Petros Pharmaceuticals, Inc 10-Q for FY2023 Q1
Petros Pharmaceuticals, Inc. (PTPI)
About this 10-Q
Petros Pharmaceuticals, Inc filed this 10-Q on May 15, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.52M
- up 2.1% from $2.47M a year earlier
- Net loss
- $1.39M
- compared with a net loss of $174.22K a year earlier
- Diluted EPS
- -$0.66
- compared with -$0.08 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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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Name of each exchange on which registered |
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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.
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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 ☐ No
As of May 15, 2023, 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; Petros’ ability to regain and maintain compliance with the Nasdaq Stock Market’s listing standards; the ability of Petros to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002; the risk that the financial performance of Petros may not be as anticipated by the merger transactions that resulted in the Company’s creation; risks resulting from Petros’ status as an emerging growth company, including that reduced disclosure requirements may make shares of Petros common stock less attractive to investors; Petros’ ability to continue as a going concern; risks related to Petros’ history of incurring significant losses; risks related to Petros’ dependence on the commercialization of a single product, Stendra®; 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 Omicron BA.5 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, 2022 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
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETROS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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Assets |
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Current assets: |
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Cash | | $ | | | $ | |
Accounts receivable, net | |
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Inventories | |
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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 promissory note | | $ | | | $ | |
Accounts payable | | | | | | |
Accrued expenses | |
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Other current liabilities | |
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Total current liabilities | |
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Promissory note, net of current portion | | | | | | |
Other long-term liabilities | |
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Total liabilities | |
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Stockholders’ Equity: | |
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Common stock (par value $ | |
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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.
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PETROS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| For the Three Months Ended March 31, | ||||
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| 2023 |
| 2022 | ||
Net sales | | $ | | | $ | |
Cost of goods sold | | | | | | |
Gross profit | | | | | | |
Operating expenses: | | | | | | |
Selling, general and administrative | | | | | | |
Gain on settlement with Vivus | | | — | | | ( |
Research and development expense | | | | | | |
Depreciation and amortization expense | | | | | | |
Total operating expenses | | | | | | |
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Loss from operations | | | ( | | | ( |
Change in fair value of derivative liability | | | — | | | |
Interest income | | | | | | — |
Interest expense, promissory note | | | ( | | | ( |
Net loss | | $ | ( | | $ | ( |
Net loss per common share | | | | | | |
Basic and Diluted | | $ | ( | | $ | ( |
Weighted average common shares outstanding | | | | | | |
Basic and Diluted | | | | | | |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
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PETROS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
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| | Preferred | | Stock | | Common | | Stock | | Paid-in | | Accumulated | | | | |||||
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| Amount |
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| Capital |
| Deficit |
| Total | ||||||
Three Months Ended March 31, 2023 | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2022 | | | — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | |
Stock-based compensation expense | |
| — | | | — | | — | | | — | | | | | | — | | | |
Shares issued for vested RSU’s | | | — | | | — | | | | | | | | ( | | | — | | | — |
Net loss | |
| — | | | — | | — | | | — | | | — | | | ( | | | ( |
Balance, March 31, 2023 | |
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| Additional |
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| | Preferred | | Stock | | Common | | Stock | | Paid-in | | Accumulated | | | | |||||
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| Amount |
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| Deficit |
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Three Months Ended March 31, 2022 | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | | — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | |
Stock-based compensation | | | — | | | — | | — | | | — | | | | | | — | | | |
Net loss | | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Balance, March 31, 2022 | | | — | | $ | — | | | $ | | | $ | | | $ | ( | | $ | ||
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
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PETROS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| 2023 |
| 2022 | ||
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 (recoveries) | |
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Inventory and sample inventory reserve | |
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Lease expense | |
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Derivative liability | |
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Deferred revenue | | | ( | | | ( |
Gain on settlement with Vivus | | | — | | | ( |
Stock-based compensation | |
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Changes in operating assets and liabilities: | |
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Accounts receivable | |
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Inventories | |
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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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Other current liabilities | |
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Other long-term liabilities | |
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Net cash used in operating activities | |
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Cash flows from financing activities: | |
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Payment of promissory note | | | ( | | | ( |
Net cash used in 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 | | $ | | | $ | |
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Supplemental cash flow information: | |
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Cash paid for interest during the period | | $ | | | $ | — |
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Noncash Items: | | | | | | |
Noncash decrease in accrued expenses related to Vivus settlement | | $ | — | | $ | ( |
Noncash decrease in accrued inventory purchases related to Vivus Settlement | | | — | | | ( |
Noncash increase in promissory note related to Vivus settlement | | | — | | | |
Noncash increase in inventory due to API reclass | | | ( | | | — |
Noncash decrease in API purchase commitment | | | | | | |
Noncash decrease in other current assets: API purchase commitment | | | ( | | | — |
Noncash issuance of common stock to non-employee | | | — | | | — |
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
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PETROS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Nature of Operations, Basis of Presentation, and Liquidity
Nature of Operations and Basis of Presentation
Petros is a pharmaceutical company focused on men’s health therapeutics with a full range of commercial capabilities including sales, marketing, regulatory and medical affairs, finance, trade relations, pharmacovigilance, market access relations, manufacturing, and distribution.
Petros consists of wholly owned subsidiaries, Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”), Neurotrope, Inc., a Nevada corporation (“Neurotrope”), Timm Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”). Petros was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting certain transactions between Petros, Metuchen, Neurotrope, and certain subsidiaries of Petros (collectively the “Mergers”). The Mergers were consummated on December 1, 2020. The Company is engaged in the commercialization and development of Stendra®, a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”), which we have licensed from Vivus, Inc. (“Vivus”). Petros also markets its own line of ED products in the form of vacuum erection device products through its subsidiaries, Timm Medical and PTV. In addition to ED products, we had an exclusive global license to develop and commercialize H100™, a novel and patented topical formulation candidate for the treatment of acute Peyronie’s disease, which license was terminated by the Company on May 11, 2023.
The Company manages its operations through two segments, Prescription Medications and Medical Devices, both of which focus on the treatment of male ED. The Prescription Medications segment consists primarily of Stendra®, which is sold generally in the United States. Expenses related to the development of H100™, prior to the license termination in May 2023, which was in the early stages of development and had not yet sought FDA approval to begin Phase 1 clinical trials, were categorized under the Prescription Medications segment. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
Business and Primary Marketed Products
Petros is a pharmaceutical company focused on men’s health therapeutics with a full range of commercial capabilities including sales, marketing, regulatory and medical affairs, finance, trade relations, pharmacovigilance, market access relations, manufacturing, and distribution.
Petros consists of wholly owned subsidiaries, Metuchen, Neurotrope, Timm Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”). We are engaged in the commercialization and development of Stendra®, a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”), which we have licensed from Vivus, Inc. (“Vivus”). Petros also markets its own line of ED products in the form of vacuum erection device products through its subsidiaries, Timm Medical and PTV. In addition to ED products, we had acquired an exclusive global license (the “Hybrid License”) to develop and commercialize H100™, a novel and patented topical formulation candidate for the treatment of acute Peyronie’s disease, which we terminated in May 2023.
The Company’s priority is the ability to sell Stendra® Over-The-Counter (“OTC”).
All transactions between the consolidated entities have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In the opinion of management, the accompanying unaudited interim 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
8
unaudited interim 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, 2022.
All transactions between the consolidated entities have been eliminated in consolidation.
Liquidity and Going Concern
We have experienced net losses and negative cash flows from operations since our inception. As of March 31, 2023, we had cash of $
In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well by as exploring additional ways to raise capital in addition to increasing cash flows from operations. There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra® and continuing to invest in research and development pursuant to our Non-Prescription / OTC strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC or H100 in order to extend its cash resources. The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of 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 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, assessment of long-lived assets, including intangible asset impairment and the valuation 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.
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk includes cash. The Company maintains cash on deposit at U.S.-based banks in amounts which, at times, exceed insured limits.
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Segment Reporting
Operating segments are components of a Company for which separate financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male erectile dysfunction. The Prescription Medications segment consists primarily of operations related to Stendra®, which is sold generally in the United States, and H100™ for the treatment of Peyronie’s disease. The Medical Devices segment consists primarily of operations related to vacuum erection devices, which are sold domestically and internationally. See Note 16 Segment Reporting.
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 Accounting Standards Codification (“ASC”) Topic 606, Revenue Recognition (“Topic 606”), the Company recognizes revenue from prescription medication sales when its performance obligations with a customer has been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide Stendra® upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of Stendra®, which is typically upon delivery. The Company invoices its customers after Stendra® has been delivered and invoice payments are generally due within
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 March 31, 2023 and December 31, 2022, 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
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.
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The Company has entered into DSAs with certain of our significant wholesaler customers that obligate the wholesalers, in exchange for fees paid by us, to: (i) manage the variability of their purchases and inventory levels within specified limits based on product demand and (ii) provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our pharmaceutical products held at their warehouse locations. See Note 3 Accounts Receivable, net for further discussion of these reserves. As of December 31, 2021, accrued contract rebates were $
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 include Vacuum Erection Devices, PreBoost, VenoSeal, penile injections (Rx), and urinary tract infection tests. 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
Contract Costs
In relation to customer contracts, the Company incurs costs to fulfill a contract but does not incur costs to obtain a contract. These costs to fulfill a contract do not meet the criteria for capitalization and are expensed as incurred. As such, the Company did not have any contract assets at March 31, 2023 and December 31, 2022.
Contract Liabilities
Under Accounting Standards Codification Topic 606, Revenue Recognition, the Company recognizes revenue when its performance obligations with a customer has been satisfied. In the event it has not been satisfied, the Company records deferred revenue as a liability on the balance sheet. As of March 31, 2023, December 31, 2022, and December 31, 2021, deferred revenue was $
Intangible Assets
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
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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.
Basic and Diluted Net Loss per Common Share
The Company computes basic net loss per common share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stocks outstanding during the period, excluding the anti-dilutive effects of stock options and warrants to purchase common stocks. The Company computes diluted net loss per common stock by dividing the net loss applicable to common stocks by the sum of the weighted-average number of common stocks outstanding during the period plus the potential dilutive effects of its convertible preferred stocks, stock options and warrants to purchase common stocks, but such items are excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between the Company’s basic and diluted net loss per stock of common stock for the three months ended March 31, 2023 and 2022. See Note 12 Basic and Diluted Net Loss per Common Share.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standard Board (“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 has adopted the new guidance with its fiscal year beginning January 1, 2023. The adoption of ASC 326 had no material effect on the Company’s financial statements.
3) Accounts Receivable, net
Accounts receivable, net is comprised of the following:
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| | March 31, | | December 31, | | December 31, | |||
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| 2023 |
| 2022 |
| 2021 | |||
Gross accounts receivables | | $ | | | $ | | | $ | |
Distribution service fees |
| | ( | | | ( |
| | ( |
Chargebacks accrual |
| | ( | | | ( |
| | — |
Cash discount allowances |
| | ( | | | ( |
| | ( |
Allowance for doubtful accounts |
| | ( | | | ( |
| | ( |
Total accounts receivable, net | | $ | | | $ | | | $ | |
For the three months ended March 31, 2023, gross billings to customers representing 10% or more of the Company’s total gross billings included
Receivables from customers representing 10% or more of the Company’s gross accounts receivable included
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4) Inventories
Inventory is comprised of the following:
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| March 31, 2023 |
| December 31, 2022 | ||
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:
|
| March 31, 2023 |
| December 31, 2022 | ||
Prepaid insurance | | $ | | | $ | |
Prepaid coupon fees | |
| | |
| |
API purchase commitment asset (see Note 13) | |
| | |
| |
Other prepaid expenses | |
| | |
| |
Other current assets | |
| | |
| |
Total prepaid expenses and other current assets | | $ | | | $ | |
6) Intangible Assets
| | | |
Balance at December 31, 2021 | | $ | |
Amortization expense | |
| ( |
Intangible Impairment | | | ( |
Balance at December 31, 2022 | |
| |
Amortization expense | | | ( |
Balance at March 31, 2023 | | $ | |
The future annual amortization related to the Company’s intangible assets is as follows as of March 31, 2023:
| | | |
2023 (remaining 9 months) |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 | | | |
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
13
7) Accrued Expenses
Accrued expenses are comprised of the following:
|
| March 31, 2023 |
| December 31, 2022 | ||
Accrued product returns | | $ | | | $ | |
Accrued contract rebates | |
| | |
| |
Due to 3PL/Wholesalers | |
| | |
| |
Accrued bonuses | | | | | | |
Accrued professional fees | |
| | |
| |
Other accrued expenses | |
| | |
| |
Total accrued expenses | | $ | | | $ | |
8) Debt
Promissory Note
In connection with the Settlement Agreement entered into with Vivus (see Note 13), Petros executed an interest-bearing promissory note (the “Note”) in favor of Vivus in the principal amount of $
Under the terms of the Note, the original principal amount of $
Future minimum principal payments of the promissory note are as follows:
| | | |
2023 (remaining 9 months) |
| $ | |
2024 | | | |
2025 | | | |
2026 | | | |
2027 | | | |
Total | | $ | |
9) 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
On November 30, 2021, the Company entered into a sublease with respect to its entire headquarters facility. The sublessor delivered a $
The components of lease expense consisted entirely of fixed lease costs related to operating leases. These costs were $
14
Supplemental balance sheet information related to leases was as follows:
|
| As of March 31, 2023 |
| As of December 31, 2022 | ||
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 March 31, 2023 |
| As of December 31, 2022 | |
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 | ||||
| | Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Operating cash flows from operating leases | | $ | | | $ | |
Future minimum lease payments under non-cancelable leases as of March 31, 2023, were as follows:
Lease Liability Maturity Analysis |
| Operating Leases | |
2023 (remaining 9 months) |
| $ | |
2024 |
| | |
2025 |
| | |
2026 | | | |
Thereafter |
| | — |
Total lease payments |
| | |
Less: Imputed Interest |
| | ( |
Total | | $ | |
Future minimum sublease income under non-cancelable leases as of March 31, 2023, were as follows:
Sublease income | | Operating Leases | |
2023 (remaining 9 months) | | | |
2024 |
| | |
Total | | $ | |
As of March 31, 2023, the Company had
10) Stock Options and Restricted Stock Units (“RSU’s”)
The Company established the 2020 Omnibus Incentive Compensation plan (the “2020 Plan”) which provides for the grants of awards to our directors, officers, employees, and consultants. The 2020 Plan authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units and other stock-based awards and cash-based awards. On December 22, 2021, our stockholders approved the Second Amendment to the 2020 Plan to increase the total number of shares of common stock issuable under the 2020 Plan by
15
The following is a summary of stock options for the three months ended March 31, 2023 and for the year ended December 31, 2022:
| | |
| | |
| Weighted-Average |
| | |
| | | | Weighted- | | Remaining | | Aggregate Intrinsic | ||
| | Number of | | Average | | Contractual | | Value | ||
|
| Shares |
| Exercise Price |
| Term (Years) |
| ($ in thousands) | ||
Options outstanding at December 31, 2022 |
| | | | |
| | | — | |
Options granted |
| — | |
| — |
| — | |
| — |
Less: options forfeited |
| — | |
| — |
| — | |
| — |
Less: options expired/cancelled |
| ( | |
| |
| — | |
| — |
Less: options exercised | | — | | | — | | — | | | — |
Options outstanding at March 31, 2023 |
| | | $ | |
| | $ | — | |
| | | | | | | | | | |
Options exercisable at March 31, 2023 |
| | | $ | |
| | $ | — | |
The following is a summary of RSU’s for the three months ended March 31, 2023 and for the year ended December 31, 2022:
| | | | | | | Weighted-Average |
| | | | Weighted- | | Remaining | |
| | Number of | | Average | | Contractual | |
| | Shares | | Fair Value at Grant Date | | Term (Years) | |
RSU’s outstanding at December 31, 2022 |
| | | $ | |
| |
RSU’s granted |
| — | | — |
| — | |
Less: RSU’s forfeited |
| — | |
| — |
| — |
Less: RSU’s expired/cancelled |
| ( | |
| |
| — |
Less: RSU’s vested |
| ( | |
| |
| — |
RSU’s outstanding at March 31, 2023 |
| | | $ | |
| |
On January 4, 2022, pursuant to a consulting agreement, the Company awarded a grant of
On April 7, 2022, the Company awarded the
On April 10, 2023, the Company awarded each of the
Stock-based compensation expense recognized for the three months ended March 31, 2023 and 2022 was $
The Company expects all RSU’s to vest.
16
11) Common Stock Warrants
The following is a summary of warrants for the three months ended March 31, 2023 and for the year ended December 31, 2022:
|
| Number of Shares |
Warrants outstanding at December 31, 2021 |
| |
Warrants issued |
| |
Warrants exercised |
| |
Warrants expired | | |
Warrants outstanding at December 31, 2022 and March 31, 2023 |
| |
As of March 31, 2023, the Company’s warrants by expiration date were as follows:
Number of Warrants |
| Exercise Price (in Dollars) |
| Expiration Date |
| | | August 23, 2023 | |
| | | June 1, 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 | |
| | | October 18, 2026 | |
| | | December 12, 2026 | |
| | | December 27, 2026 | |
|
| |
|
12) Basic and Diluted Net Income (Loss) per Common Share
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net loss per share:
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Numerator |
| |
|
| |
|
Net loss | | $ | ( | | $ | ( |
Denominator | |
| | |
| |
Weighted-average common shares for basic net income (loss) per share | |
| | |
| |
Basic and diluted net income (loss) per common share | | ( | | ( | ||
17
The following table summarizes the potentially dilutive securities convertible into common shares that were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been antidilutive:
| | For the Three Months Ended | ||
| March 31, | |||
|
| 2023 |
| 2022 |
Stock Options |
| |
| |
RSUs | | | | |
Warrants |
| |
| |
Total |
| |
| |
13) Marketing, Licensing and Distribution Agreements
(a) Vivus
On September 30, 2016, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Vivus, Inc (“Vivus”) to purchase and receive the license for the commercialization and exploitation of Stendra® for a one-time fee of $
Under the License Agreement, the Company will pay MTPC a royalty of
In addition, the Company will be responsible for a pro-rata portion of a $
In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement. The Supply Agreement was terminated, effective September 30, 2021.
On January 18, 2022, Petros and Vivus entered into a Settlement Agreement (the “Vivus Settlement Agreement”) related to the minimum purchase requirements under the Vivus Supply Agreement in 2018, 2019 and 2020 and certain reimbursement rights asserted by a third-party retailer in connection with quantities of the Company’s Stendra® product that were delivered to the third-party retailer and later returned. In connection with the Vivus Settlement Agreement, Petros retained approximately $
In addition to the payments to be made in accordance with the Note, the Company further agreed in the Vivus Settlement Agreement to (i) grant to Vivus a right of first refusal to provide certain types of debt and convertible equity (but not preferred equity) until the Note is paid in full, and (ii) undertake to make certain regulatory submissions to effectuate Vivus’ ability to exercise its rights under the License Agreement. On January 18, 2022, the Company made a prepayment of the obligations under the Note in the amount of $
As a result of entering into the Vivus Settlement Agreement, the Company decreased accrued expenses by $
18
and an increase to liabilities for the Note of $
As of March 31, 2023 and December 31, 2022, the Company has $
During the three months ended March 31, 2023 and 2022, 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) Patheon
Following the termination of the Vivus Supply Agreement, Petros, through its subsidiary Metuchen, entered into a Technology Transfer Service Agreement on January 20, 2022 with Patheon Pharmaceuticals Inc., part of Thermo Fisher Scientific (“Patheon”), pursuant to which the Company and Patheon agreed to collaborate as strategic partners for commercial production of Stendra® tablets at Patheon’s facilities in Cincinnati, Ohio. Under the Agreement, Patheon or one of its affiliates will provide pharmaceutical development and technology transfer services in order to establish and validate its ability to manufacture supply of the Company’s Stendra® product. Any commercial sale of product manufactured during the performance of the Agreement must be subject to a subsequent commercial manufacturing services agreement (with associated quality agreement) between the parties before it can be offered for commercial sale.
(c) Hybrid
In March 2020, the Company acquired the exclusive license to H100™ from Hybrid. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease.
The Company terminated its exclusive license to H100™ from Hybrid on May 11, 2023.
14) Commitments and Contingencies
(a) 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.
19
15) Segment Information
The Company manages its operations through
The Company’s results of operations by reportable segment for the three months ended March 31, 2023 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the Three Months Ended March 31, 2023 |
| Medications |
| Devices |
| Corporate |
| Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold | |
| | |
| | |
| — | |
| |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| |
Research and development expenses | |
| | |
| | |
| — | |
| |
Depreciation and amortization expense | |
| | |
| | |
| — | |
| |
Interest income | | | — | | | — | | | ( | | | ( |
Interest expense | |
| — | |
| — | |
| | |
| |
Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
The Company’s results of operations by reportable segment for the three months ended March 31, 2022 are summarized as follows:
| | | | | | | | | | | | |
|
| Prescription |
| Medical |
| | |
| | | ||
For the Three Months Ended March 31, 2022 |
| Medications |
| Devices |
| Corporate |
| Consolidated | ||||
Net sales | | $ | | | $ | | | $ | — | | $ | |
Cost of goods sold | |
| | |
| | |
| — | |
| |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| |
Gain on settlement with Vivus | | | ( | | | — | | | — | | | ( |
Research and development expenses | |
| | |
| — | |
| — | |
| |
Depreciation and amortization expense | |
| | |
| | |
| — | |
| |
Change in fair value of derivative liability | |
| — | |
| — | |
| ( | |
| ( |
Interest expense | |
| — | |
| — | |
| | |
| |
Net income (loss) | | $ | | | $ | ( | | $ | ( | | $ | ( |
The following table reflects net sales by geographic region for the three months ended March 31, 2023 and 2022:
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
Net Sales |
| 2023 |
| 2022 | ||
United States | | $ | | | $ | |
International | | | | |
| |
| | $ | | | $ | |
No individual country other than the United States accounted for 10% of total sales for the three months ended March 31, 2023 and 2022.
20
The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of March 31, 2023, are summarized as follows:
| | | | | | | | | |
| | Prescription |
| Medical |
| | | ||
|
| Medications |
| 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, 2022, are summarized as follows:
| | | | | | | | | |
| | Prescription | | Medical | | | | ||
|
| Medications |
| Devices |
| Consolidated | |||
Intangible assets, net | | $ | | | $ | | | $ | |
Total segment assets | | $ | | | $ | | | $ | |
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of Petros’ financial statements with a narrative from the perspective of management on the Company’s financial condition, results of operations, liquidity and certain other factors that may affect future results. In certain instances, parenthetical references are made to relevant sections of the Notes to Consolidated Financial Statements to direct the reader to a further detailed discussion. This section should be read in conjunction with the Consolidated Financial Statements and Supplementary Data included in this Quarterly Report on Form 10-Q. This MD&A contains forward-looking statements reflecting Petros’ current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Overview
Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) is a pharmaceutical company focused on men’s health therapeutics, consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC (“Metuchen”), Timm Medical Technologies, Inc. (“Timm Medical”), Neurotrope, Inc. (“Neurotrope”), 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). Petros is also currently conducting non-clinical consumer studies in connection with the contemplated pursuit of FDA approval for Stendra® for Non-Prescription / Over-The-Counter (“OTC”) use in treating ED.
In addition to Stendra®, Petros’ ED portfolio also includes external penile rigidity devices, namely Vacuum Erection Devices (“VEDs”), which are sold domestically and internationally. In addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health. 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.
The Company terminated its exclusive license to H100TM from Hybrid on May 11, 2023.
Going Concern
Petros has experienced net losses and negative cash flows from operations since our inception. As of March 31, 2023, the Company had cash of approximately $8.3 million, positive working capital of $7.0 million, an accumulated deficit of approximately $92.1 million and used cash in operations during the three months ended March 31, 2023 of approximately $0.7 million. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.
22
In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well as by exploring additional ways to raise capital and increase cash flows from operations. There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra® and continuing to invest in research and development pursuant to our Non-Prescription / Over-The-Counter (“OTC”) strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC in order to extend its cash resources. The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Impact of COVID-19
The impact on our results of operations of the COVID-19 pandemic and related changes in economic conditions are highly uncertain and, in many instances, outside of our control. The duration and severity of the direct and indirect effects of the pandemic continue to evolve and in ways that are difficult to anticipate. There are numerous uncertainties related to the COVID-19 pandemic that have impacted our ability to forecast our future operations as a company. The extent to which the COVID-19 pandemic, and the emergence of any new variants, will affect our business, financial position and operating results in the future cannot be predicted with certainty; however, any such impact could be material. The COVID-19 pandemic could also increase the degree to which our results, including the results of our business segments, fluctuate in the future.
For more information, please see Part II, Item 1A “Risk Factors” included elsewhere within this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Nature of Operations and Basis of Presentation
Petros is a pharmaceutical company focused on men’s health therapeutics with a full range of commercial capabilities including sales, marketing, regulatory and medical affairs, finance, trade relations, pharmacovigilance, market access relations, manufacturing, and distribution.
Petros consists of wholly owned subsidiaries, Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”), Neurotrope, Inc., a Nevada corporation (“Neurotrope”), Timm Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”). Petros was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting certain transactions between Petros, Metuchen, Neurotrope, and certain subsidiaries of Petros (collectively the “Mergers”). The Mergers were consummated on December 1, 2020. The Company is engaged in the commercialization and development of Stendra®, a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”), which we have licensed from Vivus, Inc. (“Vivus”). Petros also markets its own line of ED products in the form of vacuum erection device products through its subsidiaries, Timm Medical and PTV. In addition to ED products, we acquired an exclusive global license to develop and commercialize H100™, a novel and patented topical formulation candidate for the treatment of acute Peyronie’s disease, which license was terminated by the Company on May 11, 2023.
The Company manages its operations through two segments, Prescription Medications and Medical Devices, both of which focus on the treatment of male ED. The Prescription Medications segment consists primarily of Stendra®, which is sold generally in the United States. Expenses related to the development of H100™, which was in the early stages of development and had not yet sought FDA approval to begin Phase 1 clinical trials, were categorized under the Prescription Medications segment. We terminated the H100™ license in May 2023. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.
23
Licensing and Distribution
The Company acquired the rights to Stendra® avanafil on September 30, 2016, when it entered into the License Agreement with Vivus to purchase and receive the license for the commercialization and exploitation of Stendra® avanafil for a one-time fee of $70 million. The License Agreement gives the Company the exclusive right to sell avanafil in the U.S. and its territories, as well as Canada, South America, and India. In December 2000, Vivus originally was granted the license from Mitsubishi Tanabe Pharma Corporation (“MTPC”) to develop, market, and manufacture Stendra®. Stendra® was approved by the FDA in April 2012 to treat male ED.
The Company will pay MTPC a royalty of 5% on the first $500 million of net sales and 6% of net sales thereafter until the expiration of the applicable patent in a particular country. The last scheduled patent expiration is in April 2025. In consideration for the trademark assignment and the use of the trademarks associated with Stendra® and the Vivus technology, the Company shall (a) during the first, second, and third years following the expiration of the royalty period in a particular country in the Company’s territory, pay to Vivus a royalty equal to 2% of the net sales of Stendra® in such territory; and (b) following the fourth and fifth years following the end of the royalty period in such territory, pay to Vivus a royalty equal to 1% of the net sales of Stendra® in such territory. After the royalty period, no further royalties shall be owed with respect to net sales of Stendra® in such territory. In addition, the Company will be responsible for a pro-rata portion of a one-time $6 million milestone payment to be paid once $250 million in sales has been reached on the separate revenue stream of Stendra® during any calendar year.
In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on September 30, 2016, which has since been terminated, effective as of September 30, 2021. Following the termination of the Vivus Supply Agreement, Petros, through its subsidiary Metuchen, entered into a Technology Transfer Service Agreement on January 20, 2022 with Patheon Pharmaceuticals Inc., part of Thermo Fisher Scientific (“Patheon”), pursuant to which the Company and Patheon agreed to collaborate as strategic partners for commercial production of Stendra® tablets at Patheon’s facilities in Cincinnati, Ohio. Under the Agreement, Patheon or one of its affiliates is providing pharmaceutical development and technology transfer services in order to establish and validate its ability to manufacture supply of the Company’s Stendra® product. Any commercial sale of product manufactured during the performance of the Agreement must be subject to a subsequent commercial manufacturing services agreement (with associated quality agreement) between the parties before it can be offered for commercial sale.
The license agreement between MTPC and Vivus contains certain termination rights that will allow MTPC to terminate the agreement if Vivus were to breach any of the terms of the MTPC License or become insolvent or bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra®.
On March 27, 2018, the Company entered into a Sublicense Agreement with Acerus Pharmaceuticals Corporation (“Acerus”) whereby the Company granted to Acerus an exclusive sublicense in Canada for, among other things, the development and commercialization of Stendra® avanafil for a one-time fee of $100,000. The Company was entitled to receive an additional fee of $400,000 if Stendra® is approved by Canadian regulators, as well as commercial milestone payments and royalty fees of 12% of net sales. However, in April 2020 Health Canada issued a Notice of Deficiency (“NOD”) against the New Drug Submission. Metuchen and Acerus are currently renegotiating modified terms to the sub-license agreement and the viability of the pathway required to address the deficiency noted by Health Canada. The outcome of these negotiations is uncertain and depends on a variety of factors, including the result of Acerus’ ongoing dissolution proceedings.
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.
The Company terminated the Hybrid License on May 11, 2023
Vivus Settlement Agreement, Promissory Note and the Security Agreement
On January 18, 2022, Petros and Vivus entered into a Settlement Agreement (the “Vivus Settlement Agreement”) related to the minimum purchase requirements under the Vivus Supply Agreement in 2018, 2019 and 2020 and certain reimbursement rights asserted by a third-party retailer in connection with quantities of the Company’s Stendra® product that were delivered to the third-party retailer and later returned. In connection with the Vivus Settlement Agreement, Petros retained approximately $7.3 million of API inventory under the Vivus Supply Agreement. In exchange for the API and reduction of current liabilities, Petros executed an interest-bearing promissory
24
note (the “Note”) in favor of Vivus in the principal amount of $10,201,758, which approximate fair value. The parties also entered into a Security Agreement to secure Petros’ obligations under the Note.
In addition to the payments to be made in accordance with the Note, the Company further agreed in the Vivus Settlement Agreement to (i) grant to Vivus a right of first refusal to provide certain types of debt and convertible equity (but not preferred equity) financing issued by or to Metuchen (including any subsidiaries and intermediaries) until the Note is paid in full, and (ii) undertake to make certain regulatory submissions to effectuate Vivus’ ability to exercise its rights under the License Agreement. On January 18, 2022, the Company made a prepayment of the obligations under the Note in the amount of $900,000, and a payment of $1,542,904 with respect to a purchase order made in 2021 to Vivus. In consideration of these payments and upon the Company’s satisfaction of certain regulatory submissions. Vivus released 50% of the quantity of bulk Stendra® tablets under the Company’s existing open purchase order (the “Open Purchase Order”) being held by Vivus, which represents approximately a six-month supply of inventory. Pursuant to the Vivus Settlement Agreement Vivus also released the remaining 50% of the quantity of bulk Stendra® tablets under the Open Purchase Order, later during the first quarter of 2022, upon the Company’s satisfaction of the remaining regulatory submission requirements.
As a result of entering into the Vivus Settlement Agreement, the Company decreased the Company’s accrued expenses by $6.5 million and decreased accrued inventory purchases by $14.2 million; which were partially offset by a decrease in API purchase commitments of $6.2 million and an increase to liabilities for the Note of $10.2 million (which is net of the $0.9 million prepayment on the Note). As a result, the Company recorded a $3.4 million gain on settlement for the three months ended March 31, 2022.
Under the terms of the Note, the principal amount of $10,201,758 is payable in consecutive quarterly installments beginning on April 1, 2022 through January 1, 2027. Interest on the principal amount will accrue at a rate of 6% per year until the principal is repaid in full and is due and payable, in arrears, on the first day of each January, April, July, and October of each calendar year, commencing on April 1, 2022. The Company may prepay the Note, in whole or in part, at any time, with no premium or penalty. In the event that the Company defaults under the Security Agreement, all principal outstanding under the Note at the time of the default will bear interest at a rate of 9% per year until the full and final payment of all principal and interest under the Note (regardless of whether any default is waived or cured). If the Note is placed in the hands of any attorney for collection, or if it is collected through any legal proceeding at law or in equity or in bankruptcy, receivership, or other court proceedings, the Company will also be required to pay all costs of collection including, but not limited to, court costs and attorneys’ fees. Pursuant to the Security Agreement, dated January 18, 2022, the Company granted to Vivus a continuing security interest in all of its Stendra® API and products and its rights under the License Agreement. The Security Agreement contains customary events of default. For the three months ended March 31, 2023, the Company has paid Vivus $357,833. As of March 31, 2023, the principal balance on the Note is $9,119,943.
Reverse Stock Split
On November 30, 2022, we effected a 1-for-10 reverse stock split of the issued and outstanding shares of our Common Stock. All share and per share information herein has been adjusted to retrospectively reflect this reverse stock split.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including but not limited to those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, intangibles, income taxes, litigation, and contingencies. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our consolidated financial statements as they occur. While our significant accounting policies are more fully described in “Part I; Item 1. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” in this Quarterly Report on Form 10-Q, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these critical accounting policies with the Audit Committee of our Board of Directors.
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Revenue Recognition
The Company recognizes revenue when its performance obligations with its customers have been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide either its prescription medication or medical devices upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of the prescription medication or medical device, which is typically upon delivery.
In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers either the prescription medication or medical device to when the customers pay for the product is typically less than one year. The Company records sales net of any variable consideration, including but not limited to discounts, rebates, returns, chargebacks, and distribution fees. The Company uses the expected value method when estimating its variable consideration, unless terms are specified within contracts. The identified variable consideration is recorded as a reduction of revenue at the time revenues from sales are recognized. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.
The most significant sales deductions relate to contract returns, contract rebates and coupon redemptions, and distribution service fees (“DSA fees”). Our estimates are based on factors such as our direct and indirect customers’ buying patterns and the estimated resulting contractual deduction rates, historical experience, specific known market events and estimated future trends, current contractual and statutory requirements, industry data, estimated customer inventory levels, current contract sales terms with our direct and indirect customers, and other competitive factors. Significant judgment and estimation are required in developing the foregoing and other relevant assumptions.
Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return Stendra® and receive credit for product within six months prior to expiration date and up to one year after expiration date. The provision for returns is based upon the Company’s estimates for future Stendra® returns and historical experience. The provision of returns is part of the variable consideration recorded at the time revenue is recognized. As of March 31, 2023 and December 31, 2022, the reserves for product returns were $2.2 million and $2.3 million, respectively, and are included as a component of accrued expenses. During the three months ended March 31, 2023 and 2022, respectively, the Company recorded $0.4 million and $0.7 million of returns as a reduction of gross revenue.
Accounts Receivable
The Company extends credit to its customers in the normal course of business. Accounts receivable are recorded at the invoiced amount, net of chargebacks, distribution service fees, and cash discounts. Management determines each allowance based on historical experience along with the present knowledge of potentially uncollectible accounts.
Inventories
Inventories consist of finished goods held for sale and raw materials. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Inventories are adjusted for excess and obsolescence. Evaluation of excess inventory includes such factors as expiry date, inventory turnover, and management’s assessment of current product demand.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
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Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable markets.
Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
In connection with the Mergers in December 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros’ Common Stock. The Company estimated their fair value using the Monte Carlo Simulation approach as of March 31, 2023 and December 31, 2022. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.
Intangibles
The Company accounts for recognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. The Company reviews the carrying value and useful lives of its intangible assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which they should be amortized has changed. When indicators of impairment exist, the Company determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The Company evaluates the remaining useful life of each intangible asset that is being amortized during each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. During the year ended December 31, 2022, the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis, which indicated for the Stendra® product an impairment. The Company then prepared a discounted cash flow analysis through December 2029, representing the remaining economic useful life for the Stendra® product, resulting in an impairment of approximately $7.5 million.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
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Three Months Ended March 31, 2023 and 2022 (Unaudited)
The following table sets forth a summary of our statements of operations for the three months ended March 31, 2023 and 2022:
| | For the Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Net sales | | $ | 2,517,972 | | $ | 2,465,169 |
Cost of sales | |
| 550,742 | |
| 472,340 |
Gross profit | |
| 1,967,230 | |
| 1,992,829 |
| | | | | | |
Operating expenses: | |
| | |
| |
Selling, general and administrative | |
| 2,130,639 | |
| 3,897,738 |
Gain on settlement with Vivus | | | — | | | (3,389,941) |
Research and development | |
| 319,093 | |
| 405,360 |
Depreciation and amortization expense | |
| 826,795 | |
| 1,560,870 |
Total operating expenses | |
| 3,276,527 | |
| 2,474,027 |
| | | | | | |
Loss from operations | |
| (1,309,297) | |
| (481,198) |
| | | | | | |
Change in fair value of derivative liability | |
| — | |
| 460,000 |
Interest income | |
| 66,317 | |
| — |
Interest expense, promissory note | |
| (142,167) | |
| (153,026) |
| | | | | | |
Net loss | | $ | (1,385,147) | | $ | (174,224) |
Net Sales
Net sales for the three months ended March 31, 2023, were $2,517,972, composed of $1,506,278 of net sales from Prescription Medicines and net sales of $1,011,694 from Medical Devices.
Net sales for the three months ended March 31, 2022, were $2,465,169, composed of $1,524,768 of net sales from Prescription Medicines and net sales of $940,401 from Medical Devices.
For the three months ended March 31, 2023, gross billings to customers representing 10% or more of the Company’s total gross billings included four customers that represented approximately 23%, 19%, 15%, and 13% of total gross billings, respectively. Gross billings is a non-GAAP financial measure. For a reconciliation of net sales to gross billings, see the section titled “Reconciliation of Non-GAAP Financial Measures” below.
For the three months ended March 31, 2022, gross billings to customers representing 10% or more of the Company’s total gross billings included three customers that represented approximately 30%, 23%, and 22% of total gross billings, respectively.
Prescription Medicines sales consist of sales of Stendra® in the U.S. for the treatment of male ED. Stendra® is primarily sold directly to the four main customers as described above, which collectively accounted for approximately 91% of Stendra® net sales for the March 31, 2023. Individually, sales to the four main customers accounted for 30%, 25%, 19%, and 17%, respectively, of Stendra® gross billings for the three months ended March 31, 2023.
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 $52,803 or 2% higher during the three months ended March 31, 2023 than in the same period in 2022 consisting of a $18,490 decrease in the net sales of Stendra® and a $71,293 increase in Medical Device Sales. The decrease in net sales of Stendra® was substantially due to decreased wholesaler sales due to decreased demand and decreased related sales allowances. The increase in net sales for Medical Devices included an increase in domestic sales of VED systems partially offset by a decrease in international sales of VED systems.
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Cost of Sales
Cost of sales for the three months ended March 31, 2023, were $550,742, composed of $174,270 of cost of sales for our Prescription Medicines segment and $376,472 for our Medical Devices segment.
Cost of sales for the three months ended March 31, 2022 were $472,340, composed of $138,181 of cost of sales for our Prescription Medicines segment and $334,159 for our Medical Devices segment.
Cost of sales for the Prescription Medicine segment for the three months ended March 31, 2023 consisted of 43% royalty expenses, 29% inventory obsolescence reserves and 28% third-party product cost of sales.
Cost of sales for the Medical Device segment for the three months ended March 31, 2023 consisted of 83% raw materials and 17% production labor.
Cost of sales increased by $78,402 or 17% during the three months ended March 31, 2023 compared to the same period in 2022. For the three months ended March 31, 2023 and 2022, cost of sales as a percentage of net sales was 22% and 19%, respectively. During the three months ended March 31, 2023 the Company recorded an increase in excess and obsolete inventory of $50,499 which accounted for the increase in cost of sales.
Gross Profit
Gross profit for the three months ended March 31, 2023 was $1,967,230, or 78% of net sales, composed of $1,332,008 of gross profit from Prescription Medicines and $635,222 from Medical Devices. Gross profit for the three months ended March 31, 2022 was $1,992,829, or 81% of net sales, composed of $1,386,587 of gross profit from Prescription Medicines and $606,242 from Medical Devices. The decrease in gross profit was driven by the factors noted above.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses for the three months ended March 31, 2023, were $2,130,639, composed of $496,847 of selling, general and administrative expenses of our Prescription Medicines segment, $423,871 of selling, general and administrative expenses of our Medical Devices segment and $1,209,921 of general corporate expenses.
Selling, general and administrative expenses for the three months ended March 31, 2022 were $3,897,738, composed of $1,711,019 of selling, general and administrative expenses of our Prescription Medicines segment, $663,591 of selling, general and administrative expenses of our Medical Devices segment and $1,523,128 of general corporate expenses.
Selling, general and administrative expenses for both segments include selling, marketing and regulatory expenses. Unallocated general corporate expenses include costs that were not specific to a particular segment but are general to the group, including expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses.
Selling, general and administrative expenses decreased by $1,767,099 or 45% during the three months ended March 31, 2023, compared to the same period in 2022. Decreased selling general and administrative expenses were primarily driven by decreased direct selling and marketing expenses of $300,432, decreased professional service fees of $284,196 as management sought to reduce expenses to improve operational efficiencies, a waiver of FY 23 PDUFA fees by the FDA resulting in a $277,060 decrease in PDUFA expenses, decreased stock based compensation expense of $225,490, decreased payroll expenses of $145,697 resulting from decreased headcount and decreased other operating expenses of $534,224.
Gain on settlement with Vivus
As a result of the Vivus Promissory Note, as discussed in Note 8 and Note 13 of the Notes to Consolidated Financial Statements, the Company’s total liabilities were decreased by $3,389,941 in the form of concession of customer returns, which were recognized as a gain on settlement during the three months ended March 31, 2022.
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Research and development
Research and development expenses for the three months ended March 31, 2023 were $319,093, composed of $265,216 for our Prescription Medicines segment and $53,877 for our Medical Devices segment, respectively.
Research and development expenses for the three months ended March 31, 2022 were $405,360 and $0 for our Prescription Medicines segment and Medical Devices segment, respectively.
Research and development expenses for the Prescription Medicines segment for the three months ended March 31, 2023 are composed of $252,803 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter ("OTC") Strategies related to Stendra®; $9,920 for consulting fees related to the H100 license acquired in March 2020; and $2,493 related to the Company's tech transfer of its manufacturing process. Research and development expenses for the Prescription Medicines segment for the three months ended March 31, 2022 are composed of $191,565 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter Strategies, $150,000 for upfront licensing fees, $33,421 for clinical development expenses and $30,374 for consulting fees related to the H100 license acquired in March 2020.
Research and development expenses for the Medical Devices segment for the three months ended March 31, 2023 are composed of $53,877 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the three months ended March 31, 2023 were $0.
Research and development expenses decreased by $86,267 or 21% during the three months ended March 31, 2023, compared to the same period in 2022. Decreased research and development expenses were primarily driven by decreased upfront licensing fees, decreased clinical development expenses and decreased consulting fees related to the H100 license acquired in March 2020 partially offset by increased consulting fees related to the Company’s OTC strategies related to Stendra® and increased license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies.
Depreciation and amortization
Depreciation and amortization expenses for the three months ended March 31, 2023, were $826,795, composed of $575,470 of depreciation and amortization expenses of our Prescription Medicines segment and $251,325 of depreciation and amortization expenses of our Medical Devices segment.
Depreciation and amortization expenses for the three months ended March 31, 2022 were $1,560,870, composed of $1,269,663 of depreciation and amortization expenses of our Prescription Medicines segment and $291,207 of depreciation and amortization expenses of our Medical Devices segment.
Prescription Medicines depreciation and amortization consists primarily of the amortization of the intangible assets related to Stendra® over its estimated useful life of 10 years. Medical Devices depreciation and amortization primarily consists of the amortization of the intangible assets related to Timm Medical and PTV over their estimated useful life of 12 years.
Intangible asset impairment
During the year ended December 31, 2022, the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis, which indicate that, the Stendra® product intangible asset was impaired. The Company then prepared a discounted cash flow analysis resulting in an impairment of approximately $7.5 million.
Change in fair value of derivative liability
In connection with the Mergers consummated on December 1, 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the $460,000 represents the change in fair value of the derivative during the year ended December 31, 2022, primarily driven by the decline in the Company’s stock price as well as the passage of time,
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as it became less likely that the earnout would be met. The earnout expired in December 2022. There was no change in fair value of the derivative during the three months ended March 31, 2023.
Interest Income
Interest income for the three months ended March 31, 2023 was $66,317 on funds deposited in interest bearing money market accounts. There was no interest income for the three months ended March 31, 2022.
Interest Expense, Promissory Note
In January 2022, the Company executed a promissory note in favor of Vivus with a principal amount of $10,201,758 in connection with the Vivus Settlement Agreement. Interest expense, promissory note for the three months ended March 31, 2023 and 2022 was $142,167 and $153,026, respectively.
Liquidity and Capital Resources
General
Cash on hand totaled $8,320,368 at March 31, 2023, compared to $9,426,264 at December 31, 2022.
We have experienced net losses and negative cash flows from operations since our inception. As of March 31, 2023, we had cash of $8.3 million, working capital of $7.0 million, and an accumulated deficit of $92.1 million. Our plans include, or may include, utilizing our cash on hand, as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. In January 2022, the Company executed a promissory note in favor of Vivus in connection with the Vivus Settlement Agreement in the principal amount of $10,201,758, net of a prepayment of $900,000. The terms of this promissory note are discussed in the section titled “—Vivus Settlement Agreement, Promissory Note and the Security Agreement” above.
To date, our principal sources of capital used to fund our operations have been the revenues from product sales, private sales, registered offerings and private placements of equity securities. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited interim consolidated financial statements are issued.
In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well by as exploring additional ways to raise capital in addition to increasing cash flows from operations. There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra® and continuing to invest in research and development pursuant to our Non-Prescription / Over-The-Counter (“OTC”) strategies related to Stendra®, which we believe has the potential to dramatically increase product sales in the future and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of Stendra® OTC in order to extend its cash resources. Thus far the Company has taken steps to reduce discretionary expenditures and explored new sources of funding for our research initiatives, such as sponsored research agreements and co-development initiatives. While we are optimistic that we will be successful in our efforts to finance our operations, there can be no assurances that we will be successful in doing so. The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
In March 2020, the Company acquired the Hybrid License, providing an exclusive license to H100™. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease.
The Company terminated the Hybrid License on May 11, 2023.
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We will require additional financing to further develop and market our products, fund operations, and otherwise implement our business strategy at amounts relatively consistent with the expenditure levels disclosed above. We are exploring additional ways to raise capital, but we cannot assure you that we will be able to raise capital. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. We expect to seek additional funds through a variety of sources, which may include additional public or private equity or debt financings, collaborative, or other arrangements with corporate sources, or through other sources of financing.
We are focused on expanding our service offering through internal development, collaborations, and through strategic acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.
Debt
Vivus Note
As noted above, in January 2022, the Company executed a promissory note in favor of Vivus with a principal amount of $10,201,758 in connection with the Vivus Settlement Agreement. For more information, see the section above titled “—Vivus Settlement Agreement, Promissory Note and the Security Agreement.”
Cash Flows
The following table summarizes our cash flows for the three months ended March 31, 2023 and 2022:
| | For the Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Net cash used in operating activities | | $ | (748,363) | | $ | (5,275,701) |
Net cash used in financing activities | |
| (357,833) | |
| (900,000) |
Net decrease in cash | | $ | (1,106,196) | | $ | (6,175,701) |
Cash Flows from Operating Activities
Net cash used in operating activities for the three months ended March 31, 2023 was $748,363, which primarily reflected our net loss of $1,385,147, in addition to noncash adjustments to reconcile net loss to net cash used in operating activities of $815,033 consisting primarily of depreciation and amortization, stock compensation, and changes in operating assets and liabilities of $(178,249).
Net cash used in operating activities for the three months ended March 31, 2022 was $5,275,701, which primarily reflected our net loss of $174,224, more than offset by cash adjustments to reconcile net income to net cash used in operating activities of $2,087,394 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 $3,014,083.
Cash Flows from Financing Activities
Net cash used in financing activities was $357,834 for the three months ended March 31, 2023 consisting of payments of the promissory note.
Net cash used in financing activities was $900,000 for the three months ended March 31, 2022, consisting entirely of prepayments of promissory note.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements included in this Form 10-Q. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to
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such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure utilized by management to evaluate the Company’s performance on a comparable basis. The Company believes that Adjusted EBITDA is useful to investors as a supplemental way to evaluate the ongoing operations of the Company’s business as Adjusted EBITDA may enhance investors’ ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization and to evaluate the Company’s ability to service debt. In addition, Adjusted EBITDA is a financial measurement that management and the Company’s Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net income as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.
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 income (loss) to Adjusted EBITDA for the three months ended March 31, 2023 and 2022:
| | For the Three Months Ended | ||||
| | March 31, 2023 | ||||
|
| 2023 |
| 2022 | ||
Net Loss | | $ | (1,385,147) | | $ | (174,224) |
Interest income | |
| (66,317) | |
| — |
Interest expense, promissory note | |
| 142,167 | |
| 153,026 |
Depreciation and amortization expense | |
| 826,795 | |
| 1,560,870 |
EBITDA | |
| (482,502) | |
| 1,539,672 |
Stock based compensation | | | 130,336 | | | 355,828 |
Gain on settlement with Vivus | | | — | | | (3,389,941) |
Change in fair value of derivative liability | |
| — | |
| (460,000) |
Adjusted EBITDA | | $ | (352,166) | | $ | (1,954,441) |
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 months ended March 31, 2023 and 2022:
| | For the Three Months | ||||
| | ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Net Sales | | $ | 2,517,972 | | $ | 2,465,169 |
Product Returns | | | 357,771 | |
| 743,753 |
Contract Rebates | | | 328,484 | |
| 450,231 |
Chargebacks | | | 40,400 | |
| 36,273 |
Cash Discounts | | | 46,739 | |
| 68,233 |
Distribution Service Fees | | | 287,507 | |
| 396,937 |
Coupon Redemptions | | | 566,865 | |
| 2,351,286 |
Gross Billings | | $ | 4,145,738 | | $ | 6,511,882 |
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.
34
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, 2022, we identified a material weaknesses in internal control related to (1) Petros has an insufficient level of monitoring and oversight controls and does not enforce the implementation of key controls reflected on its internal control process matrices; (2) the sizes of Petros’ accounting and IT departments make it impracticable to achieve an appropriate segregation of duties; and (3) Petros does not have appropriate IT access related controls.
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. The Company has continued to utilize 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 March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than as noted above.
35
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 14 Commitments and Contingencies of the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference herein.
ITEM 1A. RISK FACTORS.
There are no additional risk factors other than those previously disclosed in “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 31, 2023. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in our annual report, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price.
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.
Termination of Hybrid License
In March 2020, the Company acquired an exclusive global license (the “Hybrid License”) for the development and commercialization of H100™ from Hybrid Medical LLC (“Hybrid”). On May 11, 2023, the Company delivered written notice to Hybrid to terminate the Hybrid License. The Company is not subject to any termination penalties related to the termination of the Hybrid License. Pursuant to the Letter Agreement, dated September 24, 2020, by and between the Company and Hybrid (as amended, the “Letter Agreement”), the Company shall assign and transfer to Hybrid all of the Company’s right, title, and interest in and to all regulatory filings, regulatory approvals, clinical trial agreements, and other data relating to the use, sale, offer for sale or importation of the Product in the Field in the Territory (as such terms are defined in the Letter Agreement). In connection with such transfer, Hybrid will pay the Company a fee equal to 50% of the Company’s documented costs to procure, register and maintain such filings, approvals agreements and other data. The foregoing description of the Letter Agreement is not complete and is qualified in its entirety by reference to the full text of the Letter Agreement and the amendment thereto, copies of which were filed as Exhibits 10.10 and 10.14, respectively, to the Company’s Annual Report on Form 10-K filed on March 31, 2023.
36
ITEM 6. EXHIBITS.
Exhibit No. |
| Description |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer. |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer. |
32** | | Section 1350 Certification – Principal Executive Officer and Principal Financial Officer. |
101 | | The following materials from Petros Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Changes in Stockholders’ Equity/Members’ Capital; (iv) Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* | Filed herewith. |
** | Furnished herewith. |
37
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: May 15, 2023 | By: | /s/ Fady Boctor |
| | Fady Boctor |
| | Chief Commercial Officer and Principal Executive Officer |
| | |
Date: May 15, 2023 | By: | /s/ Mitchell Arnold |
| | Mitchell Arnold |
| | Vice President of Finance and Principal Financial Officer |
38
Exhibit 31.1
CERTIFICATION PURSUANT TO SARBANES–OXLEY ACT OF 2002
I, Fady Boctor, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Petros Pharmaceuticals, Inc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 15, 2023 | By: | /s/ Fady Boctor |
| | Fady Boctor |
| | Chief Commercial Officer and Principal Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SARBANES–OXLEY ACT OF 2002
I, Mitchell Arnold, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Petros Pharmaceuticals, Inc; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 15, 2023 | By: | /s/ Mitchell Arnold |
| | Mitchell Arnold |
| | Vice President of Finance and Principal Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
In connection with the Quarterly Report of Petros Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Petros Pharmaceuticals, Inc. | |
| | |
Date: May 15, 2023 | By: | /s/ Fady Boctor |
| | Fady Boctor |
| | Chief Commercial Officer and Principal Executive Officer |
| | |
Date: May 15, 2023 | By: | /s/ Mitchell Arnold |
| | Mitchell Arnold |
| | Vice President of Finance and Principal Financial Officer |