, 2020. Accordingly, there was no principal balance of the subordinated related party term loans or accrued PIK interest as of September 30, 2021.
Income tax expense (benefit)
There was a $2,345 income tax expense for the three months ended September 30, 2021, as compared to a $6,143 income tax benefit for the three months ended September 30, 2020. The income tax expense was primarily attributed to the operations of the Medical Device segment, specifically Timm Medical, which is now included in the Company’s consolidated group.
Nine Months Ended September 30, 2021 and 2020 (unaudited)
The following table sets forth a summary of our statements of operations for the nine months ended September 30, 2021 and 2020:
| | For the Nine Months Ended | ||||
| | September 30, | ||||
| | 2021 | | 2020 | ||
Net sales |
| $ | 8,678,424 |
| $ | 6,630,180 |
Cost of sales | |
| 1,355,838 | |
| 2,305,169 |
Gross profit | |
| 7,322,586 | |
| 4,325,011 |
| | | | | | |
Operating expenses: | |
|
| |
|
|
Selling, general and administrative | |
| 11,411,113 | |
| 11,997,185 |
Research and development | |
| 799,803 | |
| 307,796 |
Depreciation and amortization expense | |
| 5,186,486 | |
| 4,984,084 |
Total operating expenses | |
| 17,397,402 | |
| 17,289,065 |
| | | | | | |
Loss from operations | |
| (10,074,816) | |
| (12,964,054) |
| | | | | | |
Change in fair value of derivative liability | |
| 9,640,000 | |
| — |
Interest expense, senior debt | |
| (356,873) | |
| (1,085,347) |
Interest expense, related party term loans | |
| — | |
| (1,148,447) |
Loss before income taxes | |
| (791,689) | |
| (15,197,848) |
| | | | | | |
Income tax expense (benefit) | |
| 9,045 | |
| (49,895) |
| | | | | | |
Net loss | | $ | (800,734) | | $ | (15,197,953) |
Net Sales
Net sales for the nine months ended September 30, 2021, were $8,678,424, composed of $6,227,753 of net sales from Prescription Medicines and net sales of $2,450,671 from Medical Devices.
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Net sales for the nine months ended September 30, 2020, were $6,630,180, composed of $4,128,694 of net sales from Prescription Medicines and net sales of $2,501,486 from Medical Devices.
For the nine months ended September 30, 2021, gross sales to customers representing 10% or more of the Company’s total gross sales included four customers that represented approximately 30%, 25%, 13% and 10% of total gross sales.
For the nine months ended September 30, 2020, gross sales to customers representing 10% or more of the Company’s total gross sales included one customer that represented approximately 80% of total gross sales.
Prescription Medicines sales consist of sales of Stendra® in the U.S. for the treatment of male ED. Stendra® was primarily sold directly to five main customers, which collectively accounted for approximately 98% of Stendra® gross sales for the nine months ended September 30, 2021. Individually, sales to the five main customers accounted for 34%, 28%, 14%, 12% and 11% of Stendra® gross sales for the nine months ended September 30, 2021.
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 $2,048,244 or 31% higher during the nine months ended September 30, 2021, than in the same period in 2020 consisting of a $2,099,060 increase in the net sales of Stendra® and a $50,815 decrease in Medical Device Sales. The increase in net sales of 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® through the 3rd quarter of 2020 and the continued recovery from the COVID-19 pandemic in 2021. The decrease in net sales for our Medical Devices segment was attributable to decreased demand in domestic sales of VED systems partially offset by increased demand in international sales of VED systems.
Cost of Sales
Cost of sales for the nine months ended September 30, 2021, were $1,355,838, composed of $607,582 of cost of sales for our Prescription Medicines segment and $748,256 for our Medical Devices segment.
Cost of sales for the nine months ended September 30, 2020, were $2,305,169, composed of $1,527,169 of cost of sales for our Prescription Medicines segment and $778,000 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the nine months ended September 30, 2021, consisted of 56% third-party product cost of sales, 50% royalty expenses and 9% 3PL order fulfillment and shipping expenses, which was partially offset by a 15% favorable adjustment to the inventory obsolescence reserves.
Cost of sales for the Medical Device segment for the nine months September 30, 2021, consisted of 87% raw materials, 10% production labor and 2% other cost of goods sold.
Cost of sales decreased by $949,331 or 41% during the nine months ended September 30, 2021, compared to the same period in 2020. For the nine months ended September 30, 2021, and 2020, cost of sales as a percentage of net sales was 16% and 35%, 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 nine months ended September 30, 2021, and decreased amortization expense due to the inventory step-up asset being fully amortized in September 2020.
Gross Profit
Gross profit for the nine months ended September 30, 2021, was $7,322,586 or 84%, composed of $5,620,172 of gross profit from Prescription Medicines and $1,702,415 from Medical Devices. Gross profit for the nine months ended September 30, 2020, was $4,325,011 or 65%, composed of $2,601,525 of gross profit from Prescription Medicines and $1,723,486 from Medical Devices. The changes in gross profit were driven by the factors noted above.
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Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the nine months ended September 30, 2021, were $11,411,113, composed of $4,985,603 of Selling, general and administrative expenses of our Prescription Medicines segment, $2,014,424 of Selling, general and administrative expenses of our Medical Devices segment and $4,411,086 of general corporate expenses.
Selling, general and administrative expenses for the nine months ended September 30, 2020, were $11,997,185, composed of $6,658,231 of selling, general and administrative expenses of our Prescription Medicines segment, $1,780,530 of selling, general and administrative expenses of our Medical Devices segment and $3,558,424 of general corporate expenses.
Selling, general and administrative expenses for both segments include selling, marketing, and regulatory expenses. Unallocated general corporate expenses include costs that were not specific to a particular segment but are general to the group, including expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees, and other similar corporate expenses.
Selling, general and administrative expenses decreased by $586,072 or 5% during the nine months ended September 30, 2021, compared to the same period in 2020. Decreased selling general and administrative expenses were primarily driven by lower payroll expenses and direct marketing expenses as management sought to reduce expenses to improve operational efficiencies partially offset by increased expenses associated with accounting, advisory, insurance, and investor relation services, which the Company did not incur in the prior period as a private company.
Research and development
Research and development expenses for the nine months ended September 30, 2021, were $799,803 in our Prescription Medicines segment. Research and development expenses for Prescription Medicines segment are composed of $535,184 for consulting fees related to the Company's Non-Prescription/OTC Strategies and $200,000 for upfront licensing fees and $64,619 for legal fees related to the H100 license acquired in March 2020.
Research and development expenses for the nine months ended September 30, 2020, were $307,796, in our Prescription Medicines segment. Research and development expenses for Prescription Medicines segment are composed of $13,875 for consulting fees related to the Company's Non-Prescription/OTC Strategies and $200,000 for upfront licensing fees, $51,180 for consulting fees and $42,741 for legal fees related to the H100 license acquired in March 2020.
Research and development expenses increased by $492,007 or 160% during the nine months ended September 30, 2021, compared to the same period in 2020. Increased research and development expenses were primarily driven by increased consulting fees related to the Company's Non-Prescription/OTC Strategies and increased legal fees related to the H100 license acquired in March 2020 partially offset by decreased consulting fees related to the H100 license acquired in March 2020.
Depreciation and amortization
Depreciation and amortization expenses for the nine months ended September 30, 2021 were $5,186,486, composed of $4,194,809 of depreciation and amortization expenses of our Prescription Medicines segment and $991,677 of depreciation and amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the nine months ended September 30, 2020, were $4,984,084, composed of $4,060,772 of depreciation and amortization expenses of our Prescription Medicines segment and $923,312 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.
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Change in fair value of derivative liability
In connection with the Mergers consummated on December 1, 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the $9,640,000 represents the change in fair value of the derivative during the nine months ended September 30, 2021, primarily driven by the decline in the Company’s stock price as well as the passage of time.
Interest expense, senior debt
Interest expense, senior debt for the nine months ended September 30, 2021, was $356,873, consisting of interest payments on our senior debt, with a weighted average balance of $3,958,927. Interest expense, senior debt for the nine months ended September 30, 2020, was $1,085,347, consisting of interest payments on our senior debt, with a weighted average balance of $10,204,922. The decrease of $728,474 or 67% was due to the pay down of $6.4 million of senior debt and unchanged weighted average interest rate subsequent to September 30, 2020.
Interest expense, subordinated related party term loans
There was no interest expense, subordinated related party term loans for the nine months ended September 30, 2021. During 2020, the Company borrowed additional subordinated related party term loans in aggregate principal amount of $15.5 million. The subordinated related party term loans were converted into shares of the Company’s common stock with the consummation of the Mergers on December 1, 2020. Accordingly, there was no principal balance of the subordinated related party term loans or accrued PIK interest as of September 30, 2021.
Income tax expense (benefit)
There was a $9,045 income tax expense for the nine months ended September 30, 2021, as compared to a $49,895 income tax benefit for the nine months ended September 30, 2020. The income tax expense was primarily attributed to the operations of the Medical Device segment, specifically Timm Medical, which is now included in the Company’s consolidated group.
Liquidity and Capital Resources
General
Cash totaled $8,135,184 at September 30, 2021, compared to $17,139,694 at December 31, 2020.
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2021, we had cash of $8.1 million, negative working capital of approximately $20.1 million, including debt of $1.7 million maturing in 2021, and sustained cumulative losses attributable to holders of common stock of $62.5 million. Our plans include, or may include, utilizing our cash and cash equivalents on hand, and our liability due to Vivus as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. In October 2021, the Company issued 3,323,616 shares of its common stock and received $5.5 million in net proceeds. In November 2021, the Company repaid $1.2 million in full satisfaction of its senior debt. While we are optimistic that we will be successful in our efforts to achieve our plans, there can be no assurances that we will be successful in doing so. As such, we obtained a continued support letter from our largest shareholder, JCP III SM AIV, L.P., through November 16, 2022.
To date, our principal sources of capital used to fund our operations have been the net proceeds we received from the Mergers, revenues from product sales, private sales and registered offering of equity securities and proceeds received from the issuance of convertible debt, as described below.
Our principal expenditures include payment for inventory of Stendra® from our key supplier, Vivus, including purchases of inventory accrued in current periods, but for which payment is due in future periods. We have significant unpaid balances owed to Vivus and are currently in discussions with Vivus with respect to amounts owed. We had an aggregate accrued unpaid balance owed to Vivus of
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$20,724,188 as of September 30, 2021. While the Company is in discussions with Vivus to convert a portion of the amounts owed into a subordinated note, though there can be no assurance that we will be successful in these discussions.
In March 2020, the Company acquired the Hybrid License, providing an exclusive license to H100™. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of $100,000 and an additional payment of $250,000 and additional annual milestone payments of $125,000, $150,000, and $200,000 are due on each of the first, second and third anniversaries of the license agreement and $250,000 annual payments due thereafter. The Company is also required to make a $1,000,000 payment upon first commercial sale and a sliding scale of percentage payments on net sales in the low single digits. Annual anniversary payments will not be required after commercialization. The Company is also obligated to make royalty payments between 3-6% of any net sales.
On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the Hybrid License was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of two hundred thousand U.S. Dollars ($200,000), which was paid within seven calendar days of entering into the second letter agreement. On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid $150,000 on October 1, 2021, $200,000 on October 31, 2021, and agreed to pay two (2) additional payments of $200,000 by December 1, 2021, and December 31, 2021.
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.
October 2021 Financing
On October 13, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited and institutional investors (the “Purchasers”). Pursuant to the Purchase Agreement, the Company agreed to sell in a registered direct offering (the “Registered Direct Offering”) 3,323,616 shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share (the “Common Stock”), to the Purchasers at an offering price of $1.715 per share and associated Investor Warrant (as defined herein). Pursuant to the Purchase Agreement, in a concurrent private placement (together with the Registered Direct Offering, the “Offerings”), the Company also agreed to sell to the Purchasers unregistered warrants (the “Investor Warrants”) to purchase up to an aggregate of 3,323,616 shares of Common Stock, representing 100% of the shares of Common Stock to be purchased in the Registered Direct Offering (the “Warrant Shares”). The Investor Warrants are exercisable at an exercise price of $1.715 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance.
The Company received net proceeds from the sale of the Shares, after deducting fees and other estimated offering expenses payable by the Company, of approximately $5.5 million. The Company intends to use the net proceeds for expansion of its men’s health platform and for working capital and general corporate purposes. The Offerings closed on October 18, 2021, subject to satisfaction of customary closing conditions.
Katalyst Securities LLC (“Katalyst”) served as a financial advisor to the company pursuant to an advisory consulting agreement (the “Katalyst Agreement”) entered into by the Company and Katalyst on October 13, 2021. Pursuant to the Katalyst Agreement, the Company paid Katalyst an advisory fee and legal expenses totaling $0.2 million for its services as a financial advisor in connection with this offering. Additionally, the Company issued to Katalyst’s representatives or designees warrants to purchase up to an aggregate of 130,000 shares of Common Stock (the “Katalyst Warrants”) with the same terms as the Investor Warrants.
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
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expect to seek additional funds through a variety of sources, which may include additional public or private equity or debt financings, collaborative, or other arrangements with corporate sources, or through other sources of financing.
We are focused on expanding our service offering through internal development, collaborations, and through strategic acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.
Debt
Senior Debt
On September 30, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) 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 No. 1 to the Loan Agreement (the “First Amendment”). A covenant was added, in which the Company must achieve a certain minimum EBITDA, as defined in the First Amendment, target for the trailing twelve-month period, ending June,30, 2018. The end of term charge was increased from $787,500 to $1,068,750. The minimum EBITDA for each of the trailing six months and the fixed charge coverage ratio were reduced from 1:1 to 0.9:1. The Company was also required to prepay $10 million in principle.
Effective April 13, 2020, the Company and Hercules entered into Amendment No. 2 to the Loan Agreement, (the “Second Amendment”), to extend the maturity date 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 September 30, 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 Second Amendment.
Effective September 30, 2020, the Company and Hercules entered into the Amendment No. 3 to Loan Agreement (the “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.
On November 3, 2021, the Company repaid the remaining balance due on the Senior Debt.
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,
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into Petros common stock in connection with the consummation of the Mergers on December 1, 2020, and the Subordinated Promissory Notes were terminated. Accordingly, the principal balance of the Subordinated Promissory Notes and accrued PIK interest was $0 as of December 31, 2020.
Cash Flows
The following table summarizes our cash flows for the nine months ended September 30, 2021, and 2020:
| | For the Nine Months | ||||
| | Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Net cash used in operating activities | | $ | (3,557,732) | | $ | (10,782,430) |
Net cash used in investing activities | |
| — | |
| (4,633) |
Net cash (used in) provided by financing activities | |
| (5,446,778) | |
| 9,310,326 |
Net decrease in cash | | $ | (9,004,510) | | $ | (1,476,737) |
Cash Flows from Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2021, was $3,557,732, which primarily reflected our net loss of $800,734, partially offset by cash adjustments to reconcile net income to net cash used in operating activities of $3,131,046 consisting primarily of depreciation and amortization, inventory obsolescence reserves, changes in the fair value of derivative liability, and changes in operating assets and liabilities of $374,048.
Net cash used in operating activities for the nine months ended September 30, 2020, was $10,782,430, which primarily reflected our net loss of $15,147,953, partially offset by adjustments to reconcile net loss to net cash provided by operating activities of $6,637,657 consisting primarily of depreciation and amortization, non-cash paid-in-kind interest and amortization of deferred financing costs and debt discount, and changes in operating assets and liabilities of $2,272,134.
Cash Flows from Investing Activities
Net cash used in investing activities was $4,633 for the nine months ended September 30, 2020, respectively, related to the acquisition of fixed assets. No cash was used in investing activities for the nine months ended September 30, 2021.
Cash Flows from Financing Activities
Net cash used in financing activities was $5,446,778 for the nine months ended September 30, 2021, consisting of payments of senior debt of $4,912,541 and a payment for the senior debt end-of-term fee of $534,237.
Net cash provided by financing activities was $9,310,326 for the nine months ended September 30, 2020, consisting of proceeds from issuance of subordinated related party term loans of $14,000,000, partially offset by payments on the senior debt of $4,639,674 and debt issuance costs of $50,000.
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 to 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.
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Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure utilized by management to evaluate the Company’s performance on a comparable basis. The Company believes that Adjusted EBITDA is useful to investors as a supplemental way to evaluate the ongoing operations of the Company’s business as Adjusted EBITDA may enhance investors’ ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization and to evaluate the Company’s ability to service debt. In addition, Adjusted EBITDA is a financial measurement that management and the Company’s Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net income as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.
The Company defines Adjusted EBITDA as net income (loss) adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) income taxes, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance or that are non-recurring in nature. For example, Adjusted EBITDA:
| ● | does not reflect the Company’s capital expenditures, future requirements for capital expenditures or contractual commitments; |
| ● | does not reflect changes in, or cash requirements for, the Company’s working capital needs; |
| ● | does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debt; and |
| ● | does not reflect payments related to income taxes, if applicable. |
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The following table presents a reconciliation of Net loss to Adjusted EBITDA for the three and nine months ended September 30, 2021, and 2020.
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net loss | | $ | (1,696,898) | | $ | (3,300,363) | | $ | (800,734) | | $ | (15,147,953) |
Interest expense, senior debt | |
| 67,936 | |
| 300,355 | | | 356,873 | | | 1,085,347 |
Interest expense, related party term loans | |
| — | |
| 669,730 | | | — | | | 1,148,447 |
Income tax expense (benefit) | |
| 2,345 | |
| (6,143) | | | 9,045 | | | (49,895) |
Depreciation and amortization expense | |
| 1,728,829 | |
| 1,661,362 | | | 5,186,486 | | | 4,984,084 |
EBITDA | |
| 102,212 | |
| (675,059) | | | 4,751,670 | | | (7,979,970) |
Change in fair value of derivative liability | |
| (1,970,000) | |
| — | | | (9,640,000) | | | — |
Adjusted EBITDA | | $ | (1,867,788) | | $ | (675,059) | | $ | (4,888,330) | | $ | (7,979,970) |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.
Gross Billings
Gross billings is a non-GAAP financial measure utilized as a key performance metric by management and the Company’s Board of Directors in their financial and operational decision-making as well as for the preparation of the annual budget. The Company believes that Gross billings is useful to investors as a supplemental way to provide an alternative measure of the total demand for the products sold by the Company. Gross billings is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net sales as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of gross billings may not be comparable to similarly titled measures reported by other companies.
Gross billings is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.
The Company defines gross billings as the amount of its aggregate sales billed to customers at standard prices before the application of certain adjustments that reduce the net amount received from customers, including product returns, certain rebates and coupon redemptions, discounts, and fees.
The following table presents a reconciliation of net sales to gross billings for the three and nine months ended September 30, 2021, and 2020.
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30 | | September 30 | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net Sales | | $ | 2,145,169 | | $ | 3,464,695 | | $ | 8,678,424 | | $ | 6,630,180 |
Product Returns | |
| 2,256,673 | |
| (118,298) | | | 4,069,440 | | | 53,448 |
Contract Rebates | |
| 607,143 | |
| 849,779 | | | 2,529,625 | | | 2,746,205 |
Chargebacks | |
| 4,748 | |
| 146,117 | | | 270,094 | | | 1,167,142 |
Cash Discounts | |
| 79,722 | |
| 73,398 | | | 346,656 | | | 200,600 |
Distribution Service Fees | |
| 540,618 | |
| 425,349 | | | 1,486,590 | | | 1,319,370 |
Coupon Redemptions | |
| 2,896,935 | |
| 582,346 | | | 4,821,786 | | | 1,802,705 |
Gross Billings | | $ | 8,531,008 | | $ | 5,423,386 | | $ | 22,202,615 | | $ | 13,919,650 |
Gross billings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.
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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.
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 Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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.
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 deficiencies in 2021. The Company has hired an external consultant to assist in 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 September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than as noted above.
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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 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 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, 2020, as filed with the SEC on March 31, 2021. 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 below, 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.
Risks Related to Petros’ Business, Industry and Operations
We expect to require additional capital in the future in order to develop our products, fund operations, and otherwise implement our business strategy. If we do not obtain any such additional financing, it may be difficult to effectively realize our long-term strategic goals and objectives.
We will require additional financing to further develop and market our products, fund operations, and otherwise implement our business strategy. Our current cash resources will not be sufficient to fund these activities. 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.
Any additional capital raised through the sale of equity or equity-backed securities may dilute our stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities.
The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.
In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
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We do not anticipate paying dividends on our common stock in the foreseeable future.
We currently plan to invest all available funds and future earnings, if any, in the development and growth of our business. We currently do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our existing and any future debt agreements may preclude us from paying dividends. As a result, a rise in the market price of our common stock, which is uncertain and unpredictable, will be our shareholders’ sole source of potential gain in the foreseeable future and our shareholders should not rely on an investment in our common stock for dividend income.
Sales of a substantial number of shares of our common stock, or the perception that such sales may occur, may adversely impact the price of our common stock.
Almost all of our outstanding shares of common stock, as well as a substantial number of shares of our common stock underlying outstanding options and warrants, are available for sale in the public market, either pursuant to Rule 144 under the Securities Act, or an effective registration statement. We are generally not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Pursuant to the shelf registration statement on Form S-3 filed on January 29, 2021, we may sell up to $100,000,000 of our equity securities over the next several years, and approximately $94,300,000 of our equity securities is available for sale under such registration statement. Sales of a substantial number of shares of our common stock in the public markets could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock would have on the market price of our common stock.
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
| ● | results of our operations and product development efforts; |
| ● | our ability to obtain working capital financing; |
| ● | additions or departures of key personnel; |
| ● | limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock; |
| ● | our ability to execute our business plan; |
| ● | sales of our common stock and decline in demand for our common stock; |
| ● | regulatory developments; |
| ● | economic and other external factors; |
| ● | investor perception of our industry or our prospects; and |
| ● | period-to-period fluctuations in our financial results. |
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In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty in the recent past. These market fluctuations may also materially and adversely affect the market price of our common stock. As a result, you may be unable to resell your shares of our common stock at a desired price.
We depend on a limited number of customers for a significant portion of our sales and the loss of, or a significant shortfall in demand from, these customers could have a material adverse effect on our financial condition and operating results.
We generate a significant amount of sales from a limited number of customers. For the nine months ended September 30, 2021, four customers accounted for approximately 78% of our consolidated gross sales, and five main customers collectively accounted for approximately 98% of Stendra® gross sales. We expect that sales to relatively few customers will continue to account for a significant percentage of our net revenues in future periods. However, these customers or any of our other customers may not continue to purchase our products at current levels, pricing, or at all, and our revenue could fluctuate significantly due to changes in economic conditions, the success of our competitors’ products, or the loss of, reduction of business with, or less favorable terms with any of our largest customers. We have not entered into purchase agreements with any of these customers, and therefore, these customers are not subject to minimum purchase orders or have any contractual obligations to purchase our products. If we were to lose one of our key customers or have a key customer significantly reduce its volume of business with us, our revenues may be materially reduced, which would materially and adversely affect our business, financial condition, and cash flows and projections.
We have terminated our contract with a major supplier, and if we are unable to enter into a contract with a new supplier in a timely manner it could have an adverse effect on our business and results of operations.
Petros entered into a commercial supply agreement with Vivus, Inc. (“Vivus”) for Stendra® on September 30, 2016 (the “Supply Agreement”), which has since been terminated, effective as of September 30, 2021. Up to that point, Petros has obtained its supply of Stendra® from Vivus pursuant to the Supply Agreement. We are currently negotiating with alternative vendors to manufacture our Stendra® product and replace Vivus. However, these negotiations are ongoing and there is no assurance that we will be able to enter into a supply agreement with such potential vendors or that at terms favorable to us. If we are unable to come to an agreement with an alternative vendor in a timely manner, we may be unable to obtain sufficient quantities of Stendra®, which would reduce our ability to make sales, deplete inventory, and materially and adversely affect our business and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuance of Unregistered Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
Exhibit No. |
| Description |
4.1 | | |
10.1 | | |
| Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer. | |
| Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer. | |
| Section 1350 Certification – Principal Executive Officer and Principal Financial Officer. | |
101 | | The following materials from Petros Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Changes in Stockholders’ Equity/Members’ Capital; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* | Filed herewith. |
+ | Furnished herewith. |
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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: November 15, 2021 | By: | /s/ Fady Boctor |
| | Fady Boctor |
| | Chief Commercial Officer and Principal Executive Officer |
| | |
Date: November 15, 2021 | By: | /s/ Mitchell Arnold |
| | Mitchell Arnold |
| | Vice President of Finance and Principal Financial Officer |
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