Form 10-K Petros Pharmaceuticals, For: Dec 31

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2020

 

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the transition period from _____________to _____________

 

Commission file number 1-39752

 

PETROS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware	85-1410058
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1185 Avenue of the Americas, 3rd Floor, New York, New York	10036
(Address of principal executive offices)	(Zip Code)

 

Registrant's telephone number, including area code: (973) 242-0005

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	PTPI	The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨Yes x No

 

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. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	x		Smaller reporting company	x
			Emerging growth company	x

 

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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes xNo

 

The aggregate market value of voting stock held by non-affiliates of the registrant computed by reference to the price at which such voting stock was last sold, as of March 20, 2021, was $20,389,869.

 

As of March 20, 2021, the registrant had 9,768,261 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

PETROS PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

	Page
PART I
Item 1. Business	1
Item 1A. Risk Factors	5
Item 1B. Unresolved Staff Comments	26
Item 2. Properties	26
Item 3. Legal Proceedings	26
Item 4. Mine Safety Disclosures	26
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	43
Item 8. Financial Statements and Supplementary Data	43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	43
Item 9A. Controls and Procedures	43
Item 9B. Other Information	45
PART III
Item 10. Directors, Executive Officers and Corporate Governance	46
Item 11. Executive Compensation	51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	54
Item 13. Certain Relationships and Related Transactions, and Director Independence	55
Item 14. Principal Accounting Fees and Services	56
PART IV
Item 15. Exhibits, Financial Statement Schedules	58
Item 16. Form 10-K Summary	59
SIGNATURES	60

 

All references to “Petros,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K (this "Form 10-K") refer to Petros Pharmaceuticals, Inc. and its subsidiaries.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains or incorporates 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”). These 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. These forward-looking statements are only predictions, and actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of risks and uncertainties, including, without limitation, Petros’ ability to execute on its business strategy, including its plans to develop and commercialize its product candidates; Petros’ ability to comply with obligations as a public reporting company; the ability of Petros to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002; the risk that the financial performance of Petros may not be as anticipated by the merger transactions that resulted in the Company’s creation; risks resulting from Petros’ status as an emerging growth company, including that reduced disclosure requirements may make shares of Petros common stock less attractive to investors; risks related to Petros’ history of incurring significant losses; risks related to Petros’ dependence on the commercialization of a single product, Stendra®, and on a single distributor thereof; risks related to Petros’ commercial supply agreement with Vivus; risks related to Petros’ ability to obtain regulatory approvals for, or market acceptance of, any of its products or product candidates; and the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic, and the related responses of governments, consumers, customers, suppliers, employees and the Company, on our business, operations, employees, financial condition and results of operations. Additional factors that could cause actual results to differ materially from the results anticipated in these forward-looking statements are described in this Annual Report, including under the section entitled “Risk Factors,” 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 this Annual Report on Form 10-K 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 this Annual Report to reflect any new information or future events or circumstances or otherwise, except as required by the federal securities laws.

 

 

RISK FACTOR SUMMARY

 

We are subject to a variety of risks and uncertainties. The following is a summary of the principal risks that we deem material to an investment in our securities, all of which are more fully described in, and should be read in conjunction with the section titled “Risk Factors” below.

 

Risks Related to Petros’ Business, Industry and Operations

 

•

Petros has incurred significant losses and may continue to experience losses in the future; however, we obtained from our largest shareholder, JCP III SM AIV, L.P., a continued support letter through May 17, 2022.

 

•

Petros is dependent on a single distributor for Stendra®, which product constitutes a substantial portion of Petros’ historic revenues. Additionally, Petros is reliant on third-party contract manufacturers to produce commercial quantities of its products and for the supply of the raw materials necessary to develop and manufacture its products.

 

•

Petros’ maintains a sublicense agreement for Stendra® with Vivus, Inc. (“Vivus”), pursuant to which Petros is dependent upon Vivus to maintain a license agreement with a third party. Additionally, Petros maintains a commercial supply agreement with Vivus (the “Supply Agreement”) for Stendra® and may be subject to substantial payment obligations. Furthermore, Vivus has granted a license to a third party to manufacture and distribute a generic version of Stendra® in the United States once it comes off patent.

 

•

Regulatory approval is limited by the Food and Drug Administration (the “FDA”) to those specific indications and conditions for which approval has been granted. Petros may be subject to fines, penalties, injunctions, or other enforcement actions if regulatory authorities determine that it is promoting any products for unapproved or “off-label” uses, resulting in reputational and business damage.

 

•

To the extent that any of our product candidates may be eligible, Petros may seek orphan drug designation from the FDA. However, there is no guarantee that Petros will be able to maintain this designation, receive this designation, or receive or maintain any corresponding benefits, including periods of exclusivity.

 

•

Petros may experience pricing pressure on the price of our products, including from private third-party payers and other managed care entities, such as pharmacy benefit managers, generic drug manufacturers, or from social or political activities, which would reduce our revenue and future profitability, if achieved.

 

•

Petros’ debt facility contains financial and operating restrictions that may limit its access to credit. In addition, Petros’ debt facility expires on December 1, 2021, and Petros may not be able to renew, extend or replace the expiring facility. If Petros fails to comply with covenants in its debt facility or if the facility is terminated, Petros may be required to immediately repay its indebtedness thereunder, which would have an adverse effect on its liquidity.

 

Risks Related to Petros Personnel

 

•

Because Petros is a small pharmaceutical company with limited resources, it may be unable to attract qualified personnel. Furthermore, Petros will need to expand its operations and increase its size, and it may experience difficulties in managing growth.

 

•

Petros may be adversely affected by any misconduct or improper activities on the part of its individual employees, principal investigators or consultants, or from cyberattacks and other security breaches that could compromise our proprietary and confidential information.

 

Risks Related to Government Regulation and Legal Proceedings for Petros

 

•

Petros’ approved drug products are subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, drug products could be subject to labeling and other restrictions and market withdrawal, and Petros may be subject to penalties if it fails to comply with regulatory requirements or experiences unanticipated product problems. Similarly, Petros’ medical devices are subject to stringent regulatory oversight and any adverse regulatory action may adversely affect our financial condition and business operations.

 

•

Petros’ current strategy to advance product candidates, including in clinical developments and through the FDA may experience material delays, exceed anticipated costs, or may not be successful at all. Any delays or inability to successfully execute our strategy to advance product candidates and to commercialize our products may materially adversely affect our financial condition and results of operations.

 

 

•

Petros relies on third parties to conduct, supervise, and monitor preclinical studies and clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials or failing to comply with regulatory requirements.

 

•

Petros’ is subject to extensive regulatory oversight and regimes, including those implemented by the consumer protection and healthcare laws, the FDA, the Federal Trade Commission (“FTC”), and others, any violations of which could subject us to, among other things, product recalls, product liability and other litigation, criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

•

Government regulations that mandate price controls and limitations on patient access to its products or establish prices paid by government entities or programs for such products may impact Petros’ business, and future results could be adversely affected by changes in such regulations or policies.

 

Risks Related to Petros’ Intellectual Property

 

•

If Petros fails to protect its intellectual property rights, its ability to pursue the development of its products would be negatively affected. Any legal action by Petros to protect or enforce its patents could be expensive and time consuming.

 

•

If Petros infringes the rights of third parties, it could be prevented from selling products and forced to pay damages and defend against litigation.

 

•

Petros may be subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

•

Changes in trends in the pharmaceutical and medical device industries, including changes to market conditions, could adversely affect Petros’ operating results.

 

Risks Related to Petros’ Strategic Transactions

 

•

Acquisitions involve risks that could result in a reduction of our operating results, cash flows and liquidity.

 

Other Risks Related to Petros’ Business and Operations

 

•

Petros has concluded that there are material weaknesses in its internal control over financial reporting, which, if not remediated, could materially adversely affect its ability to timely and accurately report its results of operations and financial condition. The accuracy of Petros’ financial reporting depends on the effectiveness of its internal controls over financial reporting.

 

•

The impact of the COVID-19 outbreak on Petros’ operations, and the operations of its partners, suppliers and logistics providers, could significantly disrupt its operations and may materially and adversely affect its business and financial conditions.

 

	•		JCP III SM AIV, L.P. maintains the ability to significantly influence all matters submitted to Petros’ stockholders for approval.
	•		Our bylaws include a forum selection clause, which may impact your ability to bring actions against us.

 

 

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

Organizational Development

 

Petros was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Petros (“Merger Sub 1”), PN Merger Sub 2, Inc., a Delaware corporation and a wholly-owned subsidiary of Petros (“Merger Sub 2”), and Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”). On July 23, 2020, the parties to the Merger Agreement entered into the First Amendment to the Agreement and Plan of Merger and Reorganization (the “First Merger Agreement Amendment”) and on September 30, 2020, the parties to the Original Merger Agreement entered into the Second Amendment to the Agreement and Plan of Merger and Reorganization (the “Second Merger Agreement Amendment” and, together with the Original Merger Agreement and the First Merger Agreement Amendment, the “Merger Agreement”). The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly-owned subsidiary of Petros (the “Metuchen Merger”) and (2) the merger of Merger Sub 2 with and into Neurotrope, with Neurotrope surviving as a wholly-owned subsidiary of Petros (the “Neurotrope Merger” and together with the Metuchen Merger, the “Mergers”). As a result of the Mergers, Metuchen and Neurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporation on December 1, 2020.

 

On December 7, 2020, Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of $20,000,000, subject to adjustment as provided in the Merger Agreement, and all of the operating assets and liabilities of Neurotrope not retained by Neurotrope in connection with the Mergers were contributed to Synaptogenix, Inc. (formerly known as Neurotrope Bioscience, Inc.), a Delaware corporation (“Synaptogenix”), a wholly-owned subsidiary of Neurotrope and (ii) holders of record of Neurotrope common stock, par value $0.0001 per share, Neurotrope preferred stock, par value $0.001 per share and certain warrants as of November 30, 2020 received a pro rata distribution of common stock of Synaptogenix, resulting in a separate, independent publicly traded company.

 

Business Model 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.

 

Stendra®

 

Stendra® is an 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. As a distinct molecule with high in-vitro affinity and selectivity for penile tissue (clinical significance of this in-vitro selectivity profile is unknown), 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).

 

On September 30, 2016, we acquired from Vivus all of the rights to license, develop, market, sell, and distribute the drug avanafil (the active ingredient in Stendra®) in the United States, Canada, South America, and India, including all assets related to, or necessary for, the exercise of such rights, such as licenses, trademarks, and intellectual property rights. The drug avanafil was initially developed by Mitsubishi Tanabe Pharma Corporation (“MTPC”) and MPTC licensed the rights to avanafil to Vivus in December 2000 (the “MPTC License”). Stendra® (avanafil) was approved by the FDA in April 2012. Petros seeks to make Stendra® the first oral ED prescription therapy available as an over-the-counter option.

 

VED Products

 

Petros also markets its own line of ED products in the form of vacuum erection device (“VED”) products through its subsidiaries, Timm Medical, Inc. (“Timm Medical”) and Pos-T-Vac, LLC (“PTV”). We plan to continue to grow the VED business both domestically and internationally. Petros believes that its potential domestic growth will come through the expansion of its distribution partner network, which currently includes national distributors such as SunMed and Vitalit and internationally through distributors such as Heize (Germany), Mediplus (UK), Euromedical (Spain), as well as a growing number of regional small-business distributors specialized in the urology landscape. Additionally, Petros intends to continue to leverage existing relationships with key clinician decision makers, offering direct purchase agreements for Centers of Excellence in prostate cancer and sexual health rehabilitation. This will allow for increased local purchase availability for consumers. We believe that potential international growth will come through additional work with existing customers to expand our current base of business while also working to unlock new international territories. In addition to expanding the distribution network, Petros is pursuing better use of the historical clinical data available regarding VEDs.

 

 

H100™

 

In addition to its ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health. In March 2020, we acquired an exclusive global license to 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. Peyronie’s disease may affect millions of men around the world, and there is no approved non-invasive treatment option. Based on current approved therapies, if approved, as of this date H100™ would become the first and only clinically approved topical non-invasive formulation for the treatment of Peyronie’s disease. Petros has established its foundation for growth and, with the addition of H100™ to the product portfolio and other pipeline opportunities for additional products, Petros believes that it can build an industry leading men’s health pharmaceutical company. Petros has no other product candidates and no other definitive license agreements at this time. However, Petros is engaged in discussions with viable, late stage therapeutic assets addressing male hormone replacement therapy, male infertility, BPH and prostate cancer, but has not entered into any binding agreements with respect thereto.

 

Manufacturing and Supply

 

Petros currently only has facilities to assemble its VED products, and therefore must rely on qualified third-party contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of its products. If, for any reason, Petros’ contract manufacturers cannot perform as agreed, it may be required to replace them. Although Petros believes there are a number of potential replacements, it may incur added costs and delays in identifying and qualifying any such replacements.

 

Petros obtains from third parties the raw materials necessary to develop and manufacture its products, including the active and inactive pharmaceutical ingredients used in its products, such as through the Supply Agreement. Petros is required to identify the supplier of all the raw materials for all FDA-approved products that it acquires from others. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, Petros would be required to qualify a substitute supplier with the FDA and, depending on the supplier, provide the FDA with notice or receive FDA approval for the supplier, which would likely delay or interrupt manufacturing of the affected product.

 

Distribution and Marketing

 

Petros has distribution agreements with the three largest pharmaceutical distributors (McKesson Corporation (“McKesson”), Cardinal Health, Inc. (“Cardinal”), and AmerisourceBergen Corporation (“AmerisourceBergen”)), as well as a direct purchase program for designated retail dispensing pharmacies within large urology group practices, enabling us to provide Stendra® to customers through most retail pharmacies in the United States. Petros currently depends on McKesson to service these pharmaceutical distribution agreements. McKesson, on an exclusive basis, provides distribution of Stendra® to its own retail pharmacies and handles Petros’ distribution to Cardinal and AmerisourceBergen.

 

In addition to established nationwide distribution mechanisms, Petros also collaborates with several commercial insurance entities with contracted access to Stendra® and enduring capabilities to expand these commercial insurance relationships for future assets. Although commercial insurance collaboration and contracts remain an important factor in patient access and affordability, Medicare and Medicaid remain largely out of scope for Stendra® and most sexual dysfunction therapies. As with many sexual dysfunction therapeutics, Medicare and Medicaid do not normally contract or reimburse for these therapies unless concomitantly indicated for other ailments beyond sexual dysfunction considered medically necessary. Nevertheless, commercial insurance access remains competitive and widely available for Stendra®.

 

Petros relies on a variety of channels to market and sell its products, including:

 

•

employee and third-party contracted sales representatives who promote Stendra® directly to high-volume physician prescribers of ED therapies and target physicians at trade associations;

 

•

online digital strategies, including search engine optimization and targeted advertisements, target physicians and consumers;

 

•

targeting of managed care organizations to deliver value-based contracts and improve placement for Stendra® on approved drug lists;

 

•

collaboration with specialty pharmacies that provide personalized service to physicians and patients, including discreet shipping to patients’ homes; and

 

•

direct marketing of our medical devices to urology offices domestically and internationally.

 

Customers

 

The Company is dependent upon three wholesale distributors and one direct customer, for approximately 81% of its gross consolidated sales for the year ended December 31, 2020. For further information refer to Note 3 of the Notes to Consolidated Financial Statements.

 

 

Competition

 

According to data provided by IQVIA, the oral ED market (specifically the PDE-5 inhibitor class) has experienced significant growth over the last couple of years especially, with a 26% increase in prescriptions (filled in pharmacies) in 2020 vs. 2019, and with 2019 increasing in oral ED prescriptions by 44% over 2018. As generic options have become available, they have led the growth in prescription volume with an enduring presence of branded prescription volume, indicating durable brand loyalty and value. Stendra® remains the only patent protected brand among the PDE-5 inhibitor class. According to Arizton Advisory and Intelligence Erectile Dysfunction Market Reports, the trajectory of growth in this class is projected to continue to grow at a Compounded Annual Growth Rate of 8% through 2023. We expect that North America will remain the lead market in this growth due to its established healthcare landscape and the prominence of comorbid conditions associated with ED.

 

Employees

 

Our Board of Directors oversees our employee relations programs as it views building our culture – from employee development and retention to diversity, equity, inclusion and belonging initiatives – as key to driving long-term value for our business and helping to mitigate risks.

 

As of December 31, 2020, we had 27 full time employees, all of whom were based inside the United States. None of our employees is represented by a labor union or covered by a collective bargaining agreement.

 

Government Regulation

 

Pharmaceutical products, development activities and manufacturing processes are subject to extensive and rigorous regulation by numerous government agencies, including the FDA and comparable foreign agencies. To varying degrees, each of these agencies monitors and enforces our compliance with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of our pharmaceutical products.

 

Regulation of Stendra®

 

Although Stendra® was approved by the FDA in April 2012, drug products approved for commercialization are subject to extensive and ongoing requirements of and review by the FDA and other regulatory authorities, including requirements related to the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, export, import, advertising, marketing, and promotional activities for such product. These requirements further include submissions of safety and other post-marketing information, including manufacturing deviations and reports, registration and listing requirements, the payment of annual fees, continued compliance with current good manufacturing practices (“cGMPs”) relating to manufacturing, quality control, quality assurance, and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians for any clinical trials conducted following approval.

 

Regulation of VED Devices

 

The FDA classifies Petros’ VED devices as Class II medical devices, which are typically subject to pre-market review and clearance by the FDA of a pre-market notification (a “510(k) clearance”). While Petros’ VED devices are exempt from 510(k) clearance requirements, they were originally approved under a 510(k) clearance. However, since 2004, the FDA no longer requires a 510(k) submission for Class II external rigidity devices. The process of obtaining marketing approval, authorization, or clearance from the FDA and comparable foreign regulatory agencies for new products, or for enhancements or modifications to existing products, could take a significant amount of time, require the expenditure of substantial financial and other resources, and require rigorous and expensive pre-clinical and clinical testing.

 

Petros also has ongoing responsibilities related to its VED devices under regulations promulgated by the FDA and comparable foreign authorities. For example, Petros is required to comply with the FDA’s Quality System Regulation (“QSR”) regulations, which set forth the good manufacturing requirements for medical devices. These include requirements related to design controls, production and process controls, process validation, purchasing controls, supplier oversight, complaint handling and investigation, corrective and preventative actions, and record-keeping. The FDA also regulates the promotion and marketing of medical devices, and requires that manufacturers only make promotional claims or statements that are consistent with the indications and labeling cleared, authorized, or approved by the FDA. For 510(k)-exempt devices, such as the Petros’ VED devices, the FDA requires that Petros promote such products consistent with the relevant device classification. Claims outside the scope of the 510(k)-exempt classification would be considered “off-label” and trigger the requirement for a new 510(k) or other premarket submission to the FDA.

 

Regulatory Approval of H100™

 

Section 505(b)(2) of the Food, Drug, and Cosmetic Act of 1938, as amended (the “FDCA”) permits the filing of a new drug application (an “NDA”), where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. The FDA interprets Section 505(b)(2) of the FDCA, for purposes of approving an NDA, to permit the applicant to rely, in part, upon published literature and/or the FDA’s previous findings of safety and efficacy for an approved product. The FDA also requires companies to perform additional clinical trials or measurements to support any deviation from the previously-approved product and to support the reliance on the applicable published literature or referenced product, referred to as bridging. The FDA may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant, if such approval is supported by study data. The label, however, may require all or some of the limitations, contraindications, warnings or precautions included in the reference product’s label, including a black box warning, or may require additional limitations, contraindications, warnings or precautions.

 

 

Petros currently plans to submit a 505(b)(2) NDA to the FDA for H100™ for treatment of Peyronie’s disease, which will allow Petros to rely, in part, on published scientific literature and/or the FDA’s prior findings regarding the safety and efficacy of approved drug products. If the FDA disagrees with the appropriateness of reliance on a reference listed drug or published literature or if Petros is not otherwise able to bridge to the reference listed drug or published literature, the Company may need to conduct additional clinical trials or other studies, which could lead to unanticipated costs and delays or to the termination of the development program. If Petros is unable to obtain approval through the 505(b)(2) NDA process, it may be required to pursue the more expensive and time consuming 505(b)(1) approval process, which consists of full reports of investigations of safety and effectiveness conducted by or for the applicant.

 

Regulation of Third-Party Contract Manufacturers

 

Third-party contract manufacturers that Petros relies on to manufacture commercial quantities of its products are also subject to cGMPs and/or the FDA’s QSR regulations, which impose extensive procedural and documentation requirements. The FDA and corresponding state and foreign agencies perform ongoing periodic unannounced inspections to ensure strict compliance with cGMPs/QSR and other applicable government regulations. Prior to approving a marketing application, manufacturers will also need to validate their manufacturing process. The FDA will also inspect the proposed manufacturing facilities to confirm that they can produce products meeting the FDA’s regulatory standards.

 

Intellectual Property

 

Petros relies on a combination of intellectual property, including patent, trademark, trade dress, copyright, trade secret and domain name protection laws, as well as confidentiality and license agreements, to protect its intellectual property and proprietary rights.

 

Petros’ rights to market, distribute and sell avanafil (the active ingredient in Stendra®) are granted under a License and Commercialization Agreement (the “License Agreement”) with Vivus entered into on September 30, 2016, which is a sublicense under Vivus’ license agreement with the owner of the Stendra® patent, MTPC. The 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, Petros has step-in rights with MTPC, which would allow Petros to continue to sell Stendra®. In March 2020, we 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. The Hybrid License relates to three US patents and two European patents directed to the formulation and use of H100™ in the treatment of Peyronie’s disease. U.S. Patent 9,333,242 contains claims directed to a transdermal gel composition containing the unique formulation of H100™. U.S. Patent 9,238,059 contains claims directed to a method for inhibiting or treating Peyronie’s disease, comprising topically administering to a portion of penile dermis of a human with Peyronie’s disease an effective amount of a gel composition containing the formulation of H100™. Additionally, U.S. Patent 10,471,131 contains further formulation claims and method of treatment claims directed to the use of H100™ in the treatment of Peyronie’s disease. There are two corresponding European Patents (EP3269372A1 and EP2804606B) that have similar corresponding issued claims. The Hybrid License terminates upon the expiration of the latest patent noted above.

 

Upon entering the Hybrid License, we paid an initial license fee of $100,000, and we will pay to Hybrid annual payments of $250,000 and additional annual milestone payments of $125,000, $150,000 and $200,000 on each of the first, second and third anniversaries of the entry into the Hybrid License. We are also required to make a $1,000,000 payment upon the first commercial sale and are required to make additional payments on a sliding scale of percentages of net sales in the low single digits. Annual anniversary payments will not be required after commercialization. The Company is also obligated to make royalty payments between 3-6% of any net sales. We also expect to incur approximately $14 million of research and development expenses relating to H100™ over the estimated four to six-year period of clinical development prior to FDA approval, including approximately $10 million for clinical trials and $4 million of other expenses.

 

Available Information

 

Information about Petros, including its reports filed with or furnished to the SEC, is available through our website at www.petrospharma.com. Such reports are accessible at no charge through our website and are made available as soon as reasonably practicable after such material is filed with or furnished to the SEC. The SEC also maintains a website that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

We have included our website addresses throughout this report as textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-K.

 

 

ITEM 1A.

RISK FACTORS

 

In addition to the other information in this Form 10-K, shareholders or prospective investors should carefully consider the following risk factors when evaluating Petros. If any of the events described below occurs, our business, financial condition, results of operations and future growth prospects could be adversely affected.

 

Risks Related to Petros’ Business, Industry and Operations

 

Petros has incurred significant losses, and may continue to experience losses in the future.

 

Petros had a net loss of $20.6 million for the year ended December 31, 2020. As of December 31, 2020, Petros had an accumulated deficit of $61.7 million. Petros cannot predict if it will achieve profitability soon or at all. Petros expects to continue to expend substantial financial and other resources on, among other things:

 

·

sales and marketing;

 

·

investments in hiring key personnel;

 

·

possible development, regulatory approval and commercialization of H100™ for the treatment of Peyronie’s disease; and

 

·

general administration, including legal, accounting and other expenses.

 

Petros may not generate sufficient revenue to offset such costs to achieve or sustain profitability in the future. Petros expects to continue to invest in its operations and product and business development to maintain and grow its current market position and to meet its expanded reporting and compliance obligations as a public company.

 

Petros expects its operating losses to continue in the near term in order to carry out its strategic objectives. Petros considers historical operating results, capital resources and financial position, and current projections and estimates as part of its plan to fund operations over a reasonable period of time.

 

Petros is reliant on the continued support from its largest shareholder for adequate financing of Petros’ operations.

 

We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2020, we had cash and cash equivalents of $17.1 million, negative working capital of approximately $16.0 million, including debt of $7.2 million maturing in 2021, and sustained cumulative losses attributable to common stockholders of $61.7 million. Our plans include, or may include, utilizing our cash and cash equivalents on hand, negotiating an extension of our debt arrangement and our liability due to Vivus as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. While we are optimistic that we will be successful in our efforts to achieve our plan, there can be no assurances that we will be successful in doing so. As such, we obtained a continued support letter from our largest shareholder, JCP III SM AIV, L.P., through May 17, 2022.

 

Petros is dependent on a single distributor for Stendra®.

 

Although Petros has agreements with the three largest pharmaceutical distributors, it currently depends on McKesson to service those agreements. McKesson, on an exclusive basis, provides distribution of Stendra® to its own retail pharmacies and handles Petros’ distribution to Cardinal and AmerisourceBergen. McKesson’s contract with us contains a provision that allows McKesson to terminate the contract for convenience upon one hundred and eighty (180) days prior notice. If McKesson terminates its contract with Petros, or is otherwise unable or unwilling to perform under its contract, Petros’ business and revenues will be adversely affected unless and until it can identify a suitable replacement.

 

Petros recorded revenues of approximately $6.4 million from sales of Stendra® in 2020, which accounted for 66.5% of Petros’ total revenues in 2020.

 

The success of Petros’ business currently depends on the successful continued commercialization of its main product, Stendra®, which is marketed, distributed and sold under a license agreement from Vivus. Petros may not be successful in commercializing Stendra® beyond its current level. Additionally, if Stendra® were to become subject to problems such as loss of patent protection, changes in prescription growth rates, material product liability litigation, unexpected side effects, regulatory proceedings, publicity affecting doctor or patient confidence, pressure from existing competitive products, changes in labeling, pricing and access pressures, supply shortages or, if a new, more effective treatment should be introduced, there would be an adverse impact on Petros’ revenues, which could be significant.

 

Petros’ license agreement for Stendra® is a sublicense that is dependent on Vivus’ license agreement with a third party.

 

Revenues from Stendra® represent a significant percentage of Petros’ overall revenues. Petros’ rights to market, distribute and sell avanafil (the active ingredient in Stendra®) are granted under the License Agreement, which is a sublicense under the MTPC License. The 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, Petros has step-in rights with MTPC, which would allow Petros to continue to sell Stendra®.

 

Petros is subject to the terms of a commercial supply agreement with Vivus and may be subject to substantial payment obligations thereunder.

 

In addition to the License Agreement, Petros entered into a commercial supply agreement with Vivus for Stendra® on September 30, 2016 (the “Supply Agreement”), which requires Petros to purchase certain minimum quantities of Stendra® in each year of the Supply Agreement term. In connection with the Supply Agreement, Vivus has claimed a shortfall of approximately $14.2 million with respect to Petros’ minimum purchase requirements in 2018, 2019 and 2020. Vivus also claims that Petros is responsible for the costs owed by Vivus to CVS Pharmacy in connection with returns of Stendra® in the amount of approximately $6.5 million that were delivered to CVS Pharmacy and later returned. Petros is currently in negotiations to determine the amounts ultimately owed to Vivus, but it may be responsible for payments of approximately $20.7 million. If required to pay these amounts to Vivus, this may adversely affect the financial condition of Petros. During the year ended December 31, 2020, Petros did not take possession of any minimum quantities of Stendra®.

 

A failure of Vivus to perform its obligations under the Supply Agreement or any cancellation of its obligations thereunder would have a material adverse effect on Petros’ business and operations.

 

Petros obtains its supply of Stendra® from Vivus pursuant to the Supply Agreement. In December of 2020, Vivus obtained approval of an in-court prepackaged plan of reorganization, under which IEH Biopharma LLC (“IEH”) obtained 100% ownership of Vivus (the “Prepackaged Plan”), and IEH assumed VIVUS’ contractual obligations under the Supply Agreement.

 

Although IEH’s acquisition of VIVUS may bring stability to its operations and reduce the risk of non-performance of its contractual obligations, including the License Agreement and the Supply Agreement, there is no assurance that IEH will cause Vivus to continue to perform its contractual obligations. If Vivus cancels the Vivus License or Supply Agreement or otherwise causes such obligations not to be performed, Petros may be unable to obtain sufficient quantities of Stendra®, which would reduce Petros’ ability to make sales and materially and adversely affect its business and results of operations.

 

Vivus has granted a license to Hetero USA, Inc. and Hetero Labs Limited to manufacture and commercialize the generic version of Stendra® in the United States once it comes off patent.

 

On January 3, 2017, Vivus granted Hetero USA, Inc. and Hetero Labs Limited (collectively, “Hetero”) a license to manufacture and commercialize the generic version of Stendra® described in its abbreviated new drug application (“ANDA”) filing in the United States as of the date that is the later of (a) October 29, 2024, which is 180 days prior to the expiration of the last to expire of the patents-in-suit, or (b) the date that Hetero obtains final approval from FDA of the Hetero ANDA.

 

Future competition from generic versions could negatively impact the sales volume of Stendra®, and prices for pharmaceutical products typically decline following generic entry onto the market. The date on which generic competition with Stendra® begins may be different from the date that the patent or regulatory exclusivity expires, and instead may occur upon the loss or expiration of patent protection or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic manufacturer of a generic version of Stendra®. If that should occur, Petros could lose a significant portion of revenues for Stendra® which could adversely affect its business, financial condition and results of operations.

 

Petros relies on a combination of several different channels to promote its products to physicians and patients in the United States and internationally.

 

Petros currently relies on a variety of channels to market and sell its products, including:

 

•

sales representatives who promote Stendra® directly to high-volume physician prescribers of ED therapies and target physicians at trade associations;

 

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online digital strategies, including search engine optimization and targeted advertisements, target physicians and consumers;

 

•

targeting of managed care organizations to deliver value-based contracts and improve placement for Stendra® on approved drug lists;

 

•

collaboration with specialty pharmacies that provide personalized service to physicians and patients, including discreet shipping to patients’ homes; and

 

•

direct marketing of our medical devices to urology offices domestically and internationally.

 

Petros will continue to depend on these strategies, partners and distribution channels in order to promote and sell its products. Petros cannot assure you that these strategies will enable it to successfully market and sell its products. Failure to successfully market and sell its products would have a material adverse effect on Petros’ business, financial condition and results of operations.

 

 

Petros is substantially dependent on a limited number of commercial products. Any difficulties or delays in product manufacturing, regulatory compliance, sales or marketing could affect Petros’ future results.

 

Petros’ ability to achieve its business objectives is directly dependent on its ability to get its products to market, and any delays or difficulties in manufacturing, regulatory compliance, sales or marketing could have an adverse impact, including but not limited to the following types of events:

 

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failure to predict market demand for, or to gain market acceptance of, approved products;

 

•

failure to comply with applicable regulatory requirements, which could result in costly and disruptive enforcement actions, or otherwise require costly and disruptive corrective actions;

 

•

delays, unavailability, or undetected defects with respect to product manufacturing materials;

 

•

failure to maintain appropriate quality standards throughout the internal and external supply network or comply with cGMPs or other regulations;

 

•

failure to establishment and maintain of adequate healthcare coverage and reimbursement;

 

•

failure to establish and maintain market demand and acceptance for Petros’ products through marketing and sales activities, and any other arrangements to promote these products;

 

•

failure to adequately train sales and marketing personnel regarding regulatory compliance matters and any exposure that Petros may face due to noncompliance of such personnel;

 

•

failure to establish and maintain agreements with wholesalers, distributors, and group purchasing organizations on commercially reasonable terms;

 

•

failure to manufacture products in sufficient quantities and at acceptable quality and manufacturing cost to meet commercial demand;

 

•

failure to effectively compete with other products on the market;

 

•

failure to maintain a continued acceptable product safety and efficacy profile;

 

•

interruptions to supply chain continuity or commercial operations as a result of man-made or natural disasters; and

 

•

failure to maintain supply chain integrity against intentional and criminal acts.

 

The FDA may determine that Petros’ products or product candidates have undesirable side effects that could result in regulatory action, impede commercialization, or delay or prevent their regulatory approval.

 

Undesirable side effects caused by Petros’ products or product candidates could adversely and materially harm the business. Undesirable side effects could limit Petros’ ability to commercialize the products, could result in product liability suits, and could result in regulatory actions, such as, but not limited to withdrawal of the products from the market, withdrawal of marketing approvals, safety communications or warnings, revisions to product labeling to add warnings or other precautions, or prompt regulators to require that Petros implement risk mitigation steps, such as post-approval studies, Risk Evaluation and Mitigation Strategy (“REMS”), and/or other strategies. Undesirable side effects could impact the ability of the Petros to complete product development, may require that development be limited to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, could cause Petros, an Institutional Review Board (“IRB”), or other reviewing entities or regulatory authorities to interrupt, delay, or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Undesirable side effects caused by or any unexpected characteristics for product candidates could also result in denial of regulatory approval by the FDA or other comparable foreign authorities for any or all targeted indications or the inclusion of unfavorable information in product labeling, such as limitations on the indicated uses or populations for which the products may be marketed or distributed, a label with significant safety warnings, including boxed warnings, contraindications, and precautions, a label without statements necessary or desirable for successful commercialization, or may result in requirements for costly post-marketing testing and surveillance, or other requirements, including REMS, to monitor the safety or efficacy of the products. Should any of the foregoing occur, Petros’ business, financial condition or results of operations may be materially harmed.

 

 

Petros relies on third-party contract manufacturers to produce commercial quantities of its products.

 

Petros currently only has facilities to assemble its VED products, and therefore must rely on qualified third-party contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of products. Petros also relies on contract manufacturers to produce quantities of its product candidates to support its development programs. Petros expects to pursue additional contract manufacturing for certain of its products in the future. Any performance failure on the part of its contract manufacturers could delay production or delivery of any approved products and could delay product candidate development programs, depriving Petros of potential product revenue and resulting in development programs taking longer than planned. Failure by Petros’ contract manufacturers to achieve and maintain high manufacturing standards could result in patient injury or death, product recalls or withdrawals, delays or failures in testing or delivery, delays in development programs, withdrawals of marketing approvals, refusal of regulatory authorities to approve new marketing applications or supplements, cost overruns or other problems that could materially adversely affect its business. Contract manufacturers may encounter difficulties involving production yields, quality control and quality assurance.

 

These third-party contract manufacturers are also subject to cGMP and/or the FDA’s Quality System Regulation (“QSR”) regulations, which impose extensive procedural and documentation requirements. The FDA and corresponding state and foreign agencies perform ongoing periodic unannounced inspections to ensure strict compliance with cGMP/QSR and other applicable government regulations. Prior to approving a marketing application, manufacturers will also need to validate their manufacturing process. The FDA will also inspect the proposed manufacturing facilities to confirm that they can produce products meeting the FDA’s regulatory standards. Failure to comply with these requirements may subject Petros to possible legal or regulatory actions, such as warning letters, suspension of manufacturing, seizure of product, injunctions, debarment, voluntary recall of a product or failure to secure product approvals, any of which could have a material adverse effect on Petros’ business, financial condition and results of operations. Beyond contractual remedies that may be available to it, Petros does not have control over third-party manufacturers’ compliance with these regulations and standards.

 

If, for any reason, Petros’ contract manufacturers cannot perform as agreed, it may be required to replace them. Although Petros believes there are a number of potential replacements, it may incur added costs and delays in identifying and qualifying any such replacements. Petros may compete with other companies for access to manufacturing facilities that can produce products in accordance with the FDA’s regulatory standards. If third party manufacturers should cease to continue to provide manufacturing services for any reason, Petros likely would experience delays in obtaining sufficient quantities of its products and product candidates to meet commercial demand or advance its development programs. Third-party facilities may also be affected by natural disasters, such as floods or fire, health pandemics or outbreaks, or such facilities could face manufacturing issues, such as contamination or regulatory findings following a regulatory inspection of such facility. In such instances, Petros may need to locate an appropriate replacement third-party relationship, which may not be readily available or on acceptable terms, which would cause additional delay and increased expense. The addition of a new or alternative manufacturer may also require FDA approvals and may have a material adverse effect on our business.

 

The inability of a manufacturer to ship orders of our products in a timely manner or to meet quality standards could cause Petros to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as Petros’ revenue would decrease and it would incur net losses as a result of sales of the product, if any sales could be made.

 

Petros relies on third parties for the supply of the raw materials necessary to develop and manufacture its products.

 

Petros is dependent on third parties for the supply of the raw materials necessary to develop and manufacture its products, including the active and inactive pharmaceutical ingredients used in its products. Petros is required to identify the supplier of all the raw materials for all FDA-approved products that it acquires from others. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, Petros would be required to qualify a substitute supplier with the FDA and, depending on the supplier, provide the FDA with notice or receive FDA approval for the supplier, which would likely delay or interrupt manufacturing of the affected product. Failure of suppliers to meet the applicable regulatory standards could also result in enforcement actions against such suppliers or Petros.

 

These third parties include foreign suppliers. Arrangements with international raw material suppliers are subject to, among other things, FDA regulation, various import duties, foreign currency risk and other government clearances. Acts of governments outside and within the United States may affect the price or availability of raw materials needed for the development or manufacture of Petros’ products. In addition, any changes in patent laws in jurisdictions outside the United States may make it increasingly difficult to obtain raw materials for research and development prior to the expiration of the applicable U.S. or foreign patents.

 

Shortages in or interruptions in the supply of raw materials could potentially delay Petros’ development programs or result in insufficient product quantities to meet commercial demand. Third-party manufacturers’ failure to obtain the raw materials necessary to manufacture sufficient quantities of products and product candidates may have a material adverse effect on Petros’ business.

 

Changes in product or product candidate manufacturing or formulation may result in additional costs or delay.

 

Any changes to product or product candidate manufacturing or formulation may materially impact Petros’ business. For approved products, manufacturing changes may require reporting to and/or approval from the applicable regulatory authorities, including the FDA. Regulatory authorities may require substantial, time consuming, and costly manufacturing work as well as studies to support such changes. Any such changes may also not accomplish the intended outcome. Additionally, changes to product candidate manufacturing during product development may also adversely impact the development program. Changes could cause product candidates to perform differently and affect the results of future studies. Such changes may also require additional testing, studies, FDA notification, or FDA approval.

 

 

Regulatory approval is limited by the FDA to those specific indications and conditions for which approval has been granted. Petros may be subject to fines, penalties, injunctions, or other enforcement actions if regulatory authorities determine that it is promoting any products for unapproved or “off-label” uses, resulting in reputational and business damage.

 

Petros must comply with requirements concerning advertising and promotion of FDA regulated products. Promotional communications with respect to therapeutics are subject to a variety of legal and regulatory restrictions and continuing review by the FDA, Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress, and the public. When the FDA or comparable foreign regulatory authorities issue regulatory approval, the approval is limited to those specific uses and indications for which a product is approved. Companies may not market or promote products for those indications and uses, for which the product has not received approval. For devices exempt from Section 510(k) of the FDCA, such as Petros’ VED devices, the FDA requires that companies promote such products consistent with the relevant device classification. Claims outside the scope of the 510(k)-exempt classification would be considered “off-label” and trigger the requirement for a new 510(k) or other premarket submission to FDA. Companies must also be able to sufficiently substantiate any product claims and must abide by the FDA’s strict requirements regarding the content of promotions and advertising.

 

While physicians may choose to prescribe products for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, companies are prohibited from marketing and promoting the products for indications and uses that are not specifically approved by the FDA or, for 510(k)-exempt devices, are outside the scope of the relevant device classification. If Petros is found to have impermissibly promoted any product, it may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations regarding product promotion, particularly those prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted a product may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.

 

In the United States, engaging in the impermissible promotion of products for off-label uses can also subject a company to false claims and other litigation under federal and state statutes, including fraud and abuse and consumer protection laws. Such litigation can lead to civil and criminal penalties and fines, agreements with governmental authorities that materially restrict a company’s business through, for example, corporate integrity agreements, suspension or exclusion from participation in federal and state healthcare programs, suspension and debarment from government contracts, and refusal of orders under existing government contracts. These false claims statutes include the federal civil False Claims Act, which allows any individual to bring a lawsuit against a company on behalf of the federal government alleging submission of false or fraudulent claims, or causing others to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government decides to intervene and prevails in the lawsuit, the individual will share in the proceeds from any fines or settlement funds. If the government declines to intervene, the individual may pursue the case alone. These False Claims Act lawsuits have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements, up to $3.0 billion, pertaining to certain sales practices and promoting off-label uses. In addition, False Claims Act lawsuits may expose sponsors to follow-on claims by private payers based on fraudulent marketing practices. This growth in litigation has increased the risk that companies will have to defend a false claim action, and pay settlements fines or restitution, as well as criminal and civil penalties, agree to comply with burdensome reporting and compliance obligations, and be excluded from Medicare, Medicaid, or other federal and state healthcare programs.

 

In the United States, the distribution of drug product samples to physicians must further comply with the requirements of the U.S. Prescription Drug Marketing Act, and the promotion of pharmaceutical products are subject to additional FDA requirements and restrictions on promotional statements. If the FDA determines that promotional activities violate its regulations and policies pertaining to product promotion, it could request the modification of promotional materials or could subject a company to regulatory or other enforcement actions, including issuance of warning letters or untitled letters, suspension or withdrawal of an approved product from the market, requests for recalls, payment of civil fines, disgorgement of money, imposition of operating restrictions, injunctions or criminal prosecution, and other enforcement actions.

 

To the extent that any of our product candidates may be eligible, Petros may seek orphan drug designation from the FDA. However, there is no guarantee that Petros will be able to maintain this designation, receive this designation, or receive or maintain any corresponding benefits, including periods of exclusivity.

 

To the extent eligible, Petros may seek orphan drug designation for its product candidates. While orphan drug designation would provide Petros with certain advantages, it neither shortens the development time or regulatory review time of a product candidate nor gives the product candidate any advantage in the regulatory review or approval process.

 

 

Generally, if a product candidate with orphan drug designation subsequently receives marketing approval before another product considered by the FDA to be the same, for the same orphan indication, the product is entitled to a period of marketing exclusivity, which precludes the FDA from approving another marketing application for the same drug for the same indication for seven years.

 

Petros may not be able to obtain any future orphan drug designations. Orphan drug designations do not guarantee that Petros will be able to successfully develop its product candidates or maintain any orphan drug designations. For instance, orphan drug designations may be revoked if the FDA finds that the request for designation contained an untrue statement of material fact or omitted material information, or if the FDA finds that the product candidate was not eligible for designation at the time of the submission of the request.

 

Moreover, even if Petros is able to receive and maintain orphan drug designations, it may ultimately not receive any period of regulatory exclusivity if the product candidate is approved. For instance, Petros may not receive orphan product regulatory exclusivity if the indication for which it receives FDA approval is broader than the orphan drug designation. Orphan exclusivity may also be lost for the same reasons that orphan drug designation may be lost. Orphan exclusivity may further be lost if Petros is unable to assure a sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

 

Even if Petros obtains orphan exclusivity, that exclusivity may not effectively protect the product from competition, as different products can be approved for the same condition or products that are the same can be approved for different conditions. Even after an orphan product is approved, the FDA can also subsequently approve a product containing the same principal molecular features for the same condition if the FDA concludes that the later product is clinically superior. The FDA may further grant orphan drug designation to multiple sponsors for the same compound or active molecule and for the same indication. If another sponsor receives FDA approval for such product before Petros does, Petros would be prevented from launching its product in the United States for the orphan indication for a period of at least seven years unless it can demonstrate clinical superiority. Moreover, third-party payors may reimburse for products off-label even if not indicated for the orphan condition.

 

Petros may experience pricing pressure on the price of our products due to social or political pressure to lower the cost of drugs, which would reduce our revenue and future profitability, if achieved.

 

Federal and state health care programs are increasingly focused on the price of prescription drugs and medical devices, including the expanded use of mandatory rebates and discounts and measures that penalize or prohibit price increases over inflation rates. Public and private third-party payers also may not consider Stendra® or our other products to be medically necessary when prescribed for ED and may decline to cover it. Recent events have resulted in increased public and governmental scrutiny of the cost of drugs, especially in connection with price increases following companies’ acquisitions of the rights to certain drug products. In particular, U.S. federal prosecutors recently issued subpoenas to a pharmaceutical company seeking information about its drug pricing practices, among other issues, and members of the U.S. Congress have sought information from certain pharmaceutical companies relating to post-acquisition drug-price increases. Petros’ revenue and future profitability, if achieved, could be negatively affected if these inquiries were to result in legislative or regulatory proposals that limit its ability to increase the prices of its products.

 

Pressure from social activist groups and future government regulations may also put downward pressure on the price of drugs, which could result in downward pressure on the prices of Petros’ products in the future.

 

Private third-party payers and other managed care entities, such as pharmacy benefit managers, continue to take action to manage the utilization of drugs and control the cost of drugs and medical devices.

 

Consolidation among managed care organizations (“MCOs”) has increased the negotiating power of MCOs and other private third-party payers. Private third-party payers increasingly employ formularies to control costs by taking into account discounts in connection with decisions about formulary inclusion or favorable formulary placement. Failure to obtain or maintain timely adequate pricing or favorable formulary placement for our products, or failure to obtain such formulary placement at favorable pricing, could adversely impact revenue. Private third-party payers, including self-insured employers, often implement formularies with copayment tiers to encourage utilization of certain drugs and have also been raising co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products Managed care also establishes formularies to control the cost of medical supplies. Payers may limit the number of drugs covered in the therapeutic class or sources in supply categories, cover only generic alternatives to drugs in the class, or impose restrictions on reimbursement of a particular drug or drugs in a class or a particular medical device.

 

Private third-party payers are also implementing new initiatives such as “copay accumulators” (policies that provide that the value of copay assistance does not count as out-of-pocket costs that are applied toward deductibles) that can shift more of the cost burden to manufacturers and patients. This cost shifting has increased consumer interest and input in medication choices, as they pay for a larger portion of their prescription costs and may cause consumers to favor lower cost generic alternatives to branded pharmaceuticals. As the U.S. payer market consolidates further and as more drugs become available in generic form, biopharmaceutical companies may face greater pricing pressure from private third-party payers, who will continue to drive more of their patients to use lower cost generic alternatives.

 

 

Products may face competition from generic drug products and other similar drug products.

 

If the FDA or comparable foreign regulatory authorities approve generic or similar versions of any of Petros’ products, the sales of Petros’ products could be adversely affected. If the Stendra® NDA is approved, the product may become the “reference listed drug” in the FDA’s Orange Book. Other applicants may then seek approval of generic versions of the product through submission of ANDAs in the United States. In support of an ANDA, a generic applicant would not need to conduct full clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration, conditions of use and labeling, among other commonalities, as the reference listed drug and that the generic version is bioequivalent to the reference listed drug, meaning it is available at the site of action at the same rate and to the same extent as the reference listed drug. Generic products may be significantly less costly to bring to market than the reference listed drug and companies that produce generic products are generally able to offer them at lower prices, and are generally preferred by third party payers. As a result, the FDA, executive administrations and Congress have taken steps to encourage increased generic drug competition in the market in an effort to bring down drug costs. The recent change in administration and control of the U.S. Senate may result in initiatives to further such competition or downward pricing.

 

Following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference listed drug is typically lost to the generic product. Moreover, in addition to generic competition, Petros could face competition from other companies seeking approval of drug products that are similar to the Company’s drug products using the 505(b)(2) regulatory pathway. Such applicants may be able to rely on Petros’ products, other approved drug products or published literature to develop drug products that are similar to Petros’. The introduction of similar drug products could expose our products to increased competition.

 

Any ANDA or 505(b)(2) applicants would need to submit patent certification statements with their applications for patents that are listed in the FDA’s Orange Book. There are detailed rules and requirements regarding the patents that may be submitted to the FDA for listing in the Orange Book. Petros may be unable to obtain patents covering its products that contain one or more claims that satisfy the requirements for listing in the Orange Book. Patents not listed in the Orange Book would not receive the protections provided by the Hatch Waxman Act.

 

Moreover, if an ANDA or 505(b)(2) applicant files a paragraph IV challenge to any patents that Petros may list in the FDA’s Orange Book and the Company does not file a patent infringement lawsuit within 45 days of receiving notice of a paragraph IV certification, the ANDA or 505(b)(2) applicant would not be subject to a 30-month stay. Litigation or other proceedings to enforce or defend intellectual property rights, however, would likely be complex in nature, may be expensive and time consuming, may divert management’s attention, and may result in unfavorable results.

 

Moreover, if any product candidate does not receive any anticipated periods of regulatory exclusivity, that product candidate may face generic or 505(b)(2) product competition sooner than anticipated, which could materially and adversely impact Petros’ business. Finally, there are already generic versions of other ED drugs on the market against which the Petros drug product competes. As generic products, these products are priced below Petros, presenting the risk that patients and their physicians will opt for those products instead of the Petros brand product.

 

The business that Petros conducts outside the United States may be adversely affected by international risk and uncertainties.

 

Although Petros’ operations are based in the United States, it conducts certain business outside the U.S. and expects to continue to do so in the future. Currently, Petros possesses the rights to license, develop, market, sell and distribute Stendra® in Canada, South America, and India, and its VED products are also marketed internationally. The active pharmaceutical ingredient for Stendra® is produced in France and shipped to the United States in tablet form for packaging. One of the manufacturers of our medical devices is based in China, and Petros expects to expand contract manufacturing for certain of its products in Europe, the Middle East, and Northern Africa in the future. Any business that it conducts outside the United States will be subject to additional risks that may materially adversely affect its ability to conduct business in international markets, including:

 

•

the ability to receive any required regulatory authorizations to commercialize products internationally and the ability to comply with international regulatory requirements;

 

•

potentially reduced protection for intellectual property rights in certain other countries;

 

•

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

•

economic weakness, including inflation or political instability, in particular foreign economies and markets;

 

•

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

 

•

production shortages resulting from any events affecting a product candidate and/or finished drug product supply or manufacturing capabilities abroad;

 

•

business interruptions resulting from geo-political actions, including war and terrorism or natural disasters, including earthquakes, hurricanes, typhoons, floods and fires; and

 

•

failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act.

 

These factors or any combination of these factors may adversely affect our revenue or our overall financial performance.

 

Petros’ debt facility contains financial and operating restrictions that may limit its access to credit. In addition, Petros’ debt facility expires on December 1, 2021, and Petros may not be able to renew, extend or replace the expiring facility. If Petros fails to comply with covenants in its debt facility or if the facility is terminated, Petros may be required to immediately repay its indebtedness thereunder, which would have an adverse effect on its liquidity.

 

Provisions governing Petros’ debt facility impose restrictions on its ability to operate, including, for some of the agreements and instruments, but not for others, its ability to:

 

•

incur capital expenditures;

 

•

incur additional debt;

 

•

pay dividends and make distributions;

 

•

redeem or repurchase capital stock;

 

•

create liens;

 

•

enter into transactions with affiliates; and

 

•

merge or consolidate with or into other entities.

 

Petros’ debt facility also contains other financial and non-financial covenants. Petros may not be able to comply with these covenants in the future. Petros’ failure to comply with these covenants may result in the declaration of an event of default, which, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the debt facility, and require Petros to pay all amounts outstanding. Such an event may also lead Petros’ lender to exercise its security interest in its assets. If an event of default occurs, Petros may not be able to cure it within any applicable cure period, if at all. If the maturity of Petros’ indebtedness is accelerated, it may not have sufficient funds available for repayment or it may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to Petros, or at all.

 

Risks Related to Petros Personnel

 

Because Petros is a small pharmaceutical company with limited resources, it may be unable to attract qualified personnel.

 

Because of the specialized nature of its business, Petros’ ability to develop products and to compete with its current and future competitors largely depends upon its ability to attract, retain and motivate highly qualified managerial, marketing, consulting and scientific personnel. Petros faces intense competition for qualified employees and consultants from biopharmaceutical companies, research organizations and academic institutions. Attracting, retaining or replacing these personnel on acceptable terms may be difficult and time-consuming given the high demand in its industry for similar personnel. There is intense competition for qualified personnel in this business sector, and we cannot assure you that Petros will be able to attract the qualified personnel necessary for the development of its business.

 

Petros will need to expand its operations and increase its size, and it may experience difficulties in managing growth.

 

As Petros increases the number of products it owns or has the right to sell, it may need to increase personnel headcounts with respect to sales, marketing, product development, scientific, or administrative departments. In addition, to meet its obligations as a public company, it will need to increase its general and administrative capabilities. The management, personnel and systems currently in place may not be adequate to support this future growth. The need to effectively manage its operations, growth and various projects requires that it:

 

•

successfully attract and recruit new employees with the required expertise and experience;

 

•

successfully grow marketing, distribution and sales infrastructure; and

 

•

continue to improve operational, manufacturing, financial and management controls, reporting systems and procedures.

 

If Petros is unable to manage this growth and increased complexity of operations, its business may be adversely affected.

 

 

Petros may be adversely affected by any misconduct or improper activities on the part of its individual employees, principal investigators or consultants.

 

Petros is exposed to the risk that any of its employees, principal investigators and consultants may engage in fraudulent conduct or other illegal activity. Although Petros has adopted a code of conduct applicable to all of its employees, it is not always possible to identify and deter misconduct by employees and other third parties, and the precautions it takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting it from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the regulations of the FDA and other regulatory authorities, including those laws requiring the reporting of true, complete and accurate information to such authorities; healthcare fraud and abuse laws and regulations in the United States and abroad; or laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. These laws also involve the improper use of information obtained in the course of clinical trials or creating fraudulent data in Petros’ nonclinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to Petros’ reputation.

 

Additionally, Petros is subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against Petros, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of Petros’ operations, any of which could adversely affect its ability to operate its business and results of operations.

 

Cyberattacks and other data security breaches could compromise our proprietary and confidential information, which could harm our business and reputation or cause us to incur increased expenses to address any such breaches.

 

In the ordinary course of our business, Petros generates, collects and stores proprietary information, including intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. If a cyber incident, such as a phishing or ransomware attack, virus, malware installation, server malfunction, software or hardware failure, impairment of data integrity, loss of data or other computer assets, adware or other similar issue, impairs, shuts down, or penetrates our computer systems, our proprietary and confidential information, including e-mails and other electronic communications, may be misappropriated. In addition, an employee, contractor, or other third party with whom we do business may attempt to obtain such information and may purposefully or inadvertently cause a breach involving such information. As a result, our information technology networks and infrastructure may be vulnerable to unpermitted access by hackers or other breaches, or employee error or malfeasance. Any such compromise of our data security and access to, or public disclosure or loss of, confidential business or proprietary information could disrupt our operations, damage our reputation, provide our competitors with valuable information and subject us to additional costs, which could adversely affect our business. We may also incur significant remediation costs, including liability for stolen customer or employee information, repairing system damage or providing benefits to affected customers or employees.

 

Risks Related to Government Regulation and Legal Proceedings for Petros

 

Petros’ approved drug products are subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, drug products could be subject to labeling and other restrictions and market withdrawal, and Petros may be subject to penalties if it fails to comply with regulatory requirements or experiences unanticipated product problems.

 

Drug products approved by the applicable regulatory authorities for commercialization are subject to extensive and ongoing requirements of and review by the FDA and other regulatory authorities, including requirements related to the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, export, import, advertising, marketing, and promotional activities for such product. These requirements further include submissions of safety and other post-marketing information, including manufacturing deviations and reports, registration and listing requirements, the payment of annual fees, continued compliance with cGMPs relating to manufacturing, quality control, quality assurance, and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and GCPs for any clinical trials conducted following approval.

 

 

Product sponsors and their collaborators, including contract manufacturer, could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs and other FDA regulatory requirements. Later discovery of previously unknown adverse events or that the product is less effective than previously thought or other problems with products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements both before and after approval, may yield various results, including:

 

•

restrictions on manufacturing or distribution, or marketing of such products;

 

•

restrictions on the labeling, including restrictions on the indication or approved patient population, and required additional warnings, such as black box warnings, contraindications, and precautions;

 

•

modifications to promotional pieces;

 

•

issuance of corrective information;

 

•

requirements to conduct post-marketing studies or other clinical trials;

 

•

clinical holds or termination of clinical trials;

 

•

requirements to establish or modify a REMS or a similar strategy;

 

•

changes to the way the product is administered;

 

•

liability for harm caused to patients or subjects;

 

•

reputational harm;

 

•

the product becoming less competitive;

 

•

warning, untitled, or cyber letters;

 

•

suspension of marketing or withdrawal of the products from the market;

 

•

regulatory authority issuance of safety alerts, Dear Healthcare Provider letters, press releases, or other communications containing warnings or other safety information about the product;

 

•

refusal to approve pending applications or supplements to approved applications;

 

•

recalls of products;

 

•

fines, restitution or disgorgement of profits or revenues;

 

•

suspension or withdrawal of marketing approvals;

 

•

refusal to permit the import or export of products;

 

•

product seizure or detention;

 

•

FDA debarment, suspension and debarment from government contracts, and refusal of orders under existing government contracts, exclusion from federal healthcare programs, consent decrees, or corporate integrity agreements; or

 

•

injunctions or the imposition of civil or criminal penalties, including imprisonment.

 

Any of these events could prevent Petros from achieving or maintaining market acceptance of its products or could substantially increase the costs and expenses of developing and commercializing products. Any of these events could further have other material and adverse effects on Petros’ operations and business.

 

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of product candidates, that could limit the marketability of products, or that could impose additional regulatory obligations on Petros.

 

Petros’ medical devices are subject to stringent regulatory oversight and any adverse regulatory action may adversely affect our financial condition and business operations.

 

Medical device products, development activities and manufacturing processes are subject to extensive and rigorous regulation by numerous government agencies, including the FDA and comparable foreign agencies. To varying degrees, each of these agencies monitors and enforces our compliance with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices.

 

Although Petros’ devices are exempt from 510(k) clearance requirements, they were originally approved under a 510(k) clearance. However, since 2004, the FDA no longer requires a 510(k) submission for Class II external rigidity devices. The process of obtaining marketing approval, authorization, or clearance from the FDA and comparable foreign regulatory agencies for new products, or for enhancements or modifications to existing products, could take a significant amount of time, require the expenditure of substantial financial and other resources, and require rigorous and expensive pre-clinical and clinical testing. Additionally, the FDA could impose limitations on the indications for use of our products. Should Petros pursue FDA clearance, authorization, or approval for a new device or device modification, it cannot be certain that it will receive required clearance, authorization, or approval from the FDA and foreign regulatory agencies for new products or modifications to existing products on a timely basis or at all. The failure to receive clearance, authorization, or approval for significant new products or modifications to existing products on a timely basis or at all could have a material, adverse effect on Petros’ financial condition and results of operations.

 

 

Both before and after a medical device product is commercially released, Petros has ongoing responsibilities under FDA and foreign regulations. For example, Petros is required to comply with QSR, which sets forth the good manufacturing requirements for medical devices. These include requirements related to design controls, production and process controls, process validation, purchasing controls, supplier oversight, complaint handling and investigation, corrective and preventative actions, and record-keeping. In addition, the FDA’s medical device reporting regulation requires companies to provide information to the FDA whenever they become aware of evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, that a malfunction occurred which would be likely to cause or contribute to a death or serious injury upon recurrence.

 

Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA, which may result in observations on Form 483, and in some cases warning letters, that require corrective action. If the FDA or equivalent foreign agency were to conclude that Petros is not in compliance with applicable laws or regulations, or that any of its medical devices may be hazardous or defective, the FDA or equivalent foreign agency could take enforcement action, which may include issuance of a warning letter, untitled letter, or other enforcement letter; seizure of the device; requesting or requiring a recall or other field action; or requiring the repair, replacement, or refund the cost of the medical device. The FDA may also impose manufacturing and other operating restrictions; enjoin and restrain certain violations of applicable law pertaining to medical devices; or assess civil or criminal penalties against Petros or its officers or employees. In addition, the FDA could recommend prosecution to the Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict Petros from effectively manufacturing, marketing, and selling products and could have a material, adverse effect on Petros’ financial condition and results of operations. In addition, negative publicity and product liability claims resulting from any adverse regulatory action could have a material, adverse effect on Petros’ financial condition and results of operations.

 

The FDA also regulates the promotion and marketing of medical devices and requires that manufacturers only make promotional claims or statements that are consistent with the indications and labeling cleared, authorized, or approved by the FDA. For 510(k)-exempt devices, such as the Petros’ VED devices, the FDA requires that Petros promote such products consistent with the relevant device classification. Claims outside the scope of the 510(k)-exempt classification would be considered “off-label” and trigger the requirement for a new 510(k) or other premarket submission to the FDA. The FDA may take enforcement action against Petros (as described above), should the FDA determine it has engaged in “off-label” promotion or other violative marketing activities.

 

Petros currently plans to submit a 505(b)(2) NDA to the FDA for H100™ for treatment of Peyronie’s disease, which will allow Petros to rely, in part, on published scientific literature and/or the FDA’s prior findings regarding the safety and efficacy of approved drug products. If Petros is not able to pursue this strategy, it will need to conduct additional development activities beyond what is currently planned, development costs will increase, and Petros may be delayed in receiving regulatory authority approval. The submission of 505(b)(2) NDAs may also subject Petros to the risk of patent infringement lawsuits or regulatory actions that would delay or prevent submission of a marketing application to the FDA, or the FDA’s marketing application review and approval.

 

The Hatch-Waxman Act added Section 505(b)(2) to the FDCA, permitting the filing of a NDA, where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. The FDA interprets Section 505(b)(2) of the FDCA, for purposes of approving an NDA, to permit the applicant to rely, in part, upon published literature and/or the FDA’s previous findings of safety and efficacy for an approved product. The FDA also requires companies to perform additional clinical trials or measurements to support any deviation from the previously approved product and to support the reliance on the applicable published literature or referenced product, referred to as bridging. The FDA may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant, if such approval is supported by study data. The label, however, may require all or some of the limitations, contraindications, warnings or precautions included in the reference product’s label, including a black box warning, or may require additional limitations, contraindications, warnings or precautions.

 

Petros currently plans to submit a 505(b)(2) NDA to the FDA for H100™ for treatment of Peyronie’s disease. If the FDA disagrees with the appropriateness of reliance on a reference listed drug or published literature or if Petros is not otherwise able to bridge to the reference listed drug or published literature, the Company may need to conduct additional clinical trials or other studies, which could lead to unanticipated costs and delays or to the termination of the development program. If Petros is unable to obtain approval through the 505(b)(2) NDA process, it may be required to pursue the more expensive and time consuming 505(b)(1) approval process, which consists of full reports of investigations of safety and effectiveness conducted by or for the applicant.

 

 

There may also be circumstances under which the FDA would not allow Petros to pursue a 505(b)(2) application. For instance, should the FDA approve a pharmaceutically equivalent product to H100™, it is the FDA’s policy that the appropriate submission would be an ANDA for a generic version of the approved product. Petros may, however, not be able to immediately submit an ANDA or have an ANDA approval made effective, as the application could be blocked by others’ periods of patent and regulatory exclusivity protection.

 

Notwithstanding the approval of a number of products by the FDA under Section 505(b)(2), pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its policies and practices with respect to Section 505(b)(2) regulatory approvals. It is also not uncommon for a sponsor of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. Any inability to pursue a 505(b)(2) application could result in new competitive products reaching the market more quickly than Petros’, which could hurt the Company’s competitive position and business prospects.

 

The 505(b)(2) regulatory pathway may also subject Petros to the risk of patent infringement lawsuits or other regulatory actions that could prevent submission of a marketing application or prevent the FDA from making the approval of a marketing application effective. Applicants submitting NDAs under Section 505(b)(2) of the FDCA must provide a patent certification for the patents listed in FDA’s list of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, for all reference listed drugs and for all brand name products identified in published literature upon which the 505(b)(2) application relies. The possible certifications are that (1) no patent information has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. If there are any applicable listed patents, the FDA may not approve the 505(b)(2) application until all listed patents have expired, unless the applicant challenges the listed patents through the last type of certification, also known as a paragraph IV certification, or otherwise indicates that it is not seeking approval of a patented method of use.

 

If Petros does challenge a listed patent through a paragraph IV certification, under the Hatch-Waxman Act, the holder of the patents or NDAs that the 505(b)(2) application references may file a patent infringement lawsuit. Filing of a patent infringement lawsuit triggers a one time, automatic, 30-month stay of the FDA’s ability to make the 505(b)(2) NDA approval effective. In such a case, the FDA may not make the 505(b)(2) NDA approval effective until the earlier of 30 months from the receipt of the notice of the paragraph IV certification, the expiration of the patent, when the infringement case concerning each such patent is favorably decided in the applicant’s favor or settled, or such shorter or longer period as may be ordered by a court. Accordingly, Petros may invest a significant amount of time and expense in the development of one or more product candidates only to be subject to significant delay and patent litigation before such product candidates may be commercialized, if at all. In addition, a 505(b)(2) application approval may, in some cases, not be submitted, or may, in other cases, not be made effective until any existing non-patent regulatory exclusivities have expired or, if possible, are carved out from the label.

 

If Petros is unable to advance its product candidates, including H100™, in clinical development, obtain regulatory approval and ultimately commercialize its product candidates, or experience significant delays in doing so, its business may be materially harmed.

 

Petros is not permitted to market or promote any of its product candidates before it receives regulatory approval from the FDA or comparable foreign regulatory authorities, and it may never receive such regulatory approval. Petros may only receive approval in a limited patient population, it may experience delays in receiving such regulatory approval, or it may not receive regulatory approval for new indications or for H100™. Even if Petros successfully commercializes H100™, it may not be successful in developing and commercializing any other product candidates, and its commercial opportunities may be limited.

 

Petros cannot be certain that any of its product candidates will be successful in clinical and preclinical trials or receive regulatory approval. Further, its product candidates may not receive regulatory approval even if they are successful in clinical trials and Petros submits the required marketing applications seeking regulatory authorization for their use.

 

For each product candidate, Petros must demonstrate safety and efficacy in humans, obtain regulatory approval in one or more jurisdictions, obtain manufacturing supply capacity and expertise, and substantially invest in marketing efforts before it is able to generate any revenue from such product candidate. The success of Petros’ product candidates, and H100™ in particular, will depend on several factors, including the following:

 

•

approval of H100™ or other products by the FDA;

 

•

successful enrollment in, and completion of, clinical trials, the design and implementation of which are agreed to by the applicable regulatory authorities, and the conduct of clinical trials by contract research organizations (“CROs”) to successfully conduct such trials within Petros’ planned budget and timing parameters and without materially adversely impacting its trials;

 

 

•

successful data from its clinical and preclinical programs that support an acceptable risk-benefit profile of its product candidates in the intended populations to the satisfaction of the applicable regulatory authorities;

 

•

timely receipt, if at all, of regulatory approvals from applicable regulatory authorities;

 

•

establishment of arrangements with third-party manufacturers, as applicable, for continued clinical supply and commercial manufacturing;

 

•

successful development of Petros’ manufacturing processes and transfer to new third-party facilities to support future development activities and commercialization that are operated by contract manufacturing organizations in a manner compliant with all regulatory requirements;

 

•

establishment and maintenance of patent and trade secret protection or regulatory exclusivity for Petros’ product candidates;

 

•

successful commercial launch of Petros’ other product candidates, if and when approved;

 

•

acceptance of Petros’ products, if and when approved, by patients, the relevant medical communities and third-party payers;

 

•

effective competition with other therapies;

 

•

establishment and maintenance of adequate healthcare coverage and reimbursement;

 

•

Petros’ ability to avoid infringing upon the patent and other intellectual property rights of third parties;

 

•

enforcement and defense of intellectual property rights and claims;

 

•

continued compliance with any post-marketing requirements imposed by regulatory authorities, including any required post-marketing clinical trials or the elements of any post-marketing REMs that may be required by the FDA or comparable requirements in other jurisdictions to ensure the benefits of the product outweigh its risks; and

 

•

maintenance of a continued acceptable safety profile of the product candidates following approval.

 

If Petros is unsuccessful with respect to these factors, it could experience significant delays or barriers to the successful commercialization of its product candidates, which may materially harm Petros’ business. Even if Petros successfully obtains regulatory approvals to manufacture and market its product candidates, its revenues will be dependent, in part, upon the size of the markets in the territories for which it gains regulatory approval and have commercial rights. If the markets for patient subsets that Petros is targeting are not as significant as it estimates, it may not generate significant revenues from sales of its approved products.

 

Petros plans to seek regulatory approval to commercialize its product candidates in the United States and in foreign countries. While the scope of regulatory approval is similar in many countries, in order to obtain separate regulatory approval in multiple countries Petros must comply with numerous and varying regulatory requirements of each such country or jurisdiction regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution. Petros cannot predict success in any such jurisdictions, and the time required to obtain approval in foreign countries may differ substantially from that required to obtain FDA approval.

 

Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. Petros may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of Petros’ product candidates.

 

The risk of failure in drug and product development is high. Before obtaining marketing approval from regulatory authorities for the sale of H100™ or other unapproved product candidates, Petros must complete nonclinical development and conduct extensive clinical trials to demonstrate the safety and efficacy of Petros’ product candidates in humans. Clinical trials are expensive, difficult to design and implement and can take many years to complete, and their outcomes are inherently uncertain. Failure can occur at any time during the clinical trial process. Nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in nonclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. It is impossible to predict when or if Petros’ unapproved product candidates will prove to be effective or safe in humans or will receive marketing approval.

 

Petros may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates. Clinical trials may be delayed, suspended or prematurely terminated because costs are greater than we anticipate or for a variety of other reasons, such as:

 

•

delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on a trial design that Petros is able to execute;

 

 

•

delay or failure in obtaining authorization to commence a trial, including approval from the appropriate IRB, to conduct testing of a candidate on human subjects, or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

•

delays or failure in reaching agreement on acceptable terms with prospective trial sites and prospective CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

•

inability, delay or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in other clinical programs;

 

•

delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

•

delay or failure in having subjects complete a trial or return for post-treatment follow-up;

 

•

clinical sites and investigators deviating from the clinical protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

•

lack of adequate funding to continue a clinical trial, including unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials and increased expenses associated with the services of Petros’ CROs and other third parties;

 

•

clinical trials of Petros’ product candidates may produce negative or inconclusive results, and it may decide, or regulators may require Petros, to conduct additional nonclinical studies, clinical trials or abandon product development programs;

 

•

Petros’ third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to Petros in a timely manner, or at all;

 

•

the supply or quality of Petros’ product candidates or other materials necessary to conduct clinical trials of its product candidates may be insufficient;

 

•

the FDA or comparable foreign regulatory authorities may require Petros to submit additional data or impose other requirements before permitting it to initiate a clinical trial; or

 

•

changes in governmental regulations or administrative actions.

 

Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval for Petros’ product candidates. Further, the FDA or comparable foreign regulatory authorities may disagree with Petros’ clinical trial design and its interpretation of data from clinical trials or may change the requirements for approval even after it has reviewed and commented on the design for Petros’ clinical trials.

 

Petros cannot be certain as to what type and how many clinical trials the FDA or comparable foreign regulatory authorities will require Petros to conduct before it may successfully gain approval to market H100™. Prior to approving a new product, the FDA generally requires that the efficacy of the product be demonstrated in two adequate and well-controlled clinical trials.

 

Petros’ product development costs will also increase if it experiences delays in nonclinical and clinical development or receiving the requisite marketing approvals. Petros does not know whether any of its nonclinical studies or clinical trials will need to be restructured or will be completed on schedule, or at all, which may harm our business and results of operations.

 

If Petros experiences delays or difficulties in the enrollment of patients in clinical trials, development of its product candidates may be delayed or prevented, which would have a material adverse effect on its business.

 

Petros may not be able to initiate clinical trials for H100™ or its other product candidates if it is unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or comparable foreign regulatory authorities. Patient enrollment is a significant factor in the timing of clinical trials.

 

Patient enrollment may be affected if Petros’ competitors have ongoing clinical trials for product candidates that are under development for the same indications as Petros’ product candidates, and patients who would otherwise be eligible for its clinical trials instead enroll in clinical trials of its competitors’ product candidates. Patient enrollment may also be affected by other factors, including:

 

•

size and nature of the patient population;

 

•

severity of the condition under investigation;

 

 

•

patient eligibility criteria for the trial in question;

 

•

nature of the trial protocol;

 

•

Petros’ ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

•

perceived risks and benefits of the product candidate under study;

 

•

the occurrence of adverse events attributable to Petros’ product candidates;

 

•

efforts to facilitate timely enrollment in clinical trials;

 

•

the number and nature of competing products or product candidates and ongoing clinical trials of competing product candidates for the same indication;

 

•

patient referral practices of physicians;

 

•

the ability to monitor patients adequately during and after treatment;

 

•

proximity and availability of clinical trial sites for prospective patients; and

 

•

continued enrollment of prospective patients by clinical trial sites.

 

If Petros experiences delays or difficulties in the enrollment of patients in clinical trials, its clinical trials may be delayed or terminated. Any delays in completing Petros’ clinical trials will increase its costs, delay or prevent its product candidate development and approval process and jeopardize Petros’ ability to commence product sales and generate additional revenue. Any of these occurrences may harm our business, financial condition and prospects significantly.

 

Petros relies on third parties to conduct, supervise, and monitor preclinical studies and clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials or failing to comply with regulatory requirements.

 

Petros may use third parties, CROs, study sites, and others to conduct, supervise, and monitor preclinical and clinical trials for product candidates. While Petros has agreements governing the activities of such third parties, it has limited influence and control over their actual performance and activities. Third-party service providers are not Petros’ employees, and except for remedies available under agreements with such third parties, Petros cannot control whether or not they devote sufficient time and resources to its development programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct studies in accordance with regulatory requirements or the study plans, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised, studies may need to be repeated, extended, delayed, or terminated, Petros may not be able to obtain, or may be delayed in obtaining, marketing approvals for product candidates, Petros may not be able to or may be delayed in commercializing product candidates, or Petros or the third party service providers may be subject to regulatory enforcement actions. As a result, results of operations and the commercial prospects for product candidates would be harmed, costs could increase and Petros’ ability to generate revenues could be delayed. Third-party service providers may also have relationships with other entities, including Petros competitors, for whom they may also be conducting development activities that could harm Petros’ competitive position.

 

Reliance on third parties for development activities will reduce Petros’ control over these activities. Nevertheless, Petros is responsible for ensuring that its studies are conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards. Regulatory authorities enforce their requirements through periodic inspections of trial sponsors, clinical and preclinical investigators, and trial sites. Any failure to comply with the applicable regulatory requirements, may subject Petros or its third party service providers to enforcement or other legal actions, the data generated in trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require the performance of additional studies.

 

Agreements with third parties conducting or otherwise assisting with studies might terminate for a variety of reasons, including a failure to perform by the third parties. If any of these relationships terminate, Petros may not be able to enter into arrangements with alternative providers or to do so on commercially reasonable terms. Switching or adding additional third parties involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, alternative arrangements could delay product development activities and adversely affect Petros’ business.

 

 

Petros’ relationships with prescribers, purchasers, third-party payers and patients are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, any violation of which could expose it to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Petros is subject to healthcare statutory and regulatory requirements and oversight by federal and state governments, as well as foreign governments in the jurisdictions in which it conducts its business. Physicians, other healthcare providers and third-party payers will play a primary role in the recommendation, prescription and use of any product candidates for which Petros has, or in the future obtains, marketing approval. Petros’ arrangements with such third parties are subject to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain its business or financial arrangements and relationships through which it markets, sell and distributes any products for which it may obtain marketing approval, including potential exclusion from federal healthcare programs and debarment from federal government contracts. Restrictions under applicable domestic and foreign healthcare laws and regulations include the following:

 

•

the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid; a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

•

U.S. federal false claims, false statements and civil monetary penalties laws, including the U.S. False Claims Act, which impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent, including false statements regarding compliance with regulations material to payment by government programs for drugs and medical supplies, or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; actions may be brought by the government or a whistleblower and may include an assertion that a claim for payment by federal healthcare programs for items and services which results from a violation of the federal Anti-Kickback Statue constitutes a false or fraudulent claim for purposes of the False Claims Act;

 

•

the U.S. federal Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) that imposes liability for executing a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

•

analogous state and foreign laws and regulations relating to healthcare fraud and abuse, such as state anti-kickback and false claims laws, that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers;

 

•

the U.S. federal physician payment transparency requirements under the Physician Payments Sunshine Act of 2010, which requires manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare or Medicaid, to report to the Centers for Medicare & Medicaid Services information related to certain payments and other transfers of value, such as payments and transfers of value to physicians and teaching hospitals (and, beginning in 2021, for transfers of value to other healthcare providers), as well as the ownership and investment interests of physicians and their immediate family members;

 

•

analogous state and foreign laws that require companies to track, report and disclose to the government and/or the public information related to payments, gifts, and other transfers of value or remuneration to physicians and other healthcare providers, marketing activities or expenditures, or product pricing or transparency information, or that require companies to implement compliance programs that meet certain standards or to restrict or limit interactions between manufacturers and members of the healthcare industry;

 

•

the U.S. federal laws that require manufacturers to report certain calculated product prices to the government or provide certain discounts or rebates to government authorities or private entities, often as a condition of reimbursement under federal healthcare programs;

 

•

HIPAA, which imposes obligations on certain covered entity healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information; and

 

•

state and foreign laws that govern the privacy and security of health information in certain circumstances, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

Efforts to ensure that Petros’ business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If governmental authorities conclude that Petros’ business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations, then government enforcement actions are possible.

 

 

Petros’ marketing and advertising are regulated by the FDA, Federal Trade Commission and State and County Attorneys General, and it may face enforcement and litigation specifically related to the nature and sales channels of its products.

 

Petros may face product liability litigation and/or other litigation from certain regulatory agencies such as the FDA, Federal Trade Commission (the “FTC”), Attorney General, Better Business Bureau, among others owing to the manner that it markets and sells certain of its products such as through nationwide newspaper advertisements, direct mailing or other direct to consumer campaigns.

 

With respect to FTC matters, if the FTC has reason to believe the law is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action through a variety of judicial and administrative processes and remedies. Any action against us by the FTC could materially and adversely affect Petros’ ability to successfully market its products.

 

In addition, Petros’ marketing and advertising is regulated by regulations, administrative actions and legal proceeding of various state and county attorneys general across the United States. Any regulation, administrative actions or legal proceeding against Petros by any of these entities could materially and adversely affect its ability to successfully market its products.

 

Petros may be subject to potential product liability and other claims, creating risks and expense.

 

Petros is also exposed to potential product liability risks inherent in the development, testing, manufacturing, marketing and sale of human therapeutic products. Product liability insurance for the pharmaceutical industry is extremely expensive, difficult to obtain and may not be available on acceptable terms, if at all. Petros cannot guarantee that the coverage limits of such insurance policies will be adequate. A successful claim against Petros in excess of its insurance coverage could have a material adverse effect upon it and on its financial condition.

 

In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity and loss of revenues as a result of product liability claims. Product liability claims can also result in regulatory consequences, such as the withdrawal of clinical trial participants, termination of clinical trials or programs, governmental authority investigations and enforcement actions, product recalls and withdrawals of approval, as well as labeling revisions. Product liability is a significant commercial risk for Petros. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. In addition, in the age of social media, plaintiffs’ counsel now has a wide variety of tools to advertise their services and solicit new clients for litigation. Thus, any significant product liability litigation or mass tort in which Petros is a defendant may have a larger number of plaintiffs than such actions have seen historically because of the increasing use of widespread and media-varied advertising.

 

Government regulations that mandate price controls and limitations on patient access to its products or establish prices paid by government entities or programs for such products may impact Petros’ business, and future results could be adversely affected by changes in such regulations or policies.

 

Pharmaceutical product pricing is subject to enhanced government and public scrutiny and calls for reform. Some states have implemented, and other states are considering implementing, pharmaceutical price controls or patient access constraints under the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of their populations that are not Medicaid-eligible. There have also been recent state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices. If implemented, efforts by government officials or legislators to implement measures to regulate prices or payments for pharmaceutical products, including legislation on drug importation, could adversely affect Petros’ business, financial condition and results of operations.

 

Changes in laws could negatively impact Petros’ business.

 

Petros’ future results could be adversely affected by changes in interpretations of existing laws and regulations, or changes in laws and regulations, including, among others, changes in taxation requirements, competition laws, privacy laws and environmental laws in the United States and other countries.

 

Risks Related to Petros’ Intellectual Property

 

If Petros fails to protect its intellectual property rights, its ability to pursue the development of its products would be negatively affected.

 

Petros’ long-term success largely depends on its ability to market technologically competitive products. Petros relies and expects to continue to rely on a combination of intellectual property, including patent, trademark, trade dress, copyright, trade secret and domain name protection laws, as well as confidentiality and license agreements, to protect its intellectual property and proprietary rights. If Petros fails to obtain and maintain adequate intellectual property protection, it may not be able to prevent third parties from launching generic or biosimilar versions of its branded products using its proprietary technologies or from marketing products that are very similar or identical to those of Petros. In addition, the patents Petros has licensed may not contain claims sufficiently broad to protect it against third parties with similar technologies or products or provide Petros with any competitive advantage, including exclusivity in a particular product area. Petros may be subject to challenges by third parties regarding its intellectual property, including, among others, claims regarding validity, enforceability, scope and effective term.

 

 

Petros’ ability to enforce its patents also depends on the laws of individual countries and each country’s practice with respect to enforcement of intellectual property rights, and the extent to which certain sovereigns may seek to engage in policies or practices that may weaken its intellectual property framework (e.g., a policy of routine compulsory licensing (or threat of compulsory licensing) of pharmaceutical intellectual property). Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. As such, Petros may have difficulty protecting its proprietary rights in these foreign countries.

 

In addition to patents, Petros relies on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions and security measures to protect its confidential and proprietary information. These measures do not guarantee protection of its trade secrets or other proprietary information. There is risk that third parties could use Petros’ technology and it could lose any competitive advantage it may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to Petros’ trade secrets, which could impair any competitive advantage it may have.

 

Petros may be involved in lawsuits to protect or enforce its patents, which could be expensive and time consuming.

 

The pharmaceutical industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies have employed intellectual property litigation to gain a competitive advantage. Petros may become subject to infringement claims or litigation arising out of patents and pending applications of its competitors or additional interference proceedings declared by the United States Patent and Trade Office to determine the priority of inventions. The defense and prosecution of intellectual property suits, United States Patent and Trade Office proceedings and related legal and administrative proceedings are costly and time-consuming to pursue, and their outcome is uncertain. Litigation may be necessary to enforce Petros’ licensed patents, to protect its trade secrets and know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. An adverse determination in litigation or interference proceedings to which Petros may become a party could subject it to significant liabilities, require it to obtain licenses from third parties or restrict or prevent it from selling its products in certain markets. Although patent and intellectual property disputes might be settled through licensing or similar arrangements, the costs associated with such arrangements may be substantial and could include paying large fixed payments and ongoing royalties. Furthermore, the necessary licenses may not be available on satisfactory terms or at all.

 

Competitors may infringe Petros’ licensed patents and Petros may file infringement claims to counter infringement or unauthorized use. This can be expensive, particularly for a company of Petros’ size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent Petros has licensed is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that Petros’ patents do not cover the other party’s technology. An adverse determination of any litigation or defense proceedings could put one or more of Petros’ patents at risk of being invalidated or interpreted narrowly.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or interference proceedings, there is a risk that some of Petros’ confidential information could be compromised by disclosure. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments.

 

If Petros infringes the rights of third parties, it could be prevented from selling products and forced to pay damages and defend against litigation.

 

If Petros’ products, methods, processes and other technologies infringe the proprietary rights of other parties, it could incur substantial costs and may have to: obtain licenses, which may not be available on commercially reasonable terms, if at all; abandon an infringing product candidate; redesign its products or processes to avoid infringement; stop using the subject matter claimed in the patents held by others; pay damages; and/or defend litigation or administrative proceedings which may be costly whether Petros wins or loses, and which could result in a substantial diversion of its financial and management resources.

 

Petros may be subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

Petros may employ individuals who were previously employed at other biotechnology or pharmaceutical companies. It may be subject to claims that it or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. Petros may also be subject to claims that former employers or other third parties have an ownership interest in its patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if Petros does not prevail, it could be required to pay substantial damages and could lose rights to important intellectual property. Even if Petros is successful, litigation could result in substantial cost and be a distraction to its management and other employees.

 

 

Changes in trends in the pharmaceutical and medical device industries, including changes to market conditions, could adversely affect Petros’ operating results.

 

The pharmaceutical and medical device industries generally, and drug discovery and development companies more specifically, are subject to increasingly rapid technological changes. Petros’ competitors might develop technologies or products that are more effective or commercially attractive than Petros’ current or future technologies, or that render its technologies or products less competitive or obsolete. If competitors introduce superior technologies or products and Petros cannot make enhancements to its technologies or products to remain competitive, its competitive position and, in turn, its business, revenue and financial condition, may be materially and adversely affected.

 

Risks Related to Petros’ Strategic Transactions

 

Acquisitions involve risks that could result in a reduction of our operating results, cash flows and liquidity.

 

Petros has made, and in the future may continue to make, strategic acquisitions including licenses of third-party products. However, it may not be able to identify suitable acquisition and licensing opportunities. It may pay for acquisitions and licenses with equity or with convertible securities. In addition, acquisitions or licenses may expose Petros to operational challenges and risks, including:

 

•

the ability to profitably manage acquired businesses or successfully integrate the acquired business’ operations and financial reporting and accounting control systems into our business;

 

•

increased indebtedness and contingent purchase price obligations associated with an acquisition;

 

•

the ability to fund cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or market conditions or unforeseen internal difficulties;

 

•

the availability of funding sufficient to meet increased capital needs;

 

•

diversion of management’s attention; and

 

•

the ability to retain or hire qualified personnel required for expanded operations.

 

In addition, acquired companies may have liabilities or risks that we fail, or are unable, to discover in the course of performing due diligence investigations. Petros cannot guarantee that the indemnification granted to it by sellers of acquired companies will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with businesses or properties that are assumed upon consummation of an acquisition. Petros may learn additional information about acquired businesses that materially adversely affect it, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on its business.

 

Failure to successfully manage the operational challenges and risks associated with, or resulting from, acquisitions could adversely affect Petros’ results of operations, cash flows and liquidity. Borrowings or issuance of convertible securities associated with any acquisitions may also result in higher levels of indebtedness, which could impact its ability to service its debt within the scheduled repayment terms.

 

Other Risks Related to Petros’ Business and Operations

 

Petros has concluded that there are material weaknesses in its internal control over financial reporting, which, if not remediated, could materially adversely affect its ability to timely and accurately report its results of operations and financial condition. The accuracy of Petros’ financial reporting depends on the effectiveness of its internal controls over financial reporting.

 

Internal controls over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements. Failure to maintain effective internal controls over financial reporting, or lapses in disclosure controls and procedures, could undermine the ability to provide accurate disclosure (including with respect to financial information) on a timely basis, which could cause investors to lose confidence in Petros’ disclosures (including with respect to financial information), require significant resources to remediate the lapse or deficiency, and expose it to legal or regulatory proceedings.

 

In connection with the audit of its December 31, 2020 financial statements, Petros’ management identified the following deficiencies, which it considers to be “material weaknesses,” which, individually or in the aggregate, could reasonably result in a material misstatement in the Company’s financial statements:

 

·

Petros currently 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. This restricts the Company’s ability to gather, analyze and report information relative to the financial statements in a timely manner, including timely and adequate review of schedules and analysis used in the financial close process and the documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. The company should evaluate their significant processes to ensure the key controls are being carried out as designed;

 

·

The size of Petros’ accounting and IT department makes it impracticable to achieve an appropriate segregation of duties;

 

·

Petros does not have appropriate IT access related controls specifically:

 

o

Elevated privileges such as administrator access to financial systems are not always assigned to individuals who do not bear responsibility for performing financial reporting or posting financial transaction (for example IT personnel).

 

o

There are no limited number of password attempts before account lockout.

 

o

There is no maximum length of days a password can be in use.

 

The Company should implement mitigating controls that would prevent or detect (in a timely manner) unauthorized transactions that might result.

 

 

Petros’ remediation efforts are ongoing and it will continue its initiatives to implement and document policies, procedures, and internal controls. Remediation of the identified material weaknesses and strengthening the internal control environment will require a substantial effort throughout 2021 and beyond, as necessary, and Petros will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Petros cannot guarantee that it will be successful in remediating the material weaknesses it identified or that its internal control over financial reporting, as modified, will enable it to identify or avoid material weaknesses in the future.

 

Petros cannot guarantee that its management will be successful in identifying and retaining appropriate personnel; that newly engaged staff or outside consultants will be successful in identifying material weaknesses in the future; or that appropriate personnel will be identified and retained prior to these deficiencies resulting in material and adverse effects on Petros’ business.

 

Petros’ consolidated balance sheet contains significant amounts of intangible assets.

 

Petros’ other intangible assets, including developed technology rights and brands, face risks for impairment and charges related to such assets may be significant as well. In the year ended December 31, 2019, Petros incurred a goodwill impairment loss of $2,443,930 and no longer has a goodwill balance.

 

The impact of the COVID-19 outbreak on Petros’ operations, and the operations of its partners, suppliers and logistics providers, could significantly disrupt its operations and may materially and adversely affect its business and financial conditions.

 

Petros’ business could be adversely impacted by the effects of the coronavirus or other epidemics. In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. As a result of the COVID-19 pandemic, which continues to rapidly evolve, “shelter in place” orders and other public health guidance measures have been implemented across much of the United States, Europe and Asia, including in the locations of the Company’s offices, key vendors and partners. The pandemic has significantly impacted the economic conditions in the U.S. and globally as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. At this time, the future trajectory of the COVID-19 outbreak remains uncertain, both in the United States U.S. and in other markets. While the Company anticipates that the currently available vaccines will be widely distributed in the future, the timing and efficacy of such vaccines are uncertain. Although the Company cannot reasonably estimate the length or severity of the impact that the COVID-19 outbreak pandemic will have on its financial results, the Company may experience a material adverse impact on its sales, results of operations, and cash flows in fiscal 2021.

 

Additionally, Petros expects that COVID-19 will continue to adversely impact the status and progress of our development programs, including any clinical and preclinical trials for H100™ or any other product candidates. Delays or other difficulties in completing clinical and preclinical trials could result in a longer period of time to obtain product regulatory approval, to commercialize our products, if approved, and realize any resulting revenue in the future.

 

The COVID-19 pandemic and the government and public health response continues to rapidly evolve. In light of the COVID-19 outbreak, the FDA has issued a number of new guidance documents. Additionally, in March 2020, the US Congress passed the Coronavirus Aid, Relief, and Economic Security Act, which, for certain critical drugs, includes strengthened provisions regarding required FDA drug shortage reporting requirements, as well as provisions regarding supply chain security, such as risk management plan requirements, and the promotion of supply chain redundancy and domestic manufacturing.

 

Petros is actively assessing and responding where possible to the potential impact of the COVID-19 outbreak. The extent to which the COVID-19 impacts its business, including its operations, will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. The continued spread of the coronavirus globally could materially and adversely impact Petros’ business including without limitation, supply chain and manufacturing matters, employee health, workforce productivity, increased insurance premiums, limitations on travel, the availability of industry advisers and personnel, and other factors that will depend on future developments beyond its control, which may have a material and adverse effect on its business, financial condition and results of operations.

 

 

JCP III SM AIV, L.P. maintains the ability to significantly influence all matters submitted to Petros’ stockholders for approval.

 

JCP III SM AIV, L.P. and its affiliates, in the aggregate, own approximately 34.8% of the Petros Common Stock. As a result, if these stockholders were to choose to act together, they could be able to significantly influence all matters submitted to Petros’ stockholders for approval, as well as Petros’ management and affairs. For example, these persons, if they choose to act together, could significantly influence the election of directors or the approval of any merger, consolidation or sale of all or substantially all of Petros’ assets. This concentration of voting power could delay or prevent an acquisition of Petros on terms that other stockholders may desire.

 

Our bylaws include a forum selection clause, which may impact your ability to bring actions against us.

 

Subject to certain limitations, our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery in the State of Delaware will be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. In addition, our bylaws provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the federal securities laws of the United States against us, our officers, directors, employees or underwriters. These limitations on the forum in which stockholders may initiate action against us could create costs, inconvenience or otherwise adversely affect your ability to seek legal redress.

 

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, a court may decline to enforce these exclusive forum provisions with respect to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction, and our stockholders may not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find the exclusive forum provisions to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

Our principal executive offices are located in New York, New York. We lease approximately 5,600 square feet of office space in Manalapan, New Jersey. The Company is in the process of ending its lease in Manalapan through either a re-let or sublease to a new tenant. We believe that our current facilities are suitable and adequate to meet our current needs. We believe that suitable additional space or substitute space will be available in the future to accommodate our operations as needed.

 

ITEM 3.

LEGAL PROCEEDINGS

 

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.

 

The information set forth in Note 15 Commitments and Contingencies of the Notes to Consolidated Financial Statements of this Form 10-K is incorporated by reference herein.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 

PART II

 

ITEM 5.

MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Shares

 

Our common shares are listed for trading on The Nasdaq Stock Market (“Nasdaq”) under the ticker symbol “PTPI.” As of March 20, 2021, there were approximately 205 holders of record of our common shares. The number of holders of record is based upon the actual number of holders registered at such date and does not include holders of shares in “street names” or persons, partnerships, associates, corporations, or other entities identified in security position listings maintained by depositories.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock and our current credit facility restricts our ability to declare or pay cash dividends or distributions. We currently anticipate that we will retain future earnings to fund development and growth of our business, and we do not anticipate paying cash dividends in the foreseeable future. The decision to pay dividends is at the discretion of our board of directors and depends upon our ability to obtain a waiver of the restriction on paying dividends contained in our credit facility, and on our financial condition, results of operations, capital requirements, and other factors that our board of directors deems relevant.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

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 7.

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 Annual Report on Form 10-K. This MD&A contains forward-looking statements reflecting Petros’ current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in this Annual Report on Form 10-K.

 

 

Overview

 

Petros is a pharmaceutical company focused on men’s health therapeutics, consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC (“Metuchen”), TIMM Medical, Inc. (“TIMM Medical”), and Pos-T-Vac, LLC (“PTV”). On September 30, 2016, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Vivus, Inc (“Vivus”) to purchase and receive the license for the commercialization and development of Stendra® for a one-time fee of $70 million. The License Agreement gives the Company the right to sell Stendra® in the U.S and its territories, Canada, South America, and India. Stendra® is a U.S. Food and Drug Administration (“FDA”) approved PDE-5 inhibitor prescription medication for the treatment of erectile dysfunction (“ED”) and is the only patent protected PDE-5 inhibitor on the market. Stendra® offers the ED therapeutic landscape a valuable addition as an oral ED therapy that may be taken as early as approximately 15 minutes prior to sexual engagement, with or without food when using the 100mg or 200mg dosing (does not apply to 50mg dosing).

 

Metuchen was founded by Joseph J. Krivulka, an experienced pharmaceutical executive who held several key leadership positions at leading pharmaceutical companies such as Mylan Laboratories Inc. and its subsidiary Bertek Inc., and was also the co-founder of Reliant Pharmaceuticals, which was sold to GlaxoSmithKline in 2007 for $1.65 billion. During the period from Metuchen’s inception in 2016 through 2018, the founder decided to outsource the sales and marketing function to an affiliated contractor. The level of performance expected from this affiliated contractor was not realized. In 2018, the founder passed away which caused significant disruption to the business. In 2019, Metuchen terminated this affiliate contractor and established its own internal sales, marketing, and trade distribution functions for Stendra®. Also in 2019, Metuchen deployed a specialized key account sales model augmented by a national non-personal promotion campaign reaching nearly 30,000 healthcare professionals. Metuchen also enhanced its digital campaigns designed to create awareness among patients and its partners. Additionally, Metuchen engaged in a wide array of specialty medical conferences including presentations at educational product theaters and launched a national savings coupon for enhanced product access. Metuchen believes that these activities have established a framework for growth into 2021 and beyond. Following a year of internal management of marketing, sales and trade distribution functions, we believe the Company is well-positioned for a strong, multi-channel sales and marketing campaign in 2021 and beyond.

 

In addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health. In March 2020, Petros acquired an exclusive global license (the “Hybrid License”) for the development and commercialization of H100™ from Hybrid Medical LLC (“Hybrid”). H100™ is a novel and patented topical formulation candidate for the treatment of acute Peyronie’s disease. Peyronie’s disease is a condition that occurs upon penile tissue disruption often caused by sexual activity or injury, healing into collagen-based scars that may ultimately harden and cause penile deformity.

 

Impact of COVID-19

 

In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. As a result of the COVID-19 pandemic, which continues to rapidly evolve, “shelter in place” orders and other public health guidance measures were implemented across much of the United States, Europe and Asia, including in the locations of the Company’s offices, key vendors and partners. The pandemic has significantly impacted the economic conditions in the U.S. and globally as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. At this time, the future trajectory of the COVID-19 outbreak remains uncertain, both in the United States and in other markets. While the Company anticipates that the currently available vaccines will be widely distributed in the future, the timing and efficacy of such vaccines are uncertain. The Company cannot reasonably estimate the length or severity of the impact that the COVID-19 outbreak will have on its financial results, and the Company may experience a material adverse impact on its sales, results of operations, and cash flows in fiscal 2021.

 

During 2020, government regulations and the voluntary business practices of the Company and prescribing physicians have prevented in-person visits by sales representatives to physicians’ offices. The Company has taken steps to mitigate the negative impact on its businesses of such restrictions. In March 2020, the Company reduced our sales representative head count to reflect the lack of in-person visits. The Company has maintained a core sales team which continues to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company’s key opinion leaders to other physicians and pharmacists. The Company anticipates rehiring and/or assigning representatives to cover sales territories as states reopen and physician access resumes new normal levels. In response to the spread of SARS-CoV-2 and COVID-19, in March 2020, the Company closed its administrative offices and as of December 31, 2020, they remain closed, with the Company’s employees continuing their work outside of the Company’s offices. The Company has selectively resumed in-person interactions by its customer-facing personnel in compliance with local and state restrictions. The Company also continues to engage with customers virtually as the Company seeks to continue to support healthcare professionals and patient care. However, the Company’s ability to engage in personal interactions with physicians and customers remains limited, and it is unknown when the Company’s offices will reopen, and these interactions will be fully resumed.

 

 

Nature of Operations and Basis of Presentation

 

Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Petros (“Merger Sub 1”), PN Merger Sub 2, Inc., a Delaware corporation and a wholly-owned subsidiary of Petros (“Merger Sub 2”), and Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”). On July 23, 2020, the parties to the Merger Agreement entered into the First Amendment to the Agreement and Plan of Merger and Reorganization (the “First Merger Agreement Amendment”) and on September 30, 2020, the parties to the Original Merger Agreement entered into the Second Amendment to the Agreement and Plan of Merger and Reorganization (the “Second Merger Agreement Amendment” and, together with the Original Merger Agreement and the First Merger Agreement Amendment, the “Merger Agreement”). The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly-owned subsidiary of Petros (the “Metuchen Merger”) and (2) the merger of Merger Sub 2 with and into Neurotrope, with Neurotrope surviving as a wholly-owned subsidiary of Petros (the “Neurotrope Merger” and together with the Metuchen Merger, the “Mergers”). As a result of the Mergers, Metuchen and Neurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporation on December 1, 2020.

 

On December 7, 2020, Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of $20,000,000, subject to adjustment as provided in the Merger Agreement, and all of the operating assets and liabilities of Neurotrope not retained by Neurotrope in connection with the Mergers were contributed to Synaptogenix, Inc. (formerly known as Neurotrope Bioscience, Inc.), a Delaware corporation (“Synaptogenix”), a wholly-owned subsidiary of Neurotrope and (ii) holders of record of Neurotrope common stock, par value $0.0001 per share, Neurotrope preferred stock, par value $0.001 per share and certain warrants as of November 30, 2020 received a pro rata distribution of common stock of Synaptogenix, resulting in a separate, independent publicly traded company.

 

The Mergers were accounted for as a reverse recapitalization in accordance with U.S. GAAP. Metuchen was determined to be the accounting acquirer based on an analysis of the criteria outlined in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) No. 805, Business Combinations (“ASC 805”), and the facts and circumstances specific to the Mergers, including: (1) Metuchen Securityholders owned approximately 51.0% of Neurotrope and Metuchen at closing of the equity securities of the combined company immediately following the closing of the transaction; (2) a majority of the board of directors of the combined company are composed of directors designated by Metuchen under the terms of the Mergers; and (3) a majority of the existing members of Metuchen’s management are the management of the combined company. The net assets of Metuchen are stated at historical costs in the Company’s Consolidated Financial Statements, with no goodwill or intangible assets recorded. Accordingly, the historical financial statements of Metuchen through November 30, 2020 became the Company’s historical financial statements, including the comparative prior periods. These Consolidated Financial Statements include the results of Petros from December 1, 2020, the date the reverse recapitalization was consummated.

 

The Company manages its operations through two segments. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male ED. The Prescription Medications segment consists primarily of Stendra®, which is sold generally in the United States. Expenses related to the development of H100™, which is in the early stages of development and has not yet sought FDA approval to begin Phase 1 clinical trials, will be within the Prescription Medications segment. The Medical Devices segment consists primarily of vacuum erection devices, which are sold domestically and internationally.

 

 

Licensing and Distribution

 

The Company acquired the rights to Stendra® avanafil on September 30, 2016 when it entered into the License Agreement with Vivus to purchase and receive the license for the commercialization and exploitation of Stendra® avanafil for a one-time fee of $70 million. The License Agreement gives the Company the exclusive right to sell avanafil in the U.S. and its territories, as well as Canada, South America, and India. In December 2000, Vivus originally was granted the license from Mitsubishi Tanabe Pharma Corporation (“MTPC”) to develop, market, and manufacture Stendra®. Stendra® was approved by the FDA in April 2012 to treat male ED.

 

The Company will pay MTPC a royalty of 5% on the first $500 million of net sales and 6% of net sales thereafter until the expiration of the applicable patent in a particular country. The last scheduled patent expiration is in April 2025. In consideration for the trademark assignment and the use of the trademarks associated with Stendra® and the Vivus technology, the Company shall (a) during the first, second, and third years following the expiration of the royalty period in a particular country in the Company’s territory, pay to Vivus a royalty equal to 2% of the net sales of Stendra® in such territory; and (b) following the fourth and fifth years following the end of the royalty period in such territory, pay to Vivus a royalty equal to 1% of the net sales of Stendra® in such territory. After the royalty period, no further royalties shall be owed with respect to net sales of Stendra® in such territory. In addition, the Company will be responsible for a pro-rata portion of a one-time $6 million milestone payment to be paid once $250 million in sales has been reached on the separate revenue stream of Stendra® during any calendar year.

 

In connection with the License Agreement, the Company and Vivus also entered into the Vivus Supply Agreement on the effective date of the License Agreement. As part of the License Agreement, the Company also acquired Vivus’ Stendra® avanafil product and sample inventories as of September 30, 2016, for an additional $0.8 million. The Vivus Supply Agreement provides that Vivus will test, supply and provide the product to the Company or its designee, directly or through one or more third parties until September 30, 2021. During the term of the Vivus Supply Agreement, the Company is required to purchase minimum annual quantities from Vivus. Vivus, in turn, procures the product from a third-party manufacturer.

 

In December of 2020, Vivus obtained approval of an in-court prepackaged plan of reorganization, under which IEH Biopharma LLC (“IEH”) obtained 100% ownership of Vivus (the “Prepackaged Plan”), and IEH assumed VIVUS’ contractual obligations under the Supply Agreement. The license agreement between MTPC and Vivus (“MTPC License”) contains certain termination rights that will allow MTPC to terminate the agreement if Vivus were to breach any of the terms of the MTPC License or become insolvent or bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra®.

 

On March 27, 2018, the Company entered into a Sublicense Agreement with Acerus Pharmaceuticals Corporation (“Acerus”) whereby the Company granted to Acerus an exclusive sublicense in Canada for, among other things, the development and commercialization of Stendra® avanafil for a one-time fee of $100,000. The Company is entitled to receive an additional fee of $400,000 if Stendra® is approved by Canadian regulators, as well as commercial milestone payments and royalty fees of 12% of net sales. The agreement remains in effect. In August 2018, the Company entered into the Acerus Supply Agreement, pursuant to which Acerus will purchase the product from the Company so long as the Acerus Sublicense Agreement remains in effect.

 

In March 2020, we entered into the Hybrid License for the development and commercialization of H100™ from Hybrid. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of $100,000 and additional payments of $250,000, with additional annual milestone payments of $125,000, $150,000 and $200,000 on each of the first, second and third anniversaries of the entry into the Hybrid License and $250,000 annual payments due thereafter.

 

 

Critical Accounting Policies and Estimates

 

The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including but not limited to those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, intangibles, income taxes, litigation, and contingencies. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our consolidated financial statements as they occur. While our significant accounting policies are more fully described in “Part II; Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 2. Summary of Significant Accounting Policies” below in this Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these critical accounting policies with the Audit Committee of our Board of Directors.

 

Revenue Recognition

 

The Company recognizes revenue when its performance obligations with its customers have been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide either its prescription medication or medical devices upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of the prescription medication or medical device, which is typically upon delivery.

 

In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers either the prescription medication or medical device to when the customers pay for the product is typically less than one year. The Company records sales net of any variable consideration, including but not limited to discounts, rebates, returns, chargebacks, and distribution fees. The Company uses the expected value method when estimating its variable consideration, unless terms are specified within contracts. The identified variable consideration is recorded as a reduction of revenue at the time revenues from sales are recognized. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.

 

The most significant sales deductions relate to contract rebates and coupon redemptions, and distribution service fees (“DSA fees”). Our estimates are based on factors such as our direct and indirect customers’ buying patterns and the estimated resulting contractual deduction rates, historical experience, specific known market events and estimated future trends, current contractual and statutory requirements, industry data, estimated customer inventory levels, current contract sales terms with our direct and indirect customers, and other competitive factors. Significant judgment and estimation is required in developing the foregoing and other relevant assumptions.

 

Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return either the prescription medication or medical device and receive credit for product. The provision for returns is based upon the Company’s estimates for future returns and historical experience. The provision of returns is part of the variable consideration recorded at the time revenue is recognized.

 

Accounts Receivable

 

The Company extends credit to its customers in the normal course of business. Accounts receivable are recorded at the invoiced amount, net of chargebacks, distribution service fees, and cash discounts. Management determines each allowance based on historical experience along with the present knowledge of potentially uncollectible accounts.

 

Inventory

 

Inventories consist of finished goods held for sale and raw materials. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Inventories are adjusted for excess and obsolescence. Evaluation of excess inventory includes such factors as expiry date, inventory turnover, and management’s assessment of current product demand.

 

 

Fair Value Measurements

 

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market.

 

Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

In connection with the Mergers in December 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock. The Company estimated their fair value using Monte Carlo Simulation approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

 

Intangibles

 

The Company accounts for recognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. The Company reviews the carrying value and useful lives of its intangible assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which they should be amortized has changed. When indicators of impairment exist, the Company determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The Company evaluates the remaining useful life of each intangible asset that is being amortized during each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.

 

Recent Accounting Pronouncements

 

For a discussion of recent accounting pronouncements, refer to Note 2 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

 

Results of Operations

 

The impact on our results of COVID-19 and related changes in economic conditions, including changes to consumer spending resulting from the rapid rise in local and national unemployment rates, are highly uncertain and, in many instances, outside of our control. The duration and severity of the direct and indirect effects of COVID-19 continue to evolve and in ways that are difficult to anticipate. There are numerous uncertainties related to the COVID-19 pandemic that have impacted our ability to forecast our future operations as a company. The extent to which COVID-19 will affect our business, financial position and operating results in the future cannot be predicted with certainty; however, any such impact could be material. COVID-19 could also increase the degree to which our results, including the results of our business segments, fluctuate in the future.

 

 

Years ended December 31, 2020 and December 31, 2019

 

The following table sets forth a summary of our statements of operations for the years ended December 31, 2020 and 2019:

 

		For the Years Ended December 31,
		2020				2019
Net sales		$	9,559,469			$	15,577,166
Cost of sales			4,046,466				7,427,111
Gross profit			5,513,003				8,150,055
Operating expenses:
Selling, general and administrative			15,674,968				19,727,223
Research and development			459,636				-
Depreciation and amortization expense			6,660,438				5,291,107
Impairment loss			-				2,443,930
Total operating expenses			22,795,042				27,462,260
Loss from operations			(17,282,039	)			(19,312,205	)
Change in fair value of derivative liability			(1,680,000	)			-
Interest expense, senior debt			(1,323,424	)			(2,428,264	)
Interest expense, related party term loans			(1,727,455	)			(11,416,697	)
Loss before income taxes			(22,012,918	)			(33,157,166	)
Income tax benefit			(1,426,993	)			(645,866	)
Net loss		$	(20,585,925	)		$	(32,511,300	)

 

Net Sales

 

Net sales for the year ended December 31, 2020 were $9,559,469, composed of $6,357,498 of net sales from Prescription Medicines and net sales of $3,201,971 from Medical Devices.

 

Net sales for the year ended December 31, 2019 were $15,577,166, composed of $11,110,660 of net sales from Prescription Medicines and net sales of $4,466,506 from Medical Devices.

 

For the year ended December 31, 2020, gross sales to customers representing 10% or more of the Company’s total gross sales included one customer that represented approximately 85% of total gross sales.

 

For the year ended December 31, 2019, gross sales from customers representing 10% or more of the Company’s total gross sales included one customer that represented approximately 86% of total gross sales.

 

Prescription Medicines sales consist of sales of Stendra® in the U.S. for the treatment of male ED. Stendra® is primarily sold directly to the one customer described above and resold through three main wholesalers, which collectively accounted for approximately 85% of Stendra® net sales for the year ended December 31, 2020. Individually, sales to the three main wholesalers either from the one customer described above or directly, accounted for 42%, 30%, and 28% of Stendra® net sales for the year ended December 31, 2020.

 

Medical Device sales consist of domestic and international sales of men’s health products for the treatment of ED. The men’s health products do not require a prescription and include Vacuum Erection Devices (“VEDs”), PreBoost, VenoSeal, penile injections (Rx), and urinary tract infection tests. Timm Medical discontinued various co-promotion activities in 2019 and is currently selling only VEDs and VenoSeal. The VEDs represent almost 100% of sales.

 

 

Net sales were 6,017,697, or 39% lower during year ended December 31, 2020 than in the same period in 2019 consisting of a $4,753,162 decrease in the net sales of Stendra® and a $1,264,535 decrease in Medical Device Sales. The decrease in net sales in Stendra® was substantially due to lower wholesaler demand to reduce inventory held by wholesalers for the potential effects of COVID-19. The decrease in net sales for our Medical Devices segment was attributable to the discontinuation of co-promotion activities and lower sales of certain products.

 

Cost of Sales

 

Cost of sales for the year ended December 31, 2020 were $4,046,466, composed of $3,083,417 of cost of sales for our Prescription Medicines segment and $963,049 for our Medical Devices segment.

 

Cost of sales for the year ended December 31, 2019 were $7,427,111 composed of $6,057,977 of cost of sales for our Prescription Medicines segment and $1,369,134 for our Medical Devices segment.

 

Cost of sales for the Prescription Medicine segment for the year ended December 31, 2020 consisted of 57% inventory obsolescence reserves, 27% third-party product cost of sales, 10% royalty expenses, and 6% third-party logistics provider order fulfillment and shipping costs.

 

Cost of sales for the Medical Device segment for the year ended December 31, 2020 consisted of 71% raw materials, 22% production labor and 7% other cost of sales.

 

Cost of sales decreased by $3,380,645 or 46% during the year ended December 31, 2020 compared to the same period 2019. For the years ended December 31, 2020 and 2019, cost of sales as a percentage of net sales were 42% and 48%, respectively. The decrease in cost of sales as a percentage of net sales was a result of less write-offs for inventory obsolescence, decreased sales order fulfillment costs (on a per unit basis), and decreased shipping expenses by the Company’s third-party logistics provider during the year ended December 31, 2020 due to reduced sales volume.

 

Gross Profit

 

Gross profit for the year ended December 31, 2020 was $5,513,003 or 58%, composed of $3,274,081 of gross profit from Prescription Medicines and $2,238,922 from Medical Devices. Gross profit for the year ended December 31, 2019 was $8,150,055 or 52%, composed of $5,052,683 of gross profit from Prescription Medicines and $3,097,372 from Medical Devices. The decrease in gross profit was driven by the factors noted above.

 

Operating Expenses

 

Selling, general and administrative

 

Selling, general and administrative expenses for the year ended December 31, 2020 were $15,674,968, composed of $8,784,716 of selling, general and administrative expenses of our Prescription Medicines segment, $2,024,448 of selling, general and administrative expenses of our Medical Devices segment and $4,865,804 of general corporate expenses.

 

Selling, general and administrative expenses for the year ended December 31, 2019 were $19,727,223, composed of $13,873,200 of selling, general and administrative expenses of our Prescription Medicines segment, $2,735,390 of selling, general and administrative expenses of our Medical Devices segment and $3,118,633 of general corporate expenses.

 

Selling, general and administrative expenses for both segments include selling, marketing and regulatory expenses. Unallocated general corporate expenses include costs that were not specific to a particular segment but are general to the group, including expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses.

 

 

Selling, general and administrative expenses decreased by $4,052,255 or 21% during the year ended December 31, 2020 compared to the same period of 2019. Decreased selling, general and administrative expenses were primarily driven by lower payroll expenses and direct marketing expenses as management sought to reduce expenses due to COVID-19; partially offset by increased accounting and legal fees associated with the Merger and a settlement of a prior year third-party liability of approximately $1.3 million no longer determined to be required.

 

Research and development

 

Research and development expenses for the year ended December 31, 2020 were $459,636, in our Prescription Medicines segment.

 

Research and development expenses for Prescription Medicines segment are composed of $66,895 for consulting fees, $100,000 for upfront licensing fees, $250,000 for licensing fee extension payments, and $42,741 for legal fees related to the H100™ license acquired in March 2020.

 

There were no research and development expenses for the year ended December 31, 2019.

 

Depreciation and amortization

 

Depreciation and amortization expenses for the year ended December 31, 2020 were $6,660,438, composed of $5,424,292 of depreciation and amortization expenses of our Prescription Medicines segment and $1,236,146 of depreciation and amortization expenses of our Medical Devices segment.

 

Depreciation and amortization expenses for the year ended December 31, 2019 were $5,291,107, composed of $4,145,833 of depreciation and amortization expenses of our Prescription Medicines segment and $1,145,274 of depreciation and amortization expenses of our Medical Devices segment.

 

Prescription Medicines depreciation and amortization consists primarily of the amortization of the intangible assets related to Stendra® over its estimated useful life of 10 years. Medical Devices depreciation and amortization primarily consists of the amortization of the intangible assets related to Timm Medical and PTV over their estimated useful life of 12 years. The increase in amortization expense was primarily driven by the accelerated method of amortization related to the Stendra® product.

 

Change in fair value of derivative liability

 

In connection with the Mergers consummated on December 1, 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the $1,680,000 represents the change in fair value of the derivative through December 31, 2020.

 

Interest expense, senior debt

 

Interest expense, senior debt for the year ended December 31, 2020 was $1,323,424 consisting of interest payments on our senior debt, with a weighted average balance of $9,574,020. Interest expense, senior debt for the year ended December 31, 2019 was $2,428,264, consisting of interest payments on our senior debt, with a weighted average balance of $15,514,168. The decrease of $1,104,840 or 45% was due to the pay down of $6.2 million of senior debt and decreased weighted average interest rate subsequent to December 31, 2019.

 

Interest expense, subordinated related party term loans

 

Interest expense, subordinated related party term loans for the year ended December 31, 2020 was $1,727,455, consisted of Paid-in-Kind (“PIK”) interest. As described under “Liquidity and Capital Resources — Debt — Subordinated Related Party Term Loans” below, the subordinated related party term loans were extinguished in an exchange transaction on September 16, 2019. During 2020, the Company borrowed additional subordinated related party term loans in aggregate principal amount of $15.5 million. The subordinated related party term loans were converted into shares of the Company’s common stock with the consummation of the Mergers on December 1, 2020. Accordingly, the principal balance of the subordinated related party term loans and accrued PIK interest was $0 as of December 31, 2020.

 

 

Income tax benefit

 

Income tax benefit for the year ended December 31, 2020 was $1,426,993 compared to income tax benefit of $645,866 for the year ended December 31, 2019. The income tax benefit is primarily attributed to the operations of the Medical Device segment, specifically Timm, which is now included in the Company’s consolidated group. The consolidated group is in a valuation allowance position, as such, the legacy deferred tax liabilities recorded at Timm have been a source of taxable income which reduced the overall valuation allowance as of December 31, 2020.

 

Liquidity and Capital Resources

 

General

 

Cash and cash equivalents totaled $17,139,694 at December 31, 2020, compared to $2,145,812 at December 31, 2019.

 

We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2020, we had cash and cash equivalents of $17.1 million, negative working capital of approximately $16.0 million, including debt of $7.2 million maturing in 2021, and sustained cumulative losses attributable to common stockholders of $61.7 million. Our plans include, or may include, utilizing our cash and cash equivalents on hand, negotiating an extension of our debt arrangement and our liability due to Vivus as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. While we are optimistic that we will be successful in our efforts to achieve our plans, there can be no assurances that we will be successful in doing so. As such, we obtained a continued support letter from our largest shareholder, JCP III SM AIV, L.P., through May 17, 2022.

 

To date, our principal sources of capital used to fund our operations have been the net proceeds we received from the Mergers, revenues from product sales, private sales of equity securities and proceeds received from the issuance of convertible debt, as described below.

 

We rely on McKesson to distribute our products to our customers. On March 27, 2020, the Company received notice of termination from McKesson. Such notice was withdrawn on April 3, 2020, following the Company’s payment of $1,915,144. As of December 31, 2020, we had $6,119,834 in Gross Accounts Receivable due from McKesson, partially offset by $1,178,521 in accrued chargebacks, cash discounts and distribution service fees. Net amounts McKesson owed to the Company was $4,941,313 as of December 31, 2020.

 

Our principal expenditures include payment for inventory of Stendra® from our key supplier, Vivus, including purchases of inventory accrued in current periods, but for which payment is due in future periods. We have significant unpaid balances owed to Vivus and are currently in discussions with Vivus with respect to amounts owed. We had an aggregate accrued unpaid balance owed to Vivus of $20,724,188 as of December 31, 2020. While the Company is in discussions with Vivus to convert a portion of the amounts owed into a subordinated note, though there can be no assurance that we will be successful in these discussions.

 

In March 2020, the Company acquired the exclusive license to H100™ from Hybrid. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of $100,000 and an additional payment of $250,000 and additional annual milestone payments of $125,000, $150,000 and $200,000 are due on each of the first, second and third anniversaries of the license agreement and $250,000 annual payments due thereafter. The Company is also required to make a $1,000,000 payment upon first commercial sale and a sliding scale of percentage payments on net sales in the low single digits. Annual anniversary payments will not be required after commercialization. The Company is also obligated to make royalty payments between 3-6% of any net sales.

 

 

On September 24, 2020, the Company and Hybrid amended the license agreement for H100™ to extend the term of the license agreement for an additional six months to March 24, 2021. In consideration for the amendment, the Company paid Hybrid $50,000 in October 2020 and the Company paid Hybrid an additional $100,000 in December 2020.

 

The Company also expects to incur approximately $14 million of research and development expenses relating to H100™ over the estimated four to six-year period of clinical development prior to FDA approval, including approximately $10 million for clinical trials and $4 million of other expenses.

 

We will require additional financing to further develop and market our products, fund operations, and otherwise implement our business strategy at amounts relatively consistent with the expenditure levels disclosed above. We are exploring additional ways to raise capital but we cannot assure you that we will be able to raise capital. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. We expect to seek additional funds through a variety of sources, which may include additional public or private equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing.

 

We are focused on expanding our service offering through internal development, collaborations, and through strategic acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.

 

Debt

 

Senior Debt

 

On September 30, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules”), for a $35 million term loan with a stated interest rate of the greater of either (i) Prime (as defined in the Loan Agreement) plus 7.25% or (ii) 10.75%. The Loan Agreement includes an additional Payable-In-Kind (“PIK”) interest that increases the outstanding principal on a monthly basis at an annual rate of 1.35% and a $787,500 end of term charge. We refer to the amounts available under the credit facility with Hercules as Senior Debt.

 

On November 22, 2017, the Company entered into Amendment Number 1 to the Loan Agreement (the “First Amendment”). A covenant was added, in which the Company must achieve a certain minimum EBITDA, as defined in the First Amendment, target for the trailing twelve-month period, ending June 30, 2018. The end of term charge was increased from $787,500 to $1,068,750. The minimum EBITDA for each of the trailing six months and the fixed charge coverage ratio were reduced from 1:1 to 0.9:1. The Company was also required to prepay $10,000,000 in principal.

 

Monthly principal payments, including interest, commenced November 1, 2018 with the outstanding balance under the Loan Agreement, as amended, due in full on November 1, 2020. The end of term charge is being recognized as interest expense and accreted over the term of the Loan Agreement, as amended, using the effective interest method.

 

On August 13, 2019, the Company entered into a forbearance agreement with Hercules under which Hercules agreed to forbear exercising any remedies under the loan for events of default through the earlier of September 30, 2019 or the occurrence of an event of default under the Loan Agreement, as amended.

 

Effective April 13, 2020, the Company and Hercules amended the Loan Agreement, as previously amended, to extend the maturity date thereof to April 1, 2021, subject to further extension to December 1, 2021 if the Company raises at least $20 million through an equity or debt financing or other transaction. The amendment was subject to the Company’s receipt of at least $2 million of equity or debt financing prior to the effectiveness of the amendment. The amendment removed the minimum EBITDA and fixed charge coverage ratio covenants and replace them with a covenant to raise at least $3 million of equity or debt financing by April 30, 2020 and minimum cash covenants, the required levels of which are dependent upon the Company’s achievement of certain revenue, EBITDA and capital raising milestones. Each of the $2 million minimum financing requirement prior to closing of the amendment and the $3 million financing requirement prior to April 30, 2020 were satisfied through the issuance of the $3 million April 2020 Second Subordinated Promissory Note described in “— Subordinated Related Party Term Loans” below. All previously accrued PIK interest was added to accrued principal, and no further PIK interest will accrue. The cash interest would accrue at a rate of the greater of (i) the prime rate reported in the Wall Street Journal plus 11.50% minus 4.25% and (ii) 11.50%. The interest rate was 11.50% at December 31, 2020. The end of term charge of $1,068,750 will be partially extended with $534,375 due on October 1, 2020 and $534,375 due on February 1, 2021. The Company incurred a $50,000 amendment fee upon closing of the amendment.

 

 

Effective September 30, 2020, the Company and Hercules entered into the Third Amendment to Loan and Security Agreement (“Third Amendment”) to provide for interest only payments commencing on October 1, 2020 and continuing through December 22, 2020 unless the Company raises net cash proceeds of at least $25 million through an equity or debt financing or other transaction on or before December 21, 2020. The Third Amendment also amended the minimum cash, minimum net revenue and minimum EBITDA financial covenants. On that same date, Juggernaut Capital Partners III, L.P., Hercules and Wells Fargo Bank, N.A. entered into an escrow agreement (the “Escrow Agreement”) to escrow certain funds in an aggregate amount equal to certain principal payments owed under the Loan Agreement, as amended. In connection with the consummation of the Mergers, the funds held in escrow were disbursed back to Juggernaut Capital Partners III, L.P. and the Escrow Agreement was terminated.

 

The Company satisfied the maturity date extension requirement pursuant to funds retained upon the closing of the Mergers in December 2020. As a result, the Senior Debt now has a maturity date of December 1, 2021.

 

Subordinated Related Party Term Loans

 

On September 30, 2016, the Company executed a Subordination Agreement with Hercules, certain related parties, including JCP III SM AIV, L.P., an affiliate of Juggernaut Capital Partners III, L.P. (the “JCP Investor,” and together with the related parties “the Related Holders”), wherein the Related Holders agreed to subordinate outstanding indebtedness of the Company owed to the Related Holders (“Sub Debt”) to the indebtedness owed under the Loan Agreement. On November 22, 2017, the Company and the Related Holders entered into an Amended and Restated Subordination Agreement (the “Amended Agreement”). Under the terms of the Amended Agreement, the principal balance of the Sub Debt was increased to $30,579,496. The cash interest rate of the amended sub debt was 12%. Additional PIK interest was 8% payable on the maturity date.

 

On December 10, 2018, JCP III CI AIV, L.P., an affiliate of the JCP Investor, acquired from Krivulka Family LLC (“Krivulka”) all of Krivulka’s ownership interest in Metuchen Therapeutics, LLC (“MT”), a holding company that owned 55% of Metuchen, giving the JCP Investor a controlling interest in Metuchen (such transaction, the “JCP Acquisition”). As part of the acquisition accounting for the JCP Acquisition, the outstanding Sub Debt was determined to have a fair value that was less than its carrying value. The fair value of the subordinated related party term loans was $22,250,746 at December 10, 2018. A debt discount of $15,506,463 was recognized and was being amortized to interest expense over the term of the debt using the effective interest method.

 

On December 10, 2018, the Company signed a subordinated promissory note for an additional $4,750,000 of Sub Debt from the JCP Investor. The proceeds were used for the acquisition of the Medical Device Business. The principal, along with PIK interest at an annual rate of 25%, was due on April 2, 2021.

 

On September 16, 2019, the Company entered into an Exchange Agreement (“Exchange Agreement”) with JCP III SM AIV, L.P. and L. Mazur Associates, JV to exchange Preferred and Common Units for the Sub Debt. Upon consummation of the exchange, the Preferred and Common Units issued were for the full satisfaction and termination of the subordinated related party term loan.

 

Instrument		Amount
Common Units, at fair value (2,434,551.28 Units)		$	29,117,232
Preferred Units, at fair value (1,373,820.51 Units)			17,500,000
Total fair value of Preferred and Common Units exchanged			46,617,232
Sub Debt principal balance			33,250,000
Add: PIK Interest			16,544,318
Less: Debt Discount			10,486,536
Total carrying value of Sub Debt exchanged			39,307,782
Excess of fair value of Preferred and Common Units exchanged over the carrying value of Sub Debt		$	(7,309,450	)

 

 

On January 31, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $3.0 million (the “First Subordinated Promissory Note”). The maturity date of the First Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On April 1, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $3.0 million (the “Second Subordinated Promissory Note”). The maturity date of the Second Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On April 22, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $4.0 million (the “Third Subordinated Promissory Note”). The maturity date of the Third Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On July 31, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $2.5 million (the “Fourth Subordinated Promissory Note”). The maturity date of the Fourth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On August 31, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $1.5 million (the “Fifth Subordinated Promissory Note”). The maturity date of the Fifth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On October 1, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $1.5 million (the “Sixth Subordinated Promissory Note,” and together with the First Subordinated Promissory Note, Second Subordinated Promissory Note, Third Subordinated Promissory Note, Fourth Subordinated Promissory Note, and Fifth Subordinated Promissory Note, the “Subordinated Promissory Notes”). The maturity date of the Sixth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

In connection with the entry into the Merger Agreement on May 17, 2020, Juggernaut Capital Partners LLP, Neurotrope and Metuchen entered into a Note Conversion and Loan Repayment Agreement pursuant to which, Juggernaut Capital Partners LLP agreed to convert all of the above outstanding subordinated promissory notes and accrued PIK interest of the Company held by Juggernaut Capital Partners LLP and the JCP Investor, into Petros common stock in connection with the consummation of the Mergers on December 1, 2020, and the Subordinated Promissory Notes were terminated. Accordingly, the principal balance of the subordinated promissory notes and accrued PIK interest was $0 as of December 31, 2020.

 

Private Placement

 

On September 16, 2019, the Company consummated a Private Placement (“Private Placement”) with V4 Capital Partners, LLC (“Lead Investor”) and other accredited investors (collectively, the “Investors”). In connection with the Private Placement, the Company agreed to issue and sell up to $3.5 million of the Company’s preferred units. Each preferred unit had an offering price of $12.7382 per unit. The Company issued 245,933 preferred units related to the Private Placement and received aggregate net proceeds from the Private Placement of $2.7 million.

 

The preferred units maintained a 5% non-cumulative quarterly dividend, include one vote per unit on all matters to be voted upon by common unit holders and require a mandatory conversion upon the closing of a qualified public offering, with the conversion price being subject to adjustment if the price per share in the qualified public offering was less than $15.92275 per preferred unit. Subject to adjustment, each preferred unit could be converted into one common unit.

 

 

In connection with the Private Placement, the Lead Investor received warrants (“Lead Investor Warrants”) to purchase an aggregate of 615,838.50 shares of the Company’s preferred units at an exercise price of $0.01 per preferred unit. The Lead Investor Warrants had an expiration date of September 16, 2020. The Company allocated the proceeds of $250,000 received from the Lead Investor for the Preferred Units between the Lead Investor Warrants and the beneficial conversion feature for the embedded conversion option. Of the proceeds received, the relative fair value allocated to the Lead Investor Warrants was $223,500 and was recorded in additional paid-in capital. In September 2020, the Company and the Lead Investor warrant holders amended the warrants to purchase an aggregate of 2,055,114.66 shares of the Company’s preferred units at an exercise price of $0.01 per preferred unit. The amendment also extended the expiration date to December 16, 2020. In November 2020, the Lead Investor warrant holders exercised their right to purchase 2,055,114.66 of the Company’s preferred units and the Company received $20,551 in proceeds.

 

Also, in connection with the Private Placement, the placement agent received warrants (“Placement Agent Warrants”) to purchase an aggregate of 10,500 shares of the Company’s common stock at an exercise price of $12.7382 per share. The Placement Agent Warrants contained an expiration date of September 16, 2024 and were converted into shares of common stock of the Company upon consummation of the Mergers. As of the date of issuance, the fair value of the Placement Agent Warrants was estimated to be $135,800 and was recorded in additional paid-in capital. The Placement Agent Warrants did not meet the criteria for liability classification and will be classified within equity as they are indexed to the Company’s stock.

 

Cash Flows

 

The following table summarizes our cash flows for the years ended December 31, 2020 and 2019:

 

		For the Years Ended December 31,
		2020				2019
Net cash (used in) provided by operating activities		$	(15,305,325	)		$	2,532,479
Net cash used in investing activities			(4,633	)			(71,540	)
Net cash provided by (used in) financing activities			30,303,840				(3,109,252	)
Net (decrease) increase in cash		$	14,993,882			$	(648,313	)

 

Cash Flows from Operating Activities

 

Net cash used in operating activities for the year ended December 31, 2020 was $15,305,325, which primarily reflected our net loss of $20,585,925, partially offset by cash adjustments to reconcile net loss to net cash used in operating activities of $10,881,149 consisting primarily of depreciation and amortization, non-cash paid-in-kind interest, inventory obsolescence reserves, changes in the fair value of derivative liability, and changes in operating assets and liabilities of $5,600,549.

 

Net cash provided by operating activities for the year ended December 31, 2019 was $2,532,479, which primarily reflected our net loss of $32,511,300, more than offset by adjustments to reconcile net loss to net cash provided by operating activities of $21,949,812 consisting primarily of depreciation and amortization, non-cash paid-in-kind interest and amortization of deferred financing costs and debt discount, and changes in operating assets and liabilities of $13,093,967.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $4,633 and $71,540 for the years ended December 31, 2020 and 2019, respectively, related to the acquisition of fixed assets.

 

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities was $30,303,840 for the year ended December 31, 2020, consisting of net proceeds received from the Mergers in December 2020 of $21,549,375 and the issuance of subordinated related party term loans of $15,500,000, partially offset by payments on the senior debt of $6,181,711 and a payment for the senior debt end-of-term fee of $534,375.

 

Net cash used in financing activities was $3,109,252 for the year ended December 31, 2019, consisting of payments on the senior debt of $6,013,257, partially offset by proceeds received from the private placement offering of $2,904,005.

 

Off-Balance Sheet Commitments and Arrangements

 

We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements included as Exhibit 99.1 to this Form 10-K. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 

Reconciliation of Non-GAAP Financial Measures

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure utilized by management to evaluate the Company’s performance on a comparable basis. The Company believes that Adjusted EBITDA is useful to investors as a supplemental way to evaluate the ongoing operations of the Company’s business as Adjusted EBITDA may enhance investors’ ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization and to evaluate the Company’s ability to service debt. In addition, Adjusted EBITDA is a financial measurement that management and the Company’s Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net income as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

 

Adjusted EBITDA is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.

 

 

The Company defines Adjusted EBITDA as net income (loss) adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) income taxes, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance or that are non-recurring in nature. For example, Adjusted EBITDA:

 

	•	does not reflect the Company’s capital expenditures, future requirements for capital expenditures or contractual commitments;
	•	does not reflect changes in, or cash requirements for, the Company’s working capital needs;
	•	does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debt; and
	•	does not reflect payments related to income taxes, if applicable.

 

The following table presents a reconciliation of Net loss to Adjusted EBITDA for the years ended December 31, 2020 and 2019.

 

		For the Years Ended December 31,
		2020				2019
Net loss		$	(20,585,925	)		$	(32,511,300	)
Interest expense, senior debt			1,323,424				2,428,264
Interest expense, related party term loans			1,727,455				11,416,697
Income tax expense (benefit)			(1,426,993	)			(645,866	)
Depreciation and amortization expense			6,660,438				5,291,107
EBITDA			(12,301,601	)			(14,021,098	)
Change in fair value of derivative liability			1,680,000				-
API Inventory reserves			830,679				1,174,428
Impairment loss			-				2,443,930
Adjusted EBITDA			(9,790,922	)			(10,402,740	)

 

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.

 

Gross Sales

 

Gross sales is a non-GAAP financial measure utilized as a key performance metric by management and the Company’s Board of Directors in their financial and operational decision-making as well as for the preparation of the annual budget. The Company believes that Gross sales is useful to investors as a supplemental way to provide an alternative measure of the total demand for the products sold by the Company. Gross sales is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net sales as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of gross sales may not be comparable to similarly titled measures reported by other companies.

 

Gross sales is adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.

 

 

The Company defines gross sales as the amount of its aggregate sales billed to customers at standard prices before the application of certain adjustments that reduce the net amount received from customers, including product returns, certain rebates and coupon redemptions, discounts and fees.

 

The following table presents a reconciliation of Net sales to Gross sales for the years ended December 31, 2020 and 2019.

 

		For the Years Ended December 31
		2020				2019
Net Sales		$	9,559,469			$	15,577,166
Product Returns			1,177,473				8,726,460
Medicaid/Medicare Rebates			-				900
Contract Rebates			3,772,001				4,328,588
Chargebacks			1,378,742				161,730
Cash Discounts			274,592				442,378
Distribution Service Fees			1,887,334				3,035,272
Coupon Redemptions			2,690,357				2,189,756
Gross Sales		$	20,739,968			$	34,462,250

 

Gross sales has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.

 

ITEM 7A.

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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our audited consolidated financial statements as of, and for the years ended December 31, 2020, and December 31, 2019 are included beginning on Page F-1 immediately following the signature page to this Annual Report. See Item 15 for a list of the financial statements included herein.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.

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)) as of December 31, 2020. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, because of certain weaknesses in internal control over financial reporting discussed below under “Management’s Report on Internal Control over Financial Reporting,” our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934, as amended, 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.

 

 

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 report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

·

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of its assets;

 

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and

 

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on our consolidated financial statements.

 

All internal control systems, no matter how well designed, have inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

As of December 31, 2020, our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of U.S. generally accepted accounting principles (“GAAP”) as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that may be considered to be material weaknesses. The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were:

 

·

Petros currently 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. This restricts the Company’s ability to gather, analyze and report information relative to the financial statements in a timely manner, including timely and adequate review of schedules and analysis used in the financial close process and the documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. The company should evaluate their significant processes to ensure the key controls are being carried out as designed;

 

·

The sizes of Petros’ accounting and IT departments make it impracticable to achieve an appropriate segregation of duties;

 

·

Petros does not have appropriate IT access related controls, specifically:

 

o

Elevated privileges such as administrator access to financial systems are not always assigned to individuals who do not bear responsibility for performing financial reporting or posting financial transaction (e.g., IT personnel).

 

o

There are no limited number of password attempts before account lockout.

 

o

There is no maximum length of days a password can be in use.

 

The Company should implement mitigating controls that would prevent or detect (in a timely manner) unauthorized transactions that might result.

 

 

The material weaknesses did not result in any identified misstatements to the consolidated financial statements and there were no changes to previously released financial results.

 

Management’s Remediation Initiatives

 

In an effort to remediate identified material weaknesses and other deficiencies and enhance our internal controls, we effected certain measures including additional closing procedures, hiring of additional financial consultants, and other review and approval processes by our management team. The remediation efforts will include the implementation of additional controls to ensure all risks have been addressed. Preparation of a GAAP disclosure checklist with appropriate review procedures will ensure that accounting guidance and disclosure requirements have been addressed. Third party contracts with key service providers will be updated to ensure that all control activities performed are defined as to service levels and appropriate review procedures of these services are implemented. We will, as resources permit, hire additional personnel to allow for segregation of duties.

 

As a result of the material weaknesses discussed above or of others, we may experience negative impacts on our ability to accurately report our results of operation and financial condition in a timely manner. If we do identify a material weakness in our internal control over financial reporting and are unsuccessful in implementing or following a remediation plan, or fail to update our internal control over financial reporting as our business evolves or to integrate acquired businesses into our controls system, if additional material weaknesses are found in our internal controls in the future, or if our external auditors cannot attest to the effectiveness of our internal control over financial review, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, an inability for us to be accepted for listing on any national securities exchange in the near future, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our Common Stock. Further, there are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. We could face additional litigation exposure and a greater likelihood of an SEC enforcement or other regulatory action if further restatements were to occur or other accounting-related problems emerge.

 

The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting identified in connection with the evaluation referred to above that occurred during our last completed fiscal quarter that has materially negatively affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

We have kept the same finance and internal controls function in place as at Petros. Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules.

 

ITEM 9B.

OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

Board of Directors

 

The Petros Board of Directors (the “Board”) is currently composed of five members of the Board (each, a “Director”). Under the amended and restated Bylaws of the Company, the number of Directors will be fixed from time to time by resolution of the Board or the stockholders at an annual meeting of the stockholders, and Directors serve until the next annual election and their successors are duly elected and qualified, or upon their earlier resignation, removal or death.

 

Below is a list of the names, ages as of March 20, 2021 and position of the individuals who currently serve as our Directors or are Director nominees to be elected at the 2021 Annual Meeting.

 

Name			Age			Position
John D. Shulman			57			Executive Chairman of the Board
Joshua N. Silverman			50			Vice Chairman of the Board
Bruce T. Bernstein			56			Director
Gregory Bradley			60			Director
Wayne R. Walker			61			Director

 

Director Biographies

 

Information concerning our continuing Directors and Director nominees is set forth below. The biographical description of each continuing Director and Director nominee includes the specific experience, qualifications, attributes and skills that led the Board to conclude that such person should serve as a Director.

 

John D. Shulman — Mr. Shulman joined Petros as Executive Chairman of the Board in 2020. Mr. Shulman founded Juggernaut Capital Partners, LLP in 2009 and leads its Investment Committee. He has over 25 years of experience with private investments, primarily into the consumer, pharmaceutical and business services sectors. Previously, Mr. Shulman was a Managing Director from 2001 to 2009 at Allied Capital Corporation, where he was a member of the Management and Investment Committees. He sits on the following Boards of Directors or Managers: Amerex Group, Ceuta Group, Foundation Consumer Healthcare, Integrated Beverage Group, Puori ApS and VOSS of Norway AS. Mr. Shulman received a B.S. in Finance from the University of Virginia. Mr. Shulman’s financial, leadership, and operational expertise enable him to contribute valuable insights into strategic governance, operations and planning for the Company.

 

Joshua N. Silverman — Mr. Silverman joined Petros as Vice Chairman of the Board in 2020. He is currently the Co-Founder and Managing Member of Parkfield Funding LLC, a member of the Board of Directors of Petros, and is a former Principal and Managing Partner of Iroquois Capital Management, LLC (“Iroquois”). Mr. Silverman served as Co-Chief Investment Officer of Iroquois from 2003 until July 2016. From 2000 to 2003, Mr. Silverman served as Co-Chief Investment Officer of Vertical Ventures, LLC, a merchant bank. Prior to forming Iroquois, Mr. Silverman was a Director of Joele Frank, a boutique consulting firm specializing in mergers and acquisitions. Previously, Mr. Silverman served as Assistant Press Secretary to The President of The United States. Mr. Silverman received his B.A. from Lehigh University in 1992. In the past five years, Mr. Silverman serves or has served on the boards of directors of Ayro Inc., Akers Bioscience, Inc., Marker Therapeutics, Inc., MGT Capital Investments Inc., National Holdings Corporation, Neurotrope, Inc., Protagenic Therapeutics, Inc., Synaptogenix, Inc. and TapImmune, Inc. Mr. Silverman’s financial, leadership, and operational expertise enable him to contribute valuable insights into strategic governance, operations and planning for the Company.

 

 

Bruce T. Bernstein — Mr. Bernstein joined Petros as a Director in 2020. Mr. Bernstein was a member of the Board of Neurotrope from 2016 to 2020 and is currently on the Board of Synaptogenix, Inc., the operating subsidiary of Neurotrope, which was spun off from Neurotrope in December 2020. Mr. Bernstein has over thirty years of experience in the securities industry, primarily as senior portfolio manager for two alternative finance funds as well as in trading and structuring of arbitrage strategies. Mr. Bernstein has served as President of Rockmore Capital, LLC since 2006, the manager of a direct investment and lending fund with peak assets under management of $140 million. Previously, he served as Co-President of Omicron Capital, LP, an investment firm based in New York, which he joined in 2001. Omicron Capital focused on direct investing and lending to public small cap companies and had peak assets under management of $260 million. Prior to joining Omicron Capital, Mr. Bernstein was with Fortis Investments Inc., where he was Senior Vice President in the bank’s Global Securities Arbitrage business unit, specializing in equity structured products and equity arbitrage and then President in charge of the bank’s proprietary investment business in the United States. Prior to Fortis, Mr. Bernstein was Director in the Equity Derivatives Group at Nomura Securities International specializing in cross-border tax arbitrage, domestic equity arbitrage and structured equity swaps. Mr. Bernstein started his career at Kidder Peabody, where he rose to the level of Assistant Treasurer. Mr. Bernstein also serves as a member of the Board of Directors of XpresSpa Holdings, the leading airport spa company in the world, based in New York. Mr. Bernstein is also a member of the board of Summit Digital Health, a laser based blood glucose monitor distributor, based in New Jersey. Mr. Bernstein holds a B.B.A. from City University of New York (Baruch). Mr. Bernstein’s banking, accounting and finance expertise enable him to contribute valuable insights into accounting and financial matters for the Company.

 

Gregory Bradley — Mr. Bradley joined Petros as a Director in 2020. Mr. Bradley is the President and CEO of Foundation Consumer Healthcare (“FCH”), which is a fast growing over the counter (“OTC”) consumer healthcare company with iconic brands including important emergency contraception solutions like Plan B One-Step and Take Action. Plan B and Take Action are the #1 and #2 selling OTC SKUs in the entire US market. Prior to creating FCH in 2014 in partnership with Juggernaut Capital Partners, Greg had 32 years of experience in the pharmaceutical and consumer packaged goods industries, including his role as Head of the US Operating Team for GlaxoSmithKline Consumer Healthcare until 2011, and CEO of Advantage Consumer Healthcare from 2011 - 2014. He has extensive experience including sales, marketing, supply chain and general management. Greg has helped create mega brands in the CPG industry in every facet of their development and commercial success. Greg is a magna cum laude graduate of Indiana University of Pennsylvania and serves on multiple industry boards and associations, including his current Executive Committee Board role with the Consumer Healthcare Products Association. Mr. Bradley’s operational expertise enable him to contribute valuable insights into strategic governance, operations and planning for the Company.

 

Wayne R. Walker — Mr. Walker joined Petros as a Director in 2020. Mr. Walker is the president of Walker Nell Partners, Inc., an international business consulting firm which he founded in 2003 and has been its Managing Partner since 2004. In his role at Walker Nell, he has served on a number of private and public company boards. Mr. Walker has also been an Independent Director at Wrap Technologies, Inc. and the Pitcairn Company since 2018. Before founding Walker Nell, from 1984 to 1998, Mr. Walker worked at the DuPont Company in Wilmington, Delaware in the Securities and Bankruptcy group, where he worked in the Corporate Secretary’s office and served as Senior Counsel. In addition, from 2001 to 2004, Mr. Walker was a partner at Parente Beard, now known as Baker Tilly and Cohn Reznick, LLP from 2015 to 2018. Additionally, from 1995 to 1998, Mr. Walker served as Chairman of the Board of Directors of Habitat for Humanity International, then a $400 million plus global non-profit housing organization spanning 60 countries. Prior to becoming Chairman of the Board of Directors, Mr. Walker held positions of corporate secretary and Chairman of the Executive and Human Resource Committees of the board at Habitat for Humanity International from 1992 to 1995. Mr. Walker holds a Doctor of Jurisprudence (JD) from Catholic University (Washington, D.C.) and a Bachelor of Arts from Loyola University (New Orleans). Mr. Walker’s accounting and operational expertise enable him to contribute valuable insights into operations and accounting for the Company.

 

Executive Officers

 

Below is a list of the names, ages as of March 20, 2021, positions, and a brief account of the business experience of the individuals who serve as our executive officers.

 

Name			Age			Position
Fady Boctor, MBA			43			President and Chief Commercial Officer
Mitchell Arnold, MBA			57			Vice President of Finance and Chief Accounting Officer
Andrew Gesek, MBA			50			President, Timm Medical

 

 

Executive Officer Biographies

 

The principal occupation and business experience for at least the past five years for our executive officers is as follows:

 

Fady Boctor, M.B.A. — Mr. Boctor has served as President and Chief Commercial Officer of Petros since 2020. Mr. Boctor has over 20 years of experience in the pharmaceutical industry, across a wide array of functions including brand and portfolio marketing, sales channel optimization, product portfolio strategy development and new product launches. Mr. Boctor has driven significant revenue growth for mainstream men’s health product lines, rare/orphan disease therapeutics, and substance abuse rescue modalities. Mr. Boctor previously served as Vice President of Marketing at Metuchen Pharmaceuticals, a position he held since March 2019. From May 2017 to March 2019, Mr. Boctor served as Director of Marketing for Adapt Pharma, Inc. Prior to joining Adapt Pharma, Inc., Mr. Boctor held various roles at Endo International plc from Mar 2010 to May 2017, most recently holding the position of Senior Brand/Marketing Manager. Mr. Boctor holds a B.A. in International Relations from Hamline University, a Masters in Diplomacy from Norwich University and an M.B.A. from the University of Manchester Business School.

 

Mitchell Arnold, M.B.A. — Mitchell Arnold has served as the Vice President of Finance and Chief Accounting Officer of Petros since 2021. Mr. Arnold, age 57, has served as Vice President of Finance of the Company since 2019. Mr. Arnold brings to the Company over 30 years of experience in organizational leadership in finance and accounting roles at both public and private companies, where he was successful in improving financial performance, cash flows, accounting processes, SOX compliance and ERP systems. Prior to joining the Company, from 2011 to 2018, Mr. Arnold served as Vice President of Financial Accounting at Akrimax Pharmaceuticals, LLC where he provided strategic guidance of accounting and finance, treasury management, risk management and insurance, information technology and facilities management. Mr. Arnold holds a Master of Business Administration degree in Finance from Temple University and a Bachelor of Science degree in Accounting from Pennsylvania State University.

 

Andrew Gesek, M.B.A. — Mr. Gesek serves as the President of Timm Medical, a position he has held since January 2016. Mr. Gesek, age 50, brings over twenty years of diverse commercial and financial experience to the table. Prior to taking on the role at Timm Medical, Mr. Gesek served from October 2009 to December 2015 as Vice President, Commercial Operations and Business Strategy & General Manager, Established Brands Portfolio for Endo International plc, where he worked closely with the President of the Branded Pharmaceuticals business to set, measure and refine the strategy for the business unit while leading a team of 20 people who provided operational support to the business. From October 2009 to December 2015, Mr. Gesek held the position of Senior Director, Business Strategy & New Product Planning at Endo International plc. After starting his career in finance at Janssen Pharmaceutica, Mr. Gesek transitioned to pharmaceutical sales and over the course of twenty years has worked in areas including: Finance, Sales, Sales Operations, Forecasting, Valuation Commercial Analytics, Business Development and Corporate Strategy in companies including Janssen, Novartis International AG, Pharmacia & Upjohn, Wyeth, LLC, Pfizer Inc., and British Technology Group International. Mr. Gesek holds a B.S. in Accounting and Finance from Drexel University and an M.B.A. from the Wharton School of Business.

 

There is no arrangement or understanding between any of the directors or officers identified above and any other person pursuant to which he was selected as a director or officer. None of the directors or officers identified above is, or has been, a participant in any transaction involving the Company, and is not a participant in any proposed transaction with the Company, in each case, required to be disclosed pursuant to Item 404(a) of Regulation S-K.

 

Director Independence

 

Our Board has reviewed the materiality of any relationship that each of our Directors and Director nominees has with Petros, either directly or indirectly. Based upon this review, our Board has determined that the following Directors and Director nominees are “independent directors” as defined by The Nasdaq Stock Market:

 

Joshua N. Silverman

Bruce T. Bernstein

Gregory Bradley

Wayne R. Walker

 

Board Committees

 

Our Board has established three committees, each of which is composed solely of independent directors:

 

	·	The Audit Committee consists of Mr. Bernstein, as Chairman, Mr. Silverman and Mr. Walker.
	·	The Compensation Committee consists of Mr. Silverman, as Chairman, Mr. Bernstein and Mr. Walker.
	·	The Nominating and Corporate Governance Committee consists of Mr. Walker, as Chairman, Mr. Bernstein and Mr. Bradley.

 

 

Each of the committees has a written charter adopted by the Board; a current copy of each such charter is available in the “Investors & Press” section on our website, http://www.petrospharma.com/investors.

 

Audit Committee

 

Our Audit Committee provides oversight of our accounting and financial reporting process, the audit of our financial statements and our internal control function. Among other matters, the Audit Committee is responsible for the following:

 

	·	appointment, compensation, and oversight the independent auditor’s services to the Company;
	·	reviewing the scope of the annual audit and non-audit services of the independent auditor and reviewing and discussing with management and the independent auditor the results of the annual audit and the review of our quarterly financial statements, including the disclosures in our annual and quarterly reports filed with the SEC;
	·	evaluating the independence of the independent auditors;
	·	evaluating and discussing with management the adequacy and effectiveness of the Company’s accounting and internal control policies and procedures;
	·	reviewing our risk assessment and risk management processes; and
	·	establishing procedures for receiving, retaining and investigating complaints received by us regarding accounting, internal accounting controls or audit matters.

 

All members of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. Our Board has determined that Mr. Bernstein is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication under the applicable rules and regulations of Nasdaq. All of the members of our Audit Committee are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq.

 

The Audit Committee was established on December 1, 2020 and held no meetings in 2020. The Board has determined that each member of the Compensation Committee is an independent director in accordance with the rules of The Nasdaq Stock Market and applicable federal securities laws and regulations.

 

Compensation Committee

 

The Compensation Committee, among other things, (i) oversees the Company’s compensation plans and practices with respect to the Company’s executive officers and directors, (ii) evaluates the performance of the executive officers of the Company, and (iii) administers the Company’s stock and incentive compensation plans and recommends changes in such plans to the Board as needed.

 

The Compensation Committee was established on December 1, 2020 and held no meetings in 2020. The Board has determined that each member of the Compensation Committee is an independent director in accordance with the rules of The Nasdaq Stock Market and applicable federal securities laws and regulations.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee assists the Board in, among other things, (i) identifies individuals qualified to become members of the Board with the goal of ensuring that the Board has the requisite expertise and that its membership consists of persons with sufficiently diverse and independent backgrounds, (ii) recommends that the Board select director nominees for election to the Board at the next annual meeting of stockholders or to fill any vacancy that occurs on the Board or any Board Committee, (iii) reviews management development and succession plans for the executive officers and their direct reports, (iv) oversees the annual self-evaluations of the Board, (v) develops and maintains the Company’s corporate governance policies and practices, including identifying best practices, and (vi) reviews and reassesses the Nominating and Corporate Governance Committee charter.

 

The Nominating and Corporate Governance Committee has adopted a formal policy regarding stockholder recommendations of director nominees, available in the “Investors & Press” section on our website, http://www.petrospharma.com/investors. The Nominating and Corporate Governance Committee considers any timely submitted and qualified director candidates recommended by any security holder entitled to vote in an election of Directors. Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee must do so by delivering a written recommendation to the Nominating and Corporation Governance Committee c/o Petros Pharmaceuticals, Inc., 1185 Avenue of the Americas, Third Floor, New York, New York 10036. The submission mush set forth: (1) the name and address of the stockholder on whose behalf the submission is made; (2) the number and class of shares of the Company that are owned beneficially by such stockholder as of the date of the submission; (3) the name and address of the proposed candidate; and (4) the resume of the proposed candidate.

 

 

Pursuant to our by-laws, nominations of persons for election to the Board at an annual meeting or at any special meeting of stockholders for the purpose of electing directors may be made by or at the direction of the Board, by any nominating committee or person appointed for such purpose by the Board, or by any stockholder of record entitled to vote for the election of directors at the meeting who complies with the following notice procedures. Such nominations, other than those made by, or at the direction of, or under the authority of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Company by a stockholder of record at such time. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Company (a) in the case of an annual meeting, not less than 90 nor more than 120 days prior to the one-year anniversary of the date of the annual meeting of the previous year; provided, however, that if the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received no earlier than 120 days prior to such annual meeting and not later than the close of business on the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders for the purpose of electing directors, not earlier than 120 days prior to such special meeting and not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. Such stockholder’s notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Company, if any, which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Exchange Act or other applicable law; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the Company which are beneficially owned by the stockholder. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and the defective nomination will be disregarded.

 

The Nominating and Corporate Governance Committee was established on December 19, 2020 and held no meetings in 2020. The Board has determined that each member of the Nominating and Corporate Governance Committee is an independent director in accordance with the rules of The Nasdaq Stock Market and applicable federal securities laws and regulations.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to all of our employees, officers and directors (including our principal executive officer and principal financial officer and principle accounting officer). Our Code of Ethics is available to security holders in the “Investors & Press” section on our website, http://www.petrospharma.com/investors.

 

Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has been involved in any of the following events during the past ten years:

 

·

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

·

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

·

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; or

 

·

being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee consists of Mr. Silverman, as Chairman, Mr. Bernstein and Mr. Walker. No member of the Compensation Committee has been an officer or employee of the Company. None of our executive officers serves on the board of directors or compensation committee of a company that has an executive officer that serves on our Board or Compensation Committee.

 

 

Family Relationships

 

There are no family relationships among our directors or executive officers.

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires our directors and executive officers and each person who owns more than ten percent of a registered class of our equity securities (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and our other equity securities. Reporting Persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms that they file. Based solely on the Company’s review of the copies of the forms received by it during the fiscal year ended December 31, 2020 and written representations that no other reports were required, the Company believes that each person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than ten percent of the Company’s common stock complied with all Section 16(a) filing requirements during such fiscal year, except for one non-timely Form 3 filed by co-filers Metuchen Therapeutics, LLC and METP Holdings, LLC and one non-timely Form 4 filed by co-filers Metuchen Therapeutics, LLC and METP Holdings, LLC reporting one transaction by each.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The Board is responsible for evaluating and approving the compensation of executive officers. The major elements of Petros’ compensation program include:

 

·

base salary;

 

·

cash bonus incentive opportunities tied to Petros’ performance and certain employment agreements;

 

·

retirement benefits through a qualified defined contribution scheme (such as a 401(k) plan in the United States); and

 

·

other benefit programs generally available to all U.S. and non-U.S. employees that are customary and appropriate for the country in which the employee is operating.

 

Petros’ compensation objectives.

 

		Description		Performance/ Job Considerations		Primary Objectives
Base Salary		Fixed cash amount.		Increases based upon individual performance against goals, objectives and job criteria such as executive qualifications, responsibilities, role criticality, potential and market value.		Recruit qualified executives or personnel. Retention of personnel.
Cash Incentive Opportunity		Short-term incentive, annual bonus opportunities.		Amount of actual payment based on achievement of corporate financial goals, key strategic and operating objectives.		Promote achievement of short-term financial goals and strategic and operating objectives.
Retirement and Welfare Benefits		401(k) plan, health and insurance benefits.		None, benefits offered to broad workforce.		Recruit qualified employees.

 

 

 

Petros provides base salary based on the executive officers’ individual responsibilities and performance. Petros offers bonus opportunities to certain executive officers and employees based primarily on company performance. See “Employment Agreements” below. Petros’ compensation decisions and salary adjustments are generally evaluated on a calendar year basis.

 

 

Summary Compensation Table

 

The following table shows compensation awarded to, paid to or earned by, Petros’ principal executive officer and principal accounting officer and Petros’ two other most highly compensated executive officers during the fiscal years ended December 31, 2020 and 2019.

 

Name and Principal Position		Year				Salary ($)				Bonus ($) (1)				Non-equity Incentive Plan Compensation ($) (2)				All Other Compensation ($) (3)				Total ($)
Fady Boctor			2020				275,725				125,000				-				67,125				467,850
President and Chief Commercial Officer			2019				208,333				50,000				-				81,412				339,745
Mitchell Arnold			2020				236,250				50,000				-				68,384				354,634
Vice President of Finance and Chief Accounting Officer
Andrew Gesek			2020				270,000				75,000				-				62,423				407,423
President, TIMM Medical			2019				300,000				-				234,688				70,250				604,937
Greg Ford (4)			2020				186,630				-				-				66,070				252,700
Chief Executive Officer			2019				367,744				-				-				82,655				450,399
Keith Lavan (5)			2020				316,856				50,000				-				95,602				462,458
Chief Financial Officer			2019				335,297				-				-				78,005				413,302

 

(1) Reflects a $50,000 signing bonus paid to Mr. Boctor upon being hired by the Company in 2019 and a $125,000 bonus paid to Mr. Boctor upon becoming the President and Chief Commercial Officer in 2020. See “Employment Agreements” below. Reflects a $50,000 bonus paid to Mr. Arnold in 2020. Reflects $75,000 bonus paid to Mr. Gesek for extending his term of employment in 2020. Reflects a $50,000 retention bonus paid to Mr. Lavan in 2020.

 

(2) Reflects performance-based cash bonuses awarded to Mr. Gesek pursuant to the terms of his employment agreement, including a $75,000 deferred signing bonus and a $159,688 bonus in connection with the sale of Timm Medical Technologies received in 2019. See “Employment Agreements” below.

 

(3) Amounts in this column reflect 401(k) contributions, insurance premiums (life, long term disability, short term disability, health and dental), and, for Mr. Ford, Mr. Lavan, and Mr. Arnold, car allowances, and, for Mr. Ford and Mr. Lavan, accrued vacation pay and represents for 2020: for Mr. Boctor, $14,233 for contributions under Metuchen’s 401(k) plan and $52,892 of insurance premiums; for Mr. Arnold, $14,064 for contributions under Metuchen’s 401(k) plan, $52,820 of insurance premiums, and $1,500 as a car allowance; and for Mr. Gesek, $9,531 for contributions under Metuchen’s 401(k) plan and $52,892 of insurance premiums; for Mr. Ford, $5,809 for contributions under Metuchen’s 401(k) plan, $52,853 of insurance premiums, $2,250 as a car allowance and $5,158 of accrued vacation pay; and for Mr. Lavan, $14,128 for contributions under Metuchen’s 401(k) plan, $52,892 of insurance premiums, $1,500 as a car allowance and $27,082 of accrued vacation pay. For 2019, this represents: for Mr. Ford, $16,800 for contributions under Metuchen’s 401(k) plan, $58,355 of insurance premiums, and $7,500 as a car allowance; for Mr. Gesek, $11,200 for contributions under Metuchen’s 401(k) plan, $59,050 of insurance premiums; for Mr. Lavan, $14,250 for contributions under Metuchen’s 401(k) plan, $58,755 of insurance premiums, and $5,000 as a car allowance; and for Mr. Boctor, $15,500 for contributions under Metuchen’s 401(k) plan, $58,912 of insurance premiums, and a $7,000 as a car allowance.

 

(4) Mr. Ford served as Chief Executive Officer until July 14, 2020.

 

(5) Mr. Lavan served as Chief Financial Officer until December 24, 2020.

 

 

Employment Agreements

 

Fady Boctor

 

On January 24, 2019, the Company provided an offer letter to Mr. Boctor. The offer letter provided for Mr. Boctor’s at-will employment and set forth his initial base salary as $250,000 per annum ($208,333 was paid pro-rata based on his start date of March 1, 2019), a signing bonus of $50,000, eligibility for an annual bonus with a target of 36% of his base salary and additional incentive bonuses, and eligibility to participate in the Company’s benefit plans generally. Mr. Boctor is subject to the Company’s standard confidentiality, non-competition and invention assignment agreement.

 

On December 11, 2020 and in connection with the commencement of Mr. Fady Boctor’s employment as the President and Chief Commercial Officer of Petros, the Company and Mr. Boctor entered into a Bonus Agreement (the “Bonus Agreement”), pursuant to which Petros agreed to award Mr. Boctor a bonus in the amount of $125,000 payable on December 15, 2020. The Bonus Agreement provides that in the event that Mr. Boctor is not employed by Petros on June 11, 2022, he shall be obligated to repay such amount to Petros, unless his employment was terminated by Petros without “Cause” or by Mr. Boctor for “Good Reason” as such terms are defined in the Bonus Agreement.

 

Effective as of February 19, 2021, the Company entered into an employment offer letter (the “Employment Offer Letter”) with Mr. Boctor, pursuant to which, Mr. Boctor will serve in an “at-will” capacity, at an initial base salary of $350,000 per annum. Mr. Boctor received a signing bonus in the amount of $250,000 (the “Signing Bonus”), payable in two equal installments of $125,000 each, the first of which was paid to Mr. Boctor in December 2020, and the second will be paid to Mr. Boctor as soon as practicable following May 1, 2021, provided that Mr. Boctor remains employed with the Company on such date. The Employment Offer Letter provides that in the event that Mr. Boctor does not remain employed by Petros on May 1, 2022, he shall be obligated to repay to Petros the Signing Bonus, unless his employment was terminated by Petros without “Cause” or by Mr. Boctor for “Good Reason” as such terms are defined in the Employment Offer Letter. Additionally, commencing in calendar year 2021, Mr. Boctor will be eligible to earn an annual cash bonus (the “Annual Bonus”) in respect of each calendar year that ends during the term of his employment, to be earned based on the achievement of performance objectives determined in the discretion of the Compensation Committee. Each Annual Bonus will be targeted at 100% of Mr. Boctor’s then-base salary. Mr. Boctor will be entitled to participate in all employee benefit plans, policies, programs or privileges made available to similarly situated employees of Petros. The Employment Offer Letter contains customary restrictive covenants and confidentiality obligations and provides that Mr. Boctor will be subject to non-competition and non-solicitation covenants during the term of his employment with Petros and for a period of one-year following Mr. Boctor’s separation from the Company under any circumstances.

 

In consideration of entering into the Employment Offer Letter, Mr. Boctor was granted an option to purchase up to 215,669 shares of the Company’s Common Stock, par value $0.0001 per share, at an exercise price of $3.74 per share (the “Options”). The Options vested 50% as of February 19, 2021, the date of grant, and the remainder shall vest in equal installments on the first and second anniversary thereof.

 

Andrew Gesek

 

On December 10, 2018, the Company entered into an employment agreement with Mr. Gesek, pursuant to which Mr. Gesek served as the Company’s Chief Operating Officer. Under his employment agreement, Mr. Gesek is entitled to an initial annual base salary of $300,000. Additionally, Mr. Gesek was eligible to receive a deferred cash signing bonus of $75,000 on January 15, 2019, an annual performance bonus with a target of up to 35% of his then-current base salary, contingent upon satisfaction of corporate performance goals, a retention bonus of $100,000 contingent upon satisfaction of corporate performance goals and Mr. Gesek’s continued employment with the Company as of the twelve (12) month anniversary of his start date, and an extension bonus of up to $75,000 payable in monthly installments between January and June 2020, contingent upon Mr. Gesek’s continued employment through June 30, 2020. The agreement also provided Mr. Gesek with the opportunity to earn ten percent (10%) of the net proceeds in excess of six million dollars ($6,000,000) of any sale of all or substantially all of Timm Medical Technologies or Pos-T-Vac, LLC or their constituent businesses, and to receive twenty percent (20%) of the gross profits (less direct expenses) of sales for the first twelve (12) months under a contract with the U.S. Department of Veterans Affairs, if he was able to secure such a contract in the first eighteen (18) months of the term of the employment agreement (the “VA Payment”).

 

Pursuant to Mr. Gesek’s employment agreement, upon termination of his employment without cause or his resignation for good reason (each as defined therein), Mr. Gesek will be entitled to receive (i) his salary, accrued vacation and PTO through the termination date, and (ii) the VA Payment, if he has submitted a bid prior to termination and a contract is entered into within six (6) months of his termination.

 

 

Accounting and Tax Considerations

 

Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that a public company may deduct as a business expense in any year with respect to such company’s chief executive officer, certain other named executive officers, and all “covered employees” as defined by Section 162(m). This deduction limitation did not previously apply to Metuchen as a private company.

 

The Company’s Compensation Committee intends to maximize deductibility of compensation under Section 162(m) to the extent practicable while maintaining a competitive, performance-based compensation program. However, the Company’s compensation committee reserves the right to award compensation which it deems to be in the Company’s best interest and in the best interest of its stockholders, but which may not be fully tax deductible under Code Section 162(m).

 

Employment Benefits Plans

 

Petros 401(k) Plan

 

Petros has a defined contribution retirement plan in which all employees are eligible to participate. This plan is intended to qualify under Section 401(k) of the Code so that contributions by employees and by Petros to the plan and income earned on plan contributions are not taxable to employees until withdrawn or distributed from the plan, and so that contributions, including employee salary deferral contributions, will be deductible by Petros when made. Petros currently provides contributions under this plan of up to six percent (6%) of an employee’s compensation, subject to statutory limits.

 

Participants may elect a salary deferral up to the statutorily prescribed annual limit for tax-deferred contributions and Metuchen may make contributions up to six percent (6%) of the participant’s compensation, subject to certain statutory limits.

 

Petros also contributes to medical, disability and other standard insurance plans for its employees.

 

Director Compensation Program

 

There was no compensation awarded to the Board for the year ended December 31, 2020.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table sets forth additional information, as of March 20, 2021, about our common stock that may be issued upon the exercise of options and other rights under the 2020 Plan.

 

Plan Category		(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights				(b) Weighted-average exercise price of outstanding options, warrants and rights				(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders			790,000			$	38.41				288,346
Equity compensation plans not approved by security holders			N/A				N/A				N/A
Total			790,000			$	38.41				288,346

 

N/A - Not applicable

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information regarding beneficial ownership of our common stock as of March 20, 2021 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our executive officers and directors; and (iii) by all of our executive officers and directors as a group. Unless otherwise indicated in the following table, the address for each person named in the table is: 1185 Avenue of the Americas, New York, NY 10036.

 

 

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership(1)				Percent of Class(2)
Juggernaut Capital Partners III GP, Ltd.(3)			3,395,964				34.8	%
Bruce T. Bernstein(4)			32,483				*
Greg Bradley			-				*
John Shulman(5)			3,395,964				34.8	%
Joshua N. Silverman(6)			138,130				1.4	%
Wayne R. Walker			-				*
Fady Boctor(7)			107,835				1.1	%
Mitch Arnold(8)			1,169				*
Andrew Gesek(9)			97				*
All directors and executive officers as a group			3,675,678				36.7	%

 

* Less than one percent.

(1)	Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares set forth in the above table.
(2)	A total of 9,768,261 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of March 20, 2021.
(3)	The shares of common stock are directly held by JCP III SM AIV, L.P. (“JCP III AIV”), METP Holdings, LLC (“METP”) and Metuchen Therapeutics, LLC (“MT”). JCP III AIV holds an ownership percentage of 67.9% of MT. The shares of common stock directly held by JCP III AIV, METP and MT are also indirectly beneficially owned by: Juggernaut Partners III GP, L.P. (“JCP III GP”), the sole general partner of JCP III AIV and METP; Juggernaut Partners III GP, Ltd. (“JCP III GP Ltd”), the sole general partner of JCP III GP; and John Shulman, the sole director of JCP III GP Ltd (JCP III GP, JCP III GP Ltd and Mr. Shulman, together the “Indirect JCP Reporting Persons”). Mr. Shulman is also a Director of Petros. The address of each of the parties herein is 5301 Wisconsin Avenue NW, Suite 570, Washington, DC 20015. Each of the Indirect JCP Reporting Persons disclaims beneficial ownership within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, or otherwise of such portion of the common stock held directly by JCP III AIV in which the Indirect Reporting Persons have no pecuniary interest.
(4)	Amount includes (1) 313 shares of common stock and (2) 32,170 shares underlying stock options held by Mr. Bernstein that were vested as of March 20, 2021 or will vest within 60 days thereafter.
(5)	John Shulman is the sole shareholder and director of JCP III GP Ltd. Refer to note 3 for further information. Mr. Shulman’s address is 5301 Wisconsin Avenue NW, Suite 570, Washington, DC 20015.
(6)	Amount includes (1) 20,000 shares of common stock and (2) 118,130 shares underlying stock options held by Mr. Silverman that were vested as of March 20, 2021 or will vest within 60 days thereafter.

(7)

Amount includes 107,835 shares underlying stock options held by Mr. Boctor that were vested as of March 20, 2021 or will vest within 60 days thereafter.

(8)

Amount includes: (1) 779 shares of common stock held directly and (2) 390 shares held thru Metuchen Therapeutics, LLC by Mr. Arnold.

(9)

Amount includes 97 shares of common stock held by Mr. Gesek thru Metuchen Therapeutics, LLC.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

SEC rules require us to disclose any transaction or currently proposed transaction in which we are a participant and in which any related person has or will have a direct or indirect material interest involving an amount that exceeds the lesser of $120,000 or one percent (1%) of the average of the Company’s total assets as of the end of last two completed fiscal years. A related person is any executive officer, director, nominee for director, or holder of 5% or more of the Company’s common stock, or an immediate family member of any of those persons.

 

 

Relationship with Juggernaut Partners III GP, L.P.

 

JCP III AIV, METP and MT hold 34.8% of the issued and outstanding shares of common stock of the Company, collectively. JCP III AIV holds an ownership percentage of 67.9% of MT. JCP III GP is the sole general partner of JCP III AIV and METP and Juggernaut Capital Partners III, L.P (“JCP III”). JCP III GP Ltd is the sole general partner of JCP III GP. John D. Shulman is the sole director of JCP III GP Ltd. Mr. Shulman is also a Director of Petros.

 

Subordinated Related Party Loans

 

On September 30, 2016, the Company executed a Subordination Agreement with Hercules and the Related Holders, wherein the Related Parties agreed to subordinate the Sub Debt to the indebtedness owed under the Loan Agreement. On November 22, 2017, the Company and the Related Holders entered into an Amended Agreement. Under the terms of the Amended Agreement, the principal balance of the Sub Debt was increased to $30,579,496. The cash interest rate of the amended sub debt was 12%. Additional PIK interest was 8% payable on the maturity date.

 

On December 10, 2018, pursuant to the JCP Acquisition, JCP III CI AIV, L.P acquired 55% of Metuchen.

 

On December 10, 2018, the Company signed a subordinated promissory note for an additional $4,750,000 of Sub Debt from the JCP Investor. The principal, along with PIK interest at an annual rate of 25%, was due on April 2, 2021.

 

On September 16, 2019, the Company entered into the Exchange Agreement, pursuant to which the Company issued 1,373,820.51 Preferred Units and 2,434,551.28 Common Units at a fair market value of $46,617,232.32 to the Related Parties in exchange for the full satisfaction and termination of the subordinated related party term loan. Pursuant to the Exchange Agreement, affiliates of JCP III received 1,129,497.00 Preferred Units and 2,001,584.89Common Units.

 

Subordinated Promissory Notes

 

From January 31, 2020 through October 1, 2020, the Company entered into the Subordinated Promissory Notes with JCP III AIV in the aggregate principal amount of $15.5 million, as further discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt – Subordinated Related Party Term Loans, which discussion of the Subordinated Promissory Notes is incorporated by reference herein. The maturity date of each Subordinated Promissory Note was April 2, 2021. Each Subordinated Promissory Note carried PIK interest at an annual rate of 20%. The Subordinated Promissory Notes aggregate principal balance and accrued PIK interest was converted into 1,762,913.30 Common Units of Metuchen, which were then converted into shares of the Company’s common stock upon the consummation of the Mergers on December 1, 2020, and the Subordinated Promissory Notes were terminated.

 

Escrow Agreement

 

Effective September 30, 2020, the Company and Hercules entered into the Third Amendment. In connection with the entry into the Third Amendment, JCP III, Hercules and Wells Fargo Bank, N.A. entered into the Escrow Agreement in order to place into escrow approximately $1,542,036.28, an amount equal to the outstanding principal payments owed under the Loan Agreement, as amended. No interest was applied to amounts held in escrow under the Escrow Agreement. In connection with the consummation of the Mergers, the funds held in escrow were disbursed back to the JCP Investor and the Escrow Agreement was terminated.

 

Director Independence

 

See “Directors, Executive Officers and Corporate Governance – Director Independence” and “Directors, Executive Officers and Corporate Governance – Board Committees” above.

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The Company engaged EisnerAmper LLP to perform an annual audit of the Company’s financial statements for the fiscal year ended December 31, 2020. The following table presents fees for professional audit services rendered by EisnerAmper LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2020 (including internal controls), and December 31, 2019, and fees billed for other services rendered by EisnerAmper LLP during those periods.

 

		2020				2019
Audit fees:(1)		$	567,240			$	174,720
Audit related fees:(2)			-				-
Tax fees: (3)							35,880
All other fees:(2)			-				-
Total		$	567,240			$	210,600

 

 

(1)

Audit fees for 2020 and 2019 relate to professional services provided in connection with the audit of our consolidated financial statements, the reviews of our quarterly condensed consolidated financial statements, services provided in connection with filing Form S-4 in connection with the Mergers and audit services provided in connection with other SEC regulatory filings.

 

(2)	There were no audit-related or other fees.

 

(3)	Tax fees related to tax compliance work.

 

The percentage of services set forth above in the category audit related fees, that were approved by the Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) (relating to the approval of a de minimus amount of non-audit services after the fact but before completion of the audit), was 100%.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Public Accountant

 

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of our independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm.

 

Prior to engagement of an independent registered public accounting firm for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.

 

1.

Audit services include audit work performed in the preparation of financial statements, as well as work that generally only an independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

	2.	Audit-Related services are for assurance and related services that are traditionally performed by an independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.
	3.	Tax services include all services performed by an independent registered public accounting firm’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

4.

Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from our independent registered public accounting firm

 

Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires our independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage our independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging our independent registered public accounting firm.

 

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

 

PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)(1) Financial Statements

 

The documents listed below are filed as part of this Form 10-K:

 

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2020, and December 31, 2019	F-2
Consolidated Statements of Operations for the years ended December 31, 2020, and December 31, 2019	F-3
Consolidated Statements of Changes in Stockholders’ Equity / Members’ Capital for the years ended December 31, 2020, and December 31, 2019	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2020, and December 31, 2019	F-5
Notes to Consolidated Financial Statements	F-6

 

(a)(2) Consolidated Financial Statement Schedules:

 

Schedules not filed are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes thereto.

 

 

(a)(3) and (b) Exhibits:

 

Exhibit No.		Description
2.1∞		Agreement and Plan of Merger and Reorganization, dated as of May 17, 2020, by and among Petros Pharmaceuticals, Inc., Neurotrope, Inc., PM Merger Sub 1, LLC, PN Merger Sub 2, Inc. and Metuchen Pharmaceuticals LLC (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
2.2		First Amendment to Agreement and Plan of Merger, dated as of July 23, 2020, by and between Petros Pharmaceuticals, Inc., PM Merger Sub 1, LLC, PN Merger Sub 2, Inc., Neurotrope, Inc. and Metuchen Pharmaceuticals LLC (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
2.3		Second Amendment to Agreement and Plan of Merger, dated as of September 30, 2020, by and between Petros Pharmaceuticals, Inc., PM Merger Sub 1, LLC, PN Merger Sub 2, Inc., Neurotrope, Inc. and Metuchen Pharmaceuticals LLC (incorporated by reference to Exhibit 2.3 to the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 2, 2020).
3.2		Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 2, 2020).
4.1		Specimen Stock Certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
4.2		Form of Senior Indenture (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 filed on January 29, 2021).
4.3		Form of Subordinated Indenture (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 filed on January 29, 2021).
4.4		Description of Capital Stock.
10.1*∞		Loan and Security Agreement, dated as of September 30, 2016, by and between the Company, the lenders a party thereto from time to time, and Hercules Capital, Inc.
10.2*		First Amendment to Loan and Security Agreement, dated as of November 22, 2017, by and between the Company, the lenders a party thereto from time to time, and Hercules Capital, Inc.
10.3*		Second Amendment to Loan and Security Agreement, dated as of April 13, 2020, by and between the Company, Pos-T-Vac, LLC, Timm Medical Technologies, LLC, the lenders a party thereto from time to time, and Hercules Capital, Inc.
10.4*		Third Amendment to Loan and Security Agreement, dated as of September 30, 2020, by and between the Company, Pos-T-Vac, LLC, Timm Medical Technologies, LLC, the lenders a party thereto from time to time, and Hercules Capital, Inc.
10.5		Registration Rights Agreement, dated as of December 1, 2020, by and among Petros Pharmaceuticals, Inc. and JCP III SM AIV, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 2, 2020).
10.6+		License and Commercialization Agreement by and between VIVUS, Inc. and Metuchen Pharmaceuticals LLC, dated September 30, 2016 (incorporated by reference to Exhibit 10.3 the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
10.7+		Commercial Supply Agreement by and between VIVUS, Inc. and Metuchen Pharmaceuticals LLC, dated September 30, 2016 (incorporated by reference to Exhibit 10.4 the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
10.8+		Logistics Services Agreement by and between McKesson Specialty Care Distribution Corporation and Metuchen Pharmaceuticals LLC, dated November 28, 2018 (incorporated by reference to Exhibit 10.5 the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
10.9*∞		License Agreement, dated as of March 14, 2020, by and between the Company and Hybrid Medical LLC.
10.10*		Letter Agreement, dated as of September 24, 2020, by and between the Company and Hybrid Medical LLC.
10.11†		Petros Pharmaceuticals, Inc. 2020 Omnibus Incentive Compensation Plan (incorporated by reference to Annex D the Company’s Registration Statement on Form S-4 filed on October 28, 2020).
10.12†		Bonus Agreement, entered into as of December 11, 2020, by and between Petros Pharmaceuticals, Inc. and Fady Boctor (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on December 15, 2020).
10.13†∞		Separation Agreement, entered into as of December 24, 2020, by and between the Company and Keith Lavan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on December 31, 2020).
10.14†∞		Employment Offer Letter, entered into as of February 19, 2021, by and between Petros Pharmaceuticals, Inc. and Fady Boctor Form of Petros Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with February 25, 2021).
10.15†∞		Form of Petros Pharmaceuticals, Inc. Nonqualified Stock Option Grant Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed won February 25, 2021).
21*		List of Subsidiaries.
23.1*		Consent of Independent Registered Public Accounting Firm.
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.

 

* Filed herewith.

 

∞

Schedules and exhibits omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or exhibit as a supplement to the SEC or its staff upon request.

 

+

Certain provisions and terms of exhibits have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The registrant will furnish a copy of any omitted provision and/or terms of exhibits to the SEC or its staff upon request.

 

†

Management contract or compensatory plan or arrangement.

 

(c) Additional Financial Statement Schedules:

 

None.

 

ITEM 16.

FORM 10-K SUMMARY

 

None.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.
March 31, 2021	By:	/s/ Fady Boctor
	Name: Title:	Fady Boctor President and Chief Commercial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Fady Boctor		President and Chief Commercial Officer		March 31, 2021
Fady Boctor		(Principal Executive Officer)
/s/ Mitchell Arnold		Vice President of Finance		March 31, 2021
Mitchell Arnold		(Principal Financial and Accounting Officer)
/s/ John D. Shulman		Executive Chairman of the Board		March 31, 2021
John D. Shulman
/s/ Joshua N. Silverman		Vice Chairman of the Board		March 31, 2021
Joshua N. Silverman
/s/ Bruce T. Bernstein		Director		March 31, 2021
Bruce T. Bernstein
/s/ Gregory Bradley		Director		March 31, 2021
Gregory Bradley
/s/ Wayne R. Walker		Director		March 31, 2021
Wayne R. Walker

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Petros Pharmaceuticals, Inc. (formerly Metuchen Pharmaceuticals, LLC)

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Petros Pharmaceuticals, Inc. and Subsidiaries (formerly Metuchen Pharmaceuticals, LLC, (the “Company”)) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity/members’ capital, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since 2016.

 

EISNERAMPER LLP 

Iselin, New Jersey 

March 31, 2021

 

 

PETROS PHARMACEUTICALS, INC. 

(Formerly Metuchen Pharmaceuticals, LLC)

 

Consolidated Balance Sheets

 

		December 31,				December 31,
		2020				2019
Assets
Current assets:
Cash		$	17,139,694			$	2,145,812
Accounts receivable, net			5,152,969				2,605,130
Inventories			760,530				2,204,428
Deposits with related party			4,576				2,325
Prepaid expenses and other current assets			2,847,284				5,129,820
Total current assets			25,905,053				12,087,515
Fixed assets, net			64,250				69,837
Intangible assets, net			32,160,919				38,811,137
API purchase commitment			11,144,257				6,721,574
Other assets			579,535				676,230
Total assets		$	69,854,014			$	58,366,293
Liabilities and Stockholders’ Equity / Members’ Capital
Current liabilities:
Current portion of senior debt, net		$	7,175,029			$	6,681,936
Accounts payable			5,609,556				3,776,443
Accrued expenses			14,683,786				20,887,262
Accrued inventory purchases			14,203,905				9,305,594
Other current liabilities			221,766				453,092
Total current liabilities			41,894,042				41,104,327
Long-term portion of senior debt			-				7,061,034
Deferred tax liability			-				1,432,167
Derivative liability			9,890,000
Other long-term liabilities			600,920				749,546
Total liabilities			52,384,962				50,347,074
Stockholders’ Equity / Members’ Capital:
Preferred stock (par value of $0.0001 per share, 50,000,000 shares authorized, 500 shares issued and outstanding as of December 31, 2020)			-				-
Common stock (par value of $0.0001 per share, 150,000,000 shares authorized, 9,707,655 shares issued and outstanding as of December 31, 2020)			971				-
Preferred units (1,619,754 units issued and outstanding as of December 31, 2019)			-				20,018,205
Common units (3,434,551 units issued and outstanding as of December 31, 2019)			-				29,117,233
Additional paid-in capital			79,170,225
Accumulated deficit			(61,702,144	)			(41,116,219	)
Total Stockholders’ Equity / Members’ Capital			17,469,052				8,019,219
Total Liabilities and Stockholders' Equity / Members' Capital		$	69,854,014			$	58,366,293

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

PETROS PHARMACEUTICALS, INC.

 

(Formerly Metuchen Pharmaceuticals, LLC)

 

Consolidated STATEMENTS OF OPERATIONS

 

		For the Years Ended December 31,
		2020				2019
Net sales		$	9,559,469			$	15,577,166
Cost of goods sold			4,046,466				7,427,111
Gross profit			5,513,003				8,150,055
Operating expenses:
Selling, general and administrative			15,674,968				19,727,223
Research and development expense			459,636				-
Depreciation and amortization expense			6,660,438				5,291,107
Impairment loss			-				2,443,930
Total operating expenses			22,795,042				27,462,260
Loss from operations			(17,282,039	)			(19,312,205	)
Change in fair value of derivative liability			(1,680,000	)			-
Interest expense, senior debt			(1,323,424	)			(2,428,264	)
Interest expense, subordinated related party term loans			(1,727,455	)			(11,416,697	)
Loss before income taxes			(22,012,918	)			(33,157,166	)
Income tax benefit			(1,426,993	)			(645,866	)
Net loss		$	(20,585,925	)		$	(32,511,300	)
Net loss per common stock
Basic and Diluted		$	(3.85	)		$	(13.22	)
Weighted average common shares outstanding
Basic and Diluted			5,340,682				2,460,026

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

PETROS PHARMACEUTICALS, INC. 

(Formerly Metuchen Pharmaceuticals, LLC)

 

Consolidated Statements of Changes in stockholders’ equity / Members’ Capital

 

		Class A Units				Class A Units Amount			Preferred Units			Preferred Units Amount			Common Units			Common Units Amount			Preferred Stock			Preferred Stock Amount			Common Stock			Common Stock Amount				Paid-in Capital			Accumulated Deficit			Total
Balance, December 31, 2018			100			$	1			-		$	-			-		$	-			-		$	-			-		$	-			$	-		$	(1,681,269	)	$	(1,681,268	)
Exchange of Class A Units for Common Units			(100	)			(1	)		-			-			1,000,000			1			-			-			-			-				-			-			-
Net proceeds from private placement offering			-				-			245,933			2,904,005			-			-			-			-			-			-				-			-			2,904,005
Issuance of lead investor warrants			-				-			-			(250,000	)		-			-			-			-			-			-				250,000			-			-
Issuance of placement agent warrants			-				-			-			(135,800	)		-			-			-			-			-			-				135,800			-			-
Conversion of related party debt into Preferred and Common Units			-				-			1,373,821			17,500,000			2,434,551			29,117,232			-			-			-			-				(385,800	)		(6,923,650	)		39,307,782
Net loss			-				-			-			-			-			-			-			-			-			-				-			(32,511,300	)		(32,511,300	)
Balance, December 31, 2019			-			$	-			1,619,754		$	20,018,205			3,434,551		$	29,117,233			-		$	-			-		$	-			$	-		$	(41,116,219	)	$	8,019,219
Conversion of subordinated related party term loans into Common Units			-				-			-			-			1,762,913			17,227,455			-			-			-			-				-			-			17,227,455
Proceeds from exercise of Metuchen warrants			-				-			2,055,115			20,551			-			-			-			-			-			-				-			-			20,551
Net proceeds received from recapitalization for the Mergers			-				-			(3,674,869	)		(20,038,756	)		(5,197,464	)		(46,344,688	)		500			-			9,707,655			971				87,380,223			-			20,997,750
Bifurcation of derivative liability related to the Mergers contingent consideration			-				-			-			-			-			-			-			-			-			-				(8,209,998	)		-			(8,209,998	)
Net loss			-				-			-			-			-			-			-			-			-			-				-			(20,585,925	)		(20,585,925	)
Balance, December 31, 2020			-			$	-			-		$	-			-		$	-			500		$	-			9,707,655		$	971			$	79,170,225		$	(61,702,144	)	$	17,469,052

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

PETROS PHARMACEUTICALS, INC. 

(Formerly Metuchen Pharmaceuticals, LLC)

 

Consolidated STATEMENTS OF CASH FLOWS

 

		For the Years Ended December 31,
		2020				2019
Cash flows from operating activities:
Net loss		$	(20,585,925	)		$	(32,511,300	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			6,660,438				5,291,107
Bad debt expense			202,525				(25,943	)
Inventory and sample inventory reserve			1,752,041				2,987,606
Non-cash paid-in-kind interest			1,771,904				6,959,236
Amortization of deferred financing costs and debt discount			37,500				4,669,384
Accretion for end of term fee			116,196				244,477
Deferred tax benefit			(1,432,166	)			(645,866	)
Lease expense			92,711				25,881
Derivative liability			1,680,000				-
Impairment loss			-				2,443,930
Changes in operating assets and liabilities:
Accounts receivable			(2,750,364	)			932,887
Inventories			728,286				2,558,067
Deposits			1,734				1,404,758
Prepaid expenses and other current assets			1,031,108				(2,201,178	)
Accounts payable			2,222,114				2,024,247
Accrued expenses			(6,203,476	)			8,340,885
Due to related parties			-				(41,152	)
Accrued inventory purchases			(250,000	)			-
Other current liabilities			(231,325	)			81,435
Long-term liabilities			(148,626	)			(5,982	)
Net cash (used in) provided by operating activities			(15,305,325	)			2,532,479
Cash flows from investing activities:
Acquisition of fixed assets			(4,633	)			(71,540	)
Net cash used in investing activities			(4,633	)			(71,540	)
Cash flows from financing activities:
Proceeds received related to the recapitalization from the Mergers			22,592,285				-
Payment of equity issuance costs			(1,042,910	)			-
Payment of senior debt			(6,181,711	)			(6,013,257	)
Payment of portion of senior debt end of term fee			(534,375	)			-
Payment of debt issuance costs			(50,000	)			-
Proceeds from subordinated related party term loans			15,500,000				2,904,005
Proceeds from the exercise of warrants			20,551				-
Net cash provided by (used in) financing activities			30,303,840				(3,109,252	)
Net increase (decrease) in cash			14,993,882				(648,313	)
Cash, beginning of year			2,145,812				2,794,125
Cash, end of year			17,139,694				2,145,812
Supplemental cash flow information:
Cash paid for interest during the year		$	1,191,400			$	2,040,965
Noncash Items:
Issuance of lead investor warrants		$	-			$	250,000
Issuance of placement agent warrants		$	-			$	135,000
Increase in preferred and common stocks from conversion of subordinated related party term loans		$	-			$	(46,617,232	)
Conversion of subordinated related party term loans into preferred and common stocks		$	17,227,455			$	39,307,782
Noncash increase in API Inventory (other assets)		$	5,148,311			$	4,775,937
Deferred Merger costs reclassified to additional paid-in capital		$	551,625			$	-

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

PETROS PHARMACEUTICALS, INC.

(Formerly Metuchen Pharmaceuticals, LLC)

 

notes to Consolidated financial STATEMENTS

 

1)	Nature of Operations, Basis of Presentation, and Liquidity

 

Nature of Operations and Basis of Presentation

 

Petros Pharmaceuticals, Inc. (“Petros” or the “Company”) was organized as a Delaware corporation on May 14, 2020 for the purpose of effecting the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Original Merger Agreement”), by and between Petros, Neurotrope, Inc., a Nevada corporation (“Neurotrope”), PM Merger Sub 1, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Petros (“Merger Sub 1”), PN Merger Sub 2, Inc., a Delaware corporation and a wholly-owned subsidiary of Petros (“Merger Sub 2”), and Metuchen Pharmaceuticals LLC, a Delaware limited liability company (“Metuchen”). On July 23, 2020, the parties to the Merger Agreement entered into the First Amendment to the Agreement and Plan of Merger and Reorganization (the “First Merger Agreement Amendment”) and on September 30, 2020, the parties to the Original Merger Agreement entered into the Second Amendment to the Agreement and Plan of Merger and Reorganization (the “Second Merger Agreement Amendment” and, together with the Original Merger Agreement and the First Merger Agreement Amendment, the “Merger Agreement”). The Merger Agreement provided for (1) the merger of Merger Sub 1, with and into Metuchen, with Metuchen surviving as a wholly-owned subsidiary of Petros (the “Metuchen Merger”) and (2) the merger of Merger Sub 2 with and into Neurotrope, with Neurotrope surviving as a wholly-owned subsidiary of Petros (the “Neurotrope Merger” and together with the Metuchen Merger, the “Mergers”). As a result of the Mergers, Metuchen and Neurotrope became wholly-owned subsidiaries of Petros, and Petros became a publicly traded corporation on December 1, 2020. On December 7, 2020, Neurotrope completed the spin-off of certain assets, whereby (i) any cash in excess of $20,000,000, subject to adjustment as provided in the Merger Agreement, and all of the operating assets and liabilities of Neurotrope not retained by Neurotrope in connection with the Mergers were contributed to Synaptogenix, Inc. (formerly known as Neurotrope Bioscience, Inc.), a Delaware corporation (“Synaptogenix”), and a wholly-owned subsidiary of Neurotrope.

 

The Mergers were accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Metuchen was determined to be the accounting acquirer based on an analysis of the criteria outlined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) No. 805, Business Combinations (“ASC 805”) and the facts and circumstances specific to the Mergers, including: (1) Metuchen Securityholders owned approximately 51.0% of the equity securities of Petros immediately following the closing of the transaction; (2) a majority of the board of directors of Petros are composed of directors designated by Metuchen under the terms of the Mergers; and (3) a majority of the existing members of Metuchen’s management are the management of Petros. The net assets of Metuchen are stated at historical costs in the Company’s Consolidated Financial Statements, with no goodwill or intangible assets recorded. Accordingly, the historical financial statements of Metuchen through November 30, 2020 became the Company’s historical financial statements, including the comparative prior periods. These Consolidated Financial Statements include Metuchen, Petros and Neurotrope, Inc, after the spin-off discussed above. from December 1, 2020, the date the reverse recapitalization was consummated.

 

All transactions between the consolidated entities have been eliminated in consolidation.

 

Liquidity

 

The Company has experienced net losses and negative cash flows from operations since its inception. As of December 31, 2020, we had cash and cash equivalents of $17.1 million, negative working capital of approximately $16.0 million, including debt of $7.2 million maturing in 2021, and sustained cumulative losses attributable to common stockholders of $61.7 million. Our plans include, or may include, utilizing our cash and cash equivalents on hand, negotiating an extension of our debt arrangement and our liability due to Vivus as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. While we are optimistic that we will be successful in our efforts to achieve our plan, there can be no assurances that we will be successful in doing so. As such, we obtained a continued support letter from our largest shareholder, JCP III SM AIV, L.P., through May 17, 2022.

 

 

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, and assessment of long-lived assets, including intangible asset impairment, and the allocation of the purchase price in acquisitions. Actual results could differ from these estimates and changes in these estimates are recorded when known.

 

Risks and Uncertainties

 

The Company is subject to risks common to companies in the pharmaceutical industry including, but not limited to, uncertainties related to commercialization of competitor products, regulatory approvals, dependence on key products, dependence on key customers and suppliers, and protection of intellectual property rights.

 

In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. As a result of the COVID-19 pandemic, which continues to rapidly evolve, “shelter in place” orders and other public health guidance measures were implemented across much of the United States, Europe and Asia, including in the locations of the Company’s offices, key vendors and partners. The pandemic has significantly impacted the economic conditions in the U.S. and globally as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. At this time, the future trajectory of the COVID-19 outbreak remains uncertain, both in the United States and in other markets. While the Company anticipates that currently available vaccines will be widely distributed in the future, the timing and efficacy of such vaccines are uncertain. The Company cannot reasonably estimate the length or severity of the impact that the COVID-19 outbreak will have on its financial results, and the Company may experience a material adverse impact on its sales, results of operations, and cash flows in fiscal 2021.

 

During 2020, government regulations and the voluntary business practices of the Company and prescribing physicians have prevented in-person visits by sales representatives to physicians’ offices. The Company has taken steps to mitigate the negative impact on its businesses of such restrictions. In March 2020, the Company reduced our sales representative head count to reflect the lack of in-person visits. The Company has maintained a core sales team which continues to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company’s key opinion leaders to other physicians and pharmacists. The Company anticipates rehiring and/or assigning representatives to cover sales territories as states reopen and physician access resumes new normal levels. In response to the spread of SARS-CoV-2 and COVID-19, in March 2020, the Company closed its administrative offices and as of December 31, 2020, they remain closed, with the Company’s employees continuing their work outside of the Company’s offices. The Company has selectively resumed in-person interactions by its customer-facing personnel in compliance with local and state restrictions. The Company also continues to engage with customers virtually as the Company seeks to continue to support healthcare professionals and patient care. However, the Company’s ability to engage in personal interactions with physicians and customers remains limited, and it is unknown when the Company’s offices will reopen, and these interactions will be fully resumed.

 

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, may be in excess of insured limits.

 

Cash and Cash Equivalents

 

The Company considers all highly-liquid investments that have maturities of three months or less when acquired to be cash equivalents.

 

 

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 18 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 ASC Topic 606, Revenue Recognition (“Topic 606”), the Company recognizes revenue from prescription medication sales when its performance obligations with a customer has been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide Stendra® upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of Stendra®, which is typically upon delivery. The Company invoices its customers after Stendra® has been delivered and invoice payments are generally due within 30 to 75 days of invoice date.

 

In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers Stendra® to when the customers pay for the product is typically less than one year. The Company records prescription medication sales net of any variable consideration, including but not limited to discounts, rebates, returns, chargebacks, and distribution fees. The Company uses the expected value method when estimating its variable consideration, unless terms are specified within contracts. The identified variable consideration is recorded as a reduction of revenue at the time revenues from sales of Stendra® are recognized. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.

 

As of December 31, 2020 and 2019, the reserves for sales deductions were $8.6 million and $12.0 million, respectively. The most significant sales deductions included in this reserve relate to returns, contract rebates, and distribution service (“DSA”) fees. Our estimates are based on factors such as our direct and indirect customers’ buying patterns and the estimated resulting contractual deduction rates, historical experience, specific known market events and estimated future trends, current contractual and statutory requirements, industry data, estimated customer inventory levels, current contract sales terms with our direct and indirect customers, and other competitive factors. Significant judgment and estimation is required in developing the foregoing and other relevant assumptions. The most significant sales deductions are further described below.

 

Product Returns

 

Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return Stendra® and receive credit for product within six months prior to expiration date and up to one year after expiration date. The provision for returns is based upon the Company’s estimates for future Stendra® returns and historical experience. The provision of returns is part of the variable consideration recorded at the time revenue is recognized. As of December 31, 2020 and 2019, the reserves for product returns were $7.1 million and $8.3 million, respectively, and are included as a component of accrued expenses.

 

Contract Rebates, Coupon Redemptions and DSA Fees

 

The Company establishes contracts with wholesalers, chain stores, and indirect customers that provide for rebates, sales incentives, DSA fees and other allowances. Some customers receive rebates upon attaining established sales volumes. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us, including fees paid to wholesalers under our DSAs, as described below. Indirect rebates are rebates paid to indirect customers that have purchased our products from a wholesaler under a contract with us.

 

The Company has entered into DSAs with certain of our significant wholesaler customers that obligate the wholesalers, in exchange for fees paid by us, to: (i) manage the variability of their purchases and inventory levels within specified limits based on product demand and (ii) provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our pharmaceutical products held at their warehouse locations.

 

 

Medical Device Sales

 

The Company’s medical device sales consist of domestic and international sales of men’s health products for the treatment of erectile dysfunction. The men’s health products do not require a prescription and include Vacuum Erection Devices, 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 30 days of invoice date for domestic customers and 90 days for international customers.

 

In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers the medical devices to when the customers pay for the product is typically less than one year. The Company records medical device sales net of any variable consideration, including but not limited to returns. The Company uses the expected value method when estimating its variable consideration. The identified variable consideration is recorded as a reduction of revenue at the time revenues from the medical device sales are recognized. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.

 

Product Returns

 

Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return medical devices and receive credit for products within 90 days of the sale. The provision for returns is based upon the Company’s estimates for future product returns and historical experience. The Company has not made significant changes to the judgments made in applying Topic 606. As of December 31, 2020 and 2019, the reserves for product returns for medical devices were not significant.

 

Contract Costs

 

In relation to customer contracts, the Company incurs costs to fulfill a contract but does not incur costs to obtain a contract. These costs to fulfill a contract do not meet the criteria for capitalization and are expensed as incurred. As such, the Company did not have any contract assets at December 31, 2020 and 2019.

 

Accounts Receivable, net

 

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. See Note 3 Accounts, Receivable, net.

 

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. See Note 4 Inventories.

 

Intangible Assets

 

The Company accounts for recognized intangible assets at cost. Intangible assets with finite useful lives are amortized over the useful life that the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. The Company review the carrying value and useful lives of its intangible assets with definite lives, or 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.

 

Given the impact of the COVID-19 outbreak on the global economy, as well as its potential impact to the Company’s business operations and cash flows, the Company constituted the COVID-19 outbreak as a triggering event requiring an impairment test for its long-lived assets with finite useful lives. The Company’s projections included the undiscounted cash flows of the remaining estimated useful lives for the Stendra product through December 2028 and December 2030 for the medical device products. Based on the impairment assessment as of December 31, 2020, the Company determined that no intangible asset impairment occurred as the undiscounted cash flows exceeded the respective carrying values of the assets. The Company did not record any impairments of intangible assets for the years ended December 31, 2020 and 2019.

 

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company evaluates the carrying value of goodwill annually in December of each year in connection with the annual budgeting and forecast process and also between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which goodwill was allocated to below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit’s carrying amount exceeds its fair value, referred to as a “step zero” approach. Subsequently (if necessary after step zero), an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This quantitative impairment test uses a combination of the income method and guideline public company comparable companies. The income method is based on a discounted future cash flow approach that uses significant assumptions of projected revenue, projected operational profit, terminal growth rates and the cost of capital. Under Topic 350, goodwill impairment is measured as the excess of the carrying amount of the reporting unit over its fair value. The Company incurred a goodwill impairment loss of $2,443,930 during the year ended December 31, 2019, related to the prescription medications segment.

 

Balance, December 31, 2018		$	2,443,930
Impairment loss			(2,443,930	)
Balance, December 31, 2019		$	-

 

Fixed Assets

 

Fixed assets consist of furniture and fixtures. Furniture and fixtures are recorded at cost, less accumulated depreciation, and are depreciated on a straight-line basis over its estimated useful life. The Company uses an estimated useful life of 7 years for furniture and fixtures. Depreciation expense for the years ended December 31, 2020 and 2019 was $10,220 and $1,703, respectively.

 

Leases

 

The Company accounts for leases in accordance with Accounting Standards Codification (“ASC”) Topic 842. Topic 842 requires organizations to recognize leased assets and liabilities on the balance sheet. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.

 

The Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company has lease agreements that include lease and non-lease components, which the Company accounts for as a single lease component for all leases.

 

Operating lease right-of-use (“ROU”) assets are included in other assets whereas operating lease liabilities are included in other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease payments are recognized as lease expense on a straight-line basis over the lease term. Lease payments included in the measurement of the lease liability are comprised of fixed payments.

 

 

Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented in the Company’s consolidated statements of operations in the same line item as expense arising from fixed lease payments for operating leases.

 

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company applies this policy to all underlying asset categories.

 

Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

 

The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

 

See Note 2 and Note 15 Commitments and Contingencies for additional information.

 

Fair Value of Financial Instruments

 

Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market.

 

Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

Financial instruments recognized at historical amounts in the consolidated balance sheets consist of cash, accounts receivable, other current assets, accounts payable, accrued expenses, other current liabilities and senior debt. The Company believes that the carrying value of cash, accounts receivable, other current assets, accounts payable, accrued expenses, other current liabilities approximates their fair values due to the short-term nature of these instruments.

 

The carrying value of senior debt as of December 31, 2020 approximated fair value. The fair value of the senior debt was estimated by discounting to present value the scheduled coupon payments and principal repayment, using an appropriate fair market yield and is considered Level 3 in the fair value hierarchy.

 

In connection with the Mergers in December 2020, each security holder of Metuchen received an earnout consideration classified as a derivative liability to be paid in the form of Petros Common Stock. The Company estimated their fair value using Monte Carlo Simulation approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability as of the closing of the Merger and December 31, 2020 was $8.2 million and $9.9 million, respectively. See Note 10 Stockholders’ Equity.

 

Deferred Financing Costs

 

Costs incurred to issue debt are deferred and presented in the consolidated balance sheets as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts.

 

Related amortization expense is recorded as a component of interest expense over the term of the related debt using the effective interest rate method.

 

 

Stock-Based Compensation

 

The Company accounts for stock-based awards to employees and consultants in accordance with applicable accounting principles, which requires compensation expense related to stock-based transactions, including employee stock options and consultant warrants, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options or warrants. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. Employee stock option and consulting expenses are recognized over the employee’s or consultant’s requisite service period (generally the vesting period of the equity grant).

 

The Company’s option pricing model requires the input of highly subjective assumptions, including the volatility and expected term. Any changes in these highly subjective assumptions can significantly impact stock-based compensation expense. See Note 11 Stock Options.

 

Costs of Equity Transactions

 

Incremental direct costs incurred to issue stocks of the Company’s preferred and common stocks are recorded as a reduction of the related proceeds.

 

Income Taxes

 

Prior to the consummation of the Mergers, Metuchen was a limited liability company (“LLCs”) for federal income tax purposes and had elected to be treated as a Partnership for federal and state income tax purposes. PTV is a disregarded entity for federal income tax purposes. As such, all income tax consequences resulting from the operations were reported on the member’s income tax return. In addition, Timm was included in the Company’s structure where taxes were paid at the entity level.

 

Following the consummation of the Mergers, Metuchen is treated as a disregarded entity (“SMLLC”) for federal income tax purposes. As such, all income tax consequences resulting from the operations of Metuchen are reported on the members’ income tax returns through the period in which the Merger was transacted. Subsequent to the Mergers, Metuchen’s activity is included in the Company’s consolidated group. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted.

 

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

 

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2020 and 2019 no accrued interest or penalties are recorded in the consolidated balance sheets.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted and signed into law, and GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act, among other things, includes changes to the tax provisions that benefits business entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act, including, permitting net operating losses, or NOLs, carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act provides other reliefs and stimulus measures. We have evaluated the impact of the CARES Act, and do not expect that any provision of the CARES Act would result in a material cash benefit to us or have a material impact on our financial statements or internal controls over financial reporting.

 

 

Contingencies

 

The Company may be subject to various patent challenges, product liability claims, government investigations and other legal proceedings in the ordinary course of business. Legal fees and other expenses related to litigation are expensed as incurred and included in general and administrative expenses in the consolidated statements of operations.

 

Shipping Costs

 

The Company records the costs of shipping related to prescription medication sales in general and administrative expense in its consolidated statements of operations. There were no shipping costs for the years ended December 31, 2020 and 2019.

 

Shipping costs related to medical devices are recorded as revenue and subsequently deducted as a component of cost of goods sold in the consolidated statements of operations. Shipping costs for the years ended December 31, 2020 and 2019 were $108,870 and $130,242 respectively.

 

Basic and Diluted Net Loss per Common Share

 

The Company computes basic net loss per common share by dividing net loss applicable to common stockholders by the weighted average number of common stocks outstanding during the period, excluding the 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 years ended December 31, 2020 and 2019. See Note 13 Basic and Diluted Net Loss per Common Share.

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for the Company for the annual periods and interim periods within annual periods beginning after December 15, 2019 for both private and public entities. The Company adopted this guidance as of January 1, 2020 and its impact was not material.

 

Pending Adoption as of December 31, 2020

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13, together with a series of subsequently issued related ASUs, has been codified in Topic 326. Topic 326 establishes new requirements for companies to estimate expected credit losses when measuring certain financial assets, including accounts receivables. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

 

3)	Accounts Receivable, net

 

Accounts receivable, net is comprised of the following:

 

		December 31, 2020				December 31, 2019
Gross accounts receivables		$	6,560,291			$	4,989,260
Distribution service fees			(972,652	)			(2,061,481	)
Chargebacks accruals			(121,269	)			(60,507	)
Cash discount allowances			(84,601	)			(235,867	)
Allowance for doubtful accounts			(228,800	)			(26,275	)
Total accounts receivable, net		$	5,152,969			$	2,605,130

 

 

 

For years ended December 31, 2020 and 2019, gross sales from customers representing 10% or more of the Company’s total gross sales included one customer which represented approximately 85% and 86% of total gross sales, respectively. Receivables from customers representing 10% or more of the Company’s gross accounts receivable included one customer at December 31, 2020 and 2019 equal to 93% and 88%, respectively, of the Company’s total gross accounts receivables.

 

4)	Inventories

 

Inventory is comprised of the following:

 

		December 31, 2020				December 31, 2019
Raw materials		$	325,932			$	798,161
Finished goods			434,598				1,406,267
Total inventory		$	760,530			$	2,204,428

 

Finished goods are net of valuation reserves of $935,866 and $220,254 as of December 31, 2020 and 2019, respectively. Raw materials are net of valuation reserves of $2,872,977 as of December 31, 2020 and 2019, which is related to bulk inventory that is fully reserved.

 

5)	Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets are comprised of the following:

 

		December 31, 2020				December 31, 2019
Prepaid samples		$	58,483			$	391,024
Prepaid insurance			149,452				287,844
Prepaid FDA fees			756,972				732,204
Prepaid coupon fees			71,500				71,500
Rebates receivable			-				1,243,120
API purchase commitment asset (see Note 14)			1,304,541				1,409,592
Other prepaid expenses			391,552				468,226
Other current assets			114,784				526,310
Total prepaid expenses and other current assets		$	2,847,284			$	5,129,820

 

Prepaid samples, which are presented net of reserves, are expensed when distributed to the sales force. The prepaid samples reserve amount was $351,224 and $145,474 at December 31, 2020 and 2019, respectively.

 

In relation to a transition services agreement with a prior owner of the product rights to Stendra®, the prior owner had processed managed care rebates and remitted them back to the Company during the year ended December 31, 2020; therefore, the Company did not have a receivable related to rebates processed by the prior owner of the product rights to Stendra® as of December 31, 2020.

 

6)	Intangible Assets

 

Balance at December 31, 2018		$	44,100,542
Amortization expense			(5,289,405	)
Balance at December 31, 2019		$	38,811,137
Amortization expense			(6,650,218	)
Balance at December 31, 2020		$	32,160,919

 

 

The future annual amortization related to the Company’s intangible assets is as follows:

 

2021				6,867,771
2022				6,191,740
2023				5,445,729
2024				4,650,787
Thereafter				9,004,892
Total			$	32,160,919

 

The intangible assets held by the Company are the Stendra® product, Timm Medical product, and PTV product and are being amortized over their estimated useful lives of 10 years, 12 years, and 12 years, respectively. The carrying value of the Stendra® product, Timm Medical product, and PTV product as of December 31, 2020 are $24.6 million, $5.9 million and $1.6 million, respectively. The carrying value of the Stendra® product, Timm Medical product, and PTV product as of December 31, 2019 were $30.0 million, $6.9 million and $1.9 million, respectively.

 

7)	Accrued Expenses

 

Accrued expenses are comprised of the following:

 

		December 31, 2020				December 31, 2019
Accrued price protection		$	1,853,979			$	1,847,639
Accrued product returns			9,452,248				10,707,807
Accrued contract rebates			412,046				1,368,279
Due to Vivus (see Note 14)			2,267,523				2,259,769
Due to third-party logistic provider			-				4,388,600
Accrued severance			519,609				-
Other accrued expenses			178,381				315,168
Total accrued expenses		$	14,683,786			$	20,887,262

 

As part of its acquisition of Stendra®, the Company provides the previous owner with price protection for certain Stendra® product returns that are processed by the previous owner. Some customer agreements require that product returns be credited at the current wholesale acquisition cost (“WAC”). If the Company subsequently raises the WAC, the Company will reimburse the previous owner for the difference between the current WAC and the original sale price for returns processed by the previous owner.

 

8)

Debt

 

Senior Debt

 

The following is a summary of the Company’s senior indebtedness at December 31, 2020 and 2019:

 

		December 31, 2020				December 31, 2019
Principal balance		$	6,653,292			$	11,688,979
Plus: Paid-In-Kind interest			-				1,101,575
Plus: End of term fee			534,237				952,416
Less: Debt issuance costs			(12,500	)			-
Total senior debt		$	7,175,029			$	13,742,970

 

On September 30, 2016, the Company entered into a loan agreement with Hercules, a third party, for a $35 million term loan (“Senior Debt”) with a stated interest rate of the greater of either (i) Prime plus 7.25% or (ii) 10.75%. The Senior Debt includes an additional Paid-In-Kind (“PIK”) interest that increases the outstanding principal on a monthly basis at an annual rate of 1.35% and a $787,500 end of term charge.

 

 

On November 22, 2017, the Company amended its loan agreement with Hercules (“First Amendment”). A covenant was added, in which the Company must achieve a certain minimum EBITDA, as defined, target for the trailing twelve-month period, ending June 30, 2018. The end of term charge was increased from $787,500 to $1,068,750. The minimum EBITDA for each of the trailing six months and the fixed charge coverage ratio (1:1 to 0.9:1) were reduced. The Company was also required to prepay $10,000,000 in principal.

 

Monthly principal payments, including interest, commenced November 1, 2018 with the outstanding balance of the Senior Debt due in full on November 1, 2020. The end of term charge is being recognized as interest expense and accreted over the term of the Senior Debt using the effective interest method.

 

On April 13, 2020, the Company amended its loan agreement with Hercules. The amendment waived all financial covenant defaults for all periods since inception through the period ending March 31, 2020. The amendment also included the following changes:

 

∙

Removed the Adjusted EBITDA and Fixed Cost Coverage Ratio Covenants.

 

∙

Extended the maturity date from October 1, 2020 to April 2021, which can be further extendable to December 1, 2021 upon achieving the Financing Milestone, as defined in the agreement.

 

∙

Increased the cash interest rate from the greater of (a) 10.75% or (b) 10.75% plus the US WSJ Prime minus 4.50% to the greater of (a) 11.50% or (b) 11.50% plus the US WSJ Prime minus 4.25%.

 

∙

Removed the PIK interest rate.

 

∙

Removed the prepayment penalty.

 

The end of term charge of $1,068,750 was partially extended with $534,375 paid on October 1, 2020 and $534,375 due on February 1, 2021.

 

Effective September 30, 2020, the Company and Hercules entered into the Third Amendment to Loan and Security Agreement (“Third Amendment”) to provide for interest only payments commencing on October 1, 2020 and continuing through December 22, 2020 unless the Company raised net cash proceeds of at least $25 million through an equity or debt financing or other transaction on or before December 21, 2020. The Third Amendment also amended the minimum cash, minimum net revenue and minimum EBITDA financial covenants. On that same date, Juggernaut Capital Partners III, L.P., Hercules and Wells Fargo Bank, N.A. entered into an escrow agreement (the “Escrow Agreement”) to escrow funds amounting to approximately $1.5 million, an amount equal to the aggregate of certain principal payments due under the Loan Agreement, as amended. In connection with the consummation of the Mergers, the funds held in escrow were disbursed back to Juggernaut Capital Partners III, L.P. and the Escrow Agreement was terminated.

 

The Company satisfied the maturity date extension requirement pursuant to funds retained upon the closing of the Mergers in December 2020. As a result, the Senior Debt now has a maturity date of December 1, 2021. As of December 31, 2020, the Company was in compliance with its covenants.

 

Interest expense on the Senior Debt was as follows for the periods indicated:

 

		For the Years Ended December 31,
		2020				2019
Interest expense for term loan		$	1,241,475			$	2,216,341
Amortization of debt issuance costs			37,500				-
PIK interest			44,449				211,923
		$	1,323,424			$	2,428,264

 

Included in accrued expenses in the accompanying consolidated balance sheets as of December 31, 2020 and 2019 is $65,885 and $132,006, respectively, of accrued and unpaid interest.

 

Subordinated Related Party Term Loans

 

Subordinated Related Party Term Loans Entered Into During 2020

 

On January 31, 2020, the Company entered into a Subordinated Promissory Note with JCP III SM AIV, L.P. (the “JCP Investor”) in the principal amount of $3.0 million (the “First Subordinated Promissory Note”). The maturity date of the First Subordinated Promissory Note was April 2, 2021 and has PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

 

On April 1, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $3.0 million (the “Second Subordinated Promissory Note”). The maturity date of the Second Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On April 22, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $4.0 million (the “Third Subordinated Promissory Note”). The maturity date of the Third Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On July 31, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $2.5 million (the “Fourth Subordinated Promissory Note”). The maturity date of the Fourth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On August 31, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $1.5 million (the “Fifth Subordinated Promissory Note”). The maturity date of the Fifth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

On October 1, 2020, the Company entered into a Subordinated Promissory Note with the JCP Investor in the principal amount of $1.5 million (the “Sixth Subordinated Promissory Note” and together with the First Subordinated Promissory Note, Second Subordinated Promissory Note, Third Subordinated Promissory Note, Fourth Subordinated Promissory Note, and Fifth Subordinated Promissory Note, the “Subordinated Promissory Notes”). The maturity date of the Sixth Subordinated Promissory Note was April 2, 2021 and had PIK interest that increases the outstanding principal on a daily basis at an annual rate of 20%.

 

In connection with the entry into the Merger Agreement on May 17, 2020, Juggernaut Capital Partners LLP, Neurotrope and Metuchen entered into a Note Conversion and Loan Repayment Agreement pursuant to which, Juggernaut Capital Partners LLP agreed to convert all of the above outstanding subordinated promissory notes and accrued PIK interest held by Juggernaut Capital Partners LLP and the JCP Investor, into Petros common stock in connection with the consummation of the Mergers on December 1, 2020, and the Subordinated Promissory Notes were terminated. Accordingly, the principal balance of the subordinated promissory note and accrued PIK interest was $0 as of December 31, 2020.

 

Interest expense on this debt was $1,727,455 comprised entirely of PIK interest, for the year ended December 31, 2020.

 

Subordinated Related Party Term Loans Entered Into Prior To 2020

 

On December 10, 2018, JCP III CI AIV, L.P., an affiliate of the JCP Investor, acquired from Krivulka Family LLC (“Krivulka”) all of Krivulka’s ownership interest in Metuchen Therapeutics, LLC (“MT”), a holding company that owned 55% of Metuchen, giving the JCP Investor a controlling interest in Metuchen (such transaction, the “JCP Acquisition”). Concurrently with the JCP Acquisition, the Company executed a Subordination Agreement (“Sub Debt”) with several related parties, L. Mazur Associates, JV (“LMA”), KFE, an entity controlled by Krivulka and the JCP Investor (herein referred to collectively as “the Related Holders”). On November 22, 2107, the Company and the Related Holders entered into an Amended and Restated Subordination Agreement (“Amended Agreement”). Under the terms of the Amended Agreement, the principal balance of the Sub Debt was increased to $30,579,496. The amount due was divided 20.9%, 20.1%, and 59%, respectively, amongst LMA, KFE, and JCP. The cash interest rate of the amended sub debt was 12%. Additional PIK interest was 8% payable on the maturity date.

 

On December 10, 2018, as part of the acquisition accounting for JCP Acquisition of a majority ownership interest in Metuchen, the outstanding Sub Debt was determined to have a fair value that was less than its carrying value. The fair value of the subordinated related party term loans was $22,250,746 at December 10, 2018. A debt discount of $15,506,463 was recognized and was being amortized to interest expense over the term of the debt using the effective interest method.

 

On December 10, 2018, the Company signed a subordinated promissory note for an additional $4,750,000 of Sub Debt from JCP. The proceeds were used for the acquisition of the Medical Device Business. The principal, along with PIK interest at an annual rate of 25%, was due on April 2, 2021.

 

 

On September 16, 2019, Metuchen entered into an Exchange Agreement (“Exchange Agreement”) with JCP and LMA to exchange Preferred Units and Common Units for the Sub Debt. Upon consummation of the exchange, the Preferred Units and Common Units issued were for the full satisfaction and termination of the subordinated related party term loan. As of each of December 31, 2020 and 2019, there was no outstanding principal balance or accrued interest for the subordinated related term loans. The following chart summarizes the instruments exchanged in the transaction as of September 16, 2019:

 

Common Units, at fair value (2,434,551.28 Units)		$	29,117,232
Preferred Units, at fair value (1,373,820.51 Units)			17,500,000
Total fair value of Preferred and Common Units exchanged			46,617,232
Sub Debt principal balance			33,250,000
Add: PIK Interest			16,544,318
Less: Debt Discount			10,486,536
Total carrying value of Sub Debt exchanged			39,307,782
Excess of fair value of Preferred and Common Units exchanged over the carrying value of Sub Debt		$	(7,309,450	)

 

Based on ASC 470, the Company accounted for the exchange between related parties as a capital transaction. The carrying value of the subordinated related party term loans, including any accrued interest, on the date of the exchange was $39.3 million and the fair value of Preferred and Common Units was $46.6 million. As this is a capital transaction between related parties it is not appropriate to record an extinguishment loss; therefore, the company recorded the $7.3 million difference between the carrying value of the subordinated related party term loans and the fair value of the Preferred and Common Units to members’ capital. See Note 9 Members’ Capital for the determination of fair value of the Preferred and Common Units.

 

The Company had subordinated related party term loans which was converted into common and preferred stocks on September 16, 2019. Interest expense on this debt was $11,416,697, including PIK interest of $6,747,313 for the year ended December 31, 2019.

 

9)	Members’ Capital

 

(a)

Capitalization

 

Prior to September 16, 2019, The Company authorized 100 units of Class A Common Units (the “Class A Units”) to be issued and outstanding. In addition, there were Restricted Member Units (“RMU’s”) that were designated as a class of incentive units (also known as “Class B Units”).

 

On September 16, 2019, the Company amended and restated its operating agreement creating the rights and preferences relating to the Preferred Units and Common Units mentioned in the Private Placement Offering below. The issued and outstanding Preferred Units and Common Units were exchanged for Common Stock of the Company in connection with the Mergers.

 

(b)

Preferred Units

 

A holder of a Preferred Unit was entitled to vote on any matter requiring the approval of such units. In addition, the Preferred Unit holders were entitled to distributions, after adjustment for specific items, for each fiscal year.

 

The following actions required the prior consent of the holders of a majority of the outstanding Preferred Units: (a) amend, alter or repeal any provision of the amended and restated operating agreement (if such amendment would adversely affect any of the rights or preferences of the Preferred Units); (b) authorize or create membership interests that have a preference over the Preferred Units as to dividends or liquidation; (c) declare or pay any dividends or distributions; (d) dissolve or liquidate (in whole or in part), consolidate, merge, convey, lease, sell, or transfer all or substantially all of the assets of the Company; or purchase or otherwise acquire (directly or indirectly) all or substantially all of the assets or equity interest issued by another company; or file a petition for bankruptcy or receivership of the Company; (e) repurchase or redeem any Membership Interests; or (f) enter into any agreement, commitment or arrangement to do any of the foregoing. See also Note 12 Section (f) for further discussion of Preferred Units.

 

(c)

Common Units (formerly known as Class A Units)

 

A holder of a Common Unit was entitled to vote on any matter requiring the approval of such units. In addition, the Common Unit holders were entitled to distributions, after adjustment for specific items, for each fiscal year.

 

 

Effective with the amended and restated operating agreement on August 26, 2019, each Class A Unit was exchanged for 10,000 Common Units. There was no change to the ownership percentages as a result of the exchange and the rights and privileges of Common Unit holders is consistent with that of the Class A Unit.

 

(d)

Class B Units

 

As of September 16, 2019, none of the Class B Units had been issued. Effective with the amended and restated operating agreement on September 16, 2019, the Class B Units were no longer an authorized membership interest of the Company.

 

(e)

Liquidation

 

Upon liquidation of the Company or upon any Company sale, the Company was required to pay, hold, or distribute, or cause to be paid, held or distributed, the proceeds thereof as follows: (a) first, to the holders of Preferred Units, pro rata in proportion to the number of Preferred Units held by such holders, until the holders of such Preferred Units receive in respect of each Preferred Unit held by them, the preferred liquidation preference amount; (b) second, to the holders of Common Units, pro rata in proportion to the number of Common Units held by such holders, the remaining proceeds available for distribution.

 

(f)

Private Placement Offering

 

On September 16, 2019, the Company executed a Private Placement offering (“Private Placement”) with V4 Capital Partners, LLC (“Lead Investor”) and other accredited investors (collectively “Investors”). None of the Investors had previously held an interest in the Company. Pursuant to the Private Placement, the Company agreed to issue and sell up to $3.5 million of the Company’s Preferred Units. Each Preferred Unit had an offering price of $12.7382 per unit. The Company issued 245,933 Preferred Units related to the Private Placement and received aggregate net proceeds from the Private Placement of $2.7 million.

 

The Preferred Units maintained a 5% non-cumulative quarterly dividend, included one vote per unit on all matters to be voted upon by Common Unit holders and required a mandatory conversion upon the closing of a qualified public offering, with the conversion price being subject to adjustment if the price per share in the qualified public offering was less than $15.92275 per Preferred Unit. Subject to adjustment, each Preferred Unit could be converted into one Common Unit. The Preferred Units did not meet the criteria for liability classification and are classified within equity. In addition, the embedded conversion feature was considered clearly and closely related to the Preferred Units and did not require bifurcation. However, the embedded conversion feature represents a beneficial conversion feature with a relative fair value of $26,500 and has been recorded to additional paid-in capital, included within the $250,000 proceeds received related to the issuance of the lead investor warrants.

 

In connection with the Private Placement, the Lead Investor received warrants (“Lead Investor Warrants”) to purchase an aggregate of 615,838.50 shares of the Company’s Preferred Units at an exercise price of $0.01 per Preferred Unit. The Lead Investor Warrants had an expiration date of September 16, 2020. The Lead Investor Warrants were only exercisable upon a qualified public offering being consummated within one year. As of the date of issuance, the fair value of the Lead Investor Warrants was estimated to be $2.1 million. To record the issuance of the Lead Investor Warrants, the Company allocated the proceeds of $250,000 received from the Lead Investor for the Preferred Units between the Lead Investor Warrants and the beneficial conversion feature for the embedded conversion option. Of the proceeds received, the relative fair value allocated to the Lead Investor Warrants was $223,500 and was included in additional paid-in capital. The Lead Investor Warrants did not meet the criteria for liability classification. In September 2020, the Company and the Lead Investor warrant holders amended the warrants to purchase an aggregate of 2,055,114.66 shares of the Company’s preferred units at an exercise price of $0.01 per preferred unit. The amendment also extended the expiration date to December 16, 2020. In November 2020, the Lead Investor warrant holders exercised their right to purchase 2,055,114.66 of the Company’s preferred units and the Company received $20,551 in proceeds.

 

The Company estimated their fair value using Monte Carlo Simulation approach. Significant judgments used in the valuation model included the overall likelihood of a qualified public offering occurring and Management’s estimate for the aggregate equity value, including an estimate for the proceeds from a qualified public offering as well as giving consideration in the event the price per share in a qualified public offering is below 125% of the $12.7382 price per Preferred Unit. Also incorporated in the fair value of the Lead Investor Warrants was a risk-free rate, estimated volatility of equity and an incremental discount for lack of marketability.

 

Also, in connection with the Private Placement, the placement agent received warrants (“Placement Agent Warrants”) to purchase an aggregate of 10,500 shares of the Company’s common stock at an exercise price of $12.7382 per share. The Placement Agent Warrants could be exercised any time on or after September 16, 2019. The Placement Agent Warrants contained an expiration date of September 16, 2024 and were converted into shares of common stock of the Company upon the consummation of the Mergers. As of the date of issuance, the fair value of the Placement Agent Warrants was estimated to be $135,800 and was included in additional paid-in capital. The Placement Agent Warrants did not meet the criteria for liability classification.

 

 

The Company estimated their fair value using the Black-Scholes valuation model. The inputs used to value the Placement Agent Warrants included the Preferred Unit Price and the Placement Agent Warrant Strike Price (both of which are $12.7382), the expiration date of the Placement Agent Warrants of September 16, 2024, the risk-free rate to the expiration date of 1.73%, and the estimated volatility over the expected term of the Placement Agent Warrants of 90.0%.

 

As there had been no public market for Metuchen’s Common Units, the estimated fair value of its Common Units was determined by the Board of Directors as of the Private Placement date, with input from management, considering the Company’s most recently available valuations of the aggregate equity value of the Company. In addition to considering the results of these valuations, the Company’s Board of Directors considered various objective and subjective factors to determine the fair value of its Common and Preferred Units as of the private placement date, including the progress of the Company’s products sales, external market conditions affecting and trends within the life sciences industry and the likelihood of achieving a liquidity event. The fair value of the Company’s Common Units as of the Private Placement Date was determined to be the difference between the fair value of the Company’s aggregate equity and the summation of the fair values of the Preferred Units, the Lead Investor Warrants and Placement Agent Warrants.

 

10)	Stockholders’ Equity

 

Upon consummation of the Mergers, each outstanding Common Unit or Preferred Unit of Metuchen was exchanged for a number of shares of Petros common stock, par value $0.0001 per share (the “Petros Common Stock”), equal to 0.4968, which resulted in an aggregate of 4,949,610 shares of Petros Common Stock issued to the holders of Metuchen units in the Mergers. In addition, each holder of Neurotrope common stock, par value $0.0001 per share (the “Neurotrope Common Stock”) received one (1) share of Petros Common Stock for every five (5) shares of Neurotrope Common Stock held, and each holder of Neurotrope preferred stock, par value $0.001 per share (the “Neurotrope Preferred Stock”) received one (1) share of Petros preferred stock (the “Petros Preferred Stock”) for every one (1) share of Neurotrope Preferred Stock held. In addition, each holder of outstanding options to purchase Neurotrope Common Stock or outstanding warrants to purchase Neurotrope Common Stock that were not previously exercised prior to the consummation of the Mergers was converted into equivalent options and warrants to purchase one (1) share of Petros Common Stock for every five (5) shares of Neurotrope Common Stock outstanding pursuant to such options or warrants.

 

As a result of the Mergers, the former Neurotrope shareholders collectively own approximately 4,758,045 shares of Petros Common Stock and 500 shares of Petros Preferred Stock and the former Metuchen unit holders collectively own 4,949,610 shares of Petros Common Stock. Accordingly, the former Metuchen unit holders collectively own approximately 51% of Petros and the former Neurotrope shareholders collectively own approximately 49% of Petros.

 

On January 26, 2021, 500 shares of the Company’s Preferred Stock were converted into 60,606 shares of the Company’s common stock.

 

Backstop Agreement

 

In connection with the entry into the Merger Agreement, Neurotrope and an affiliated entity of Juggernaut Capital Partners (“Juggernaut”) entered into a Backstop Agreement pursuant to which Juggernaut agreed to contribute to Metuchen at the closing of the Mergers an amount equal to the Working Capital Shortfall Amount (as defined in the Merger Agreement), if any, as determined in accordance with the Merger Agreement, up to an aggregate amount not to exceed $6,000,000 (the “Commitment Cap”). Following the closing of the Mergers and until the one-year anniversary of the closing of the Mergers (the “Anniversary Date”), Juggernaut agreed to contribute, or cause an affiliate to contribute, to Petros an amount equal to the Commitment Cap less the Working Capital Shortfall Amount (the “Post-Closing Commitment”) on the Anniversary Date; provided, however, that, (a) in the event that, at any time between the closing of the Mergers and the Anniversary Date, the closing price per share of Petros’s Common Stock on The Nasdaq Capital Market or any other securities exchanges on which the Petros Common Stock is then traded equals or exceeds $2.175 for a period of ten consecutive trading days, then the Post-Closing Commitment shall be reduced by fifty percent (50%) and (b) in the event that, at any time between the closing of the Mergers and the Anniversary Date, the closing price per share of Petros’s Common Stock on The Nasdaq Capital Market or any other securities exchanges on which the Petros Common Stock is then traded equals or exceeds $2.5375 for a period of ten (10) consecutive trading days, then the Post-Closing Commitment shall be $0.

 

Pursuant to the Backstop Agreement and upon closing of the Mergers, Juggernaut paid the Company $2.6 million for the Working Capital Shortfall Amount, which was recorded in equity in relation to the net proceeds received from the reverse capitalization.

 

 

Contingent Consideration

 

Pursuant to the Merger Agreement, each security holder of Metuchen received a right to receive such security holder’s pro rata stock of an aggregate of 14,232,090 stocks of Petros Common Stock potentially issuable upon the achievement of certain milestones set forth in the Merger Agreement. The milestones are for the achievement of stock price and market capitalization, as defined over a two-year period.

 

Milestone Earnout Payments

 

In connection with the Mergers, each security holder of Metuchen received an equity classified earnout consideration to be paid in the form of Petros Common Stock if the Closing Price (as defined in the Merger Agreement) per share of stock of Petros’ Common Stock equals or exceeds certain milestones set forth in the Merger Agreement, as discussed below. Each milestone earnout payment is only achievable and payable one time and upon attainment of such milestone earnout payment. In no event will the sum of the milestone earnout payments be greater than 4,000,000 shares of Petros Common Stock. As of December 31, 2020, the milestones have not been achieved.

 

If at any time following the Closing (as defined in the Merger Agreement) and prior to the one-year anniversary of the Closing, the Closing Price per share of Petros Common Stock is, for a period of twenty (20) trading days during any thirty (30) consecutive trading day period, greater than or equal to:

 

	·	$8.00 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$10.00 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$13.00 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$15.00 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.

 

If at any time within the twelve (12) month period following the one-year anniversary of the Closing, the Closing Price per share of Petros Common Stock is, for a period of twenty (20) trading days during any thirty (30) consecutive trading day period, greater than or equal to:

 

	·	$10.00 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$12.50 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$16.25 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.
	·	$18.75 - then the earnout payment will be equal to 1,000,000 shares of Petros Common Stock.

 

Market Capitalization/Gross Proceeds Earnout Payments

 

In connection with the Mergers, each security holder of Metuchen received the right to receive earnout consideration, which is liability classified, to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds that equals or exceeds certain milestones set forth in the Merger Agreement, as discussed below. Each milestone earnout payment is only achievable and payable one time and upon attainment of such milestone. In no event will the sum of the milestone earnout payments be greater than 10,232,090 shares of Petros Common Stock. As of December 31, 2020, the milestones have not been achieved. The fair value of the derivative liability was $9.9 million as of December 31, 2020.

 

Metuchen equity holders will have the opportunity to receive the following during the period ending on the second anniversary of the Closing:

 

a.

The Earnout Payment shall be equal to 2,000,000 shares of Petros Common Stock if:

	i.	Petros’ Market Capitalization (as defined in the Merger Agreement) is greater than or equal to $250,000,000 for a period of twenty (20) trading days during any thirty (30) consecutive trading day period with a Closing Price of no less than $17.50 on each such trading day; or
	ii.	Petros receives aggregate gross proceeds of at least $25,000,000 in an offering (or series of offerings within a sixty (60) calendar day period) of Petros Common Stock with a price per share of Petros Common Stock sold equal to no less than $17.50 in each offering (or series of offerings) and where Petros has a Market Capitalization immediately prior to each such offering (or series of offerings) equal to at least $250,000,000.

b.

The Earnout Payment shall be equal to 2,000,000 shares of Petros Common Stock if:

	i.	Petros’ Market Capitalization is greater than or equal to $300,000,000 for a period of twenty (20) trading days during any thirty (30) consecutive trading day period with a Closing Price of no less than $18.75 on each such trading day; or
	ii.	Petros receives aggregate gross proceeds of at least $30,000,000 in an offering (or series of offerings within a sixty (60) calendar day period) of Petros Common Stock with a price per share of Petros Common Stock sold equal to no less than $18.75 in each offering (or series of offerings) and where Petros has a Market Capitalization immediately prior to each such offering (or series of offerings) equal to at least $300,000,000.

 

 

c.

The Earnout Payment shall be equal to 3,000,000 shares of Petros Common Stock if:

	i.	Petros’ Market Capitalization is greater than or equal to $400,000,000 for a period of twenty (20) trading days during any thirty (30) consecutive trading day period with a Closing Price of no less than $22.50 on each such trading day; or
	ii.	Petros receives aggregate gross proceeds of at least $40,000,000 in an offering (or series of offerings within a sixty (60) calendar day period) of Petros Common Stock with a price per share of Petros Common Stock sold equal to no less than $22.50 in each offering (or series of offerings) and where Petros has a Market Capitalization immediately prior to each such offering (or series of offerings) equal to at least $400,000,000.

d.

The Earnout Payment shall be equal to 3,232,090 shares of Petros Common Stock if:

	i.	Petros’ Market Capitalization is greater than or equal to $500,000,000 for a period of twenty (20) trading days during any thirty (30) consecutive trading day period with a Closing Price of no less than $23.75 on each such trading day; or
	ii.	Petros receives aggregate gross proceeds of at least $50,000,000 in an offering (or series of offerings within a sixty (60) calendar day period) of Petros Common Stock with a price per share of Petros Common Stock sold equal to no less than $23.75 in each offering (or series of offerings) and where Petros has a Market Capitalization immediately prior to each such offering (or series of offerings) equal to at least $500,000,000.

 

11)	Stock Options

 

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. As of December 31, 2020, there were 1,078,346 shares authorized and 504,015 shares available for issuance under the 2020 Plan.

 

Upon the consummation of the Mergers as disclosed in Note 1, Neurotrope options issued and outstanding as of December 1, 2020 were converted into equivalent options to purchase stocks of Petros common stock and were adjusted to give effect to the Exchange Ratio set forth in the Merger Agreement. The following is a summary of stock options for the period from December 1, 2020 through December 31, 2020:

 

		Number of Shares				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (Years)				Aggregate Instrinsic Value ($ in thousands)
Options outstanding at December 1, 2020			574,331			$	51.43				0.9			$	-
Options granted			-				-				-				-
Less: options forfeited			-				-				-				-
Less: options expired/cancelled			-				-				-				-
Less: options exercised			-				-				-				-
Options outstanding at December 31, 2020			574,331			$	51.43				0.9			$	-
Options exercisable at December 31, 2020			574,331			$	51.43				0.9			$	-

 

Upon the consummation of the Mergers as disclosed in Note 1, the vesting of former Neurotrope stock options in accordance with their terms was accelerated due to a change in control pursuant to the terms of the Neurotrope, Inc. 2013 Equity Incentive Plan and the Neurotrope, Inc. 2017 Equity Incentive Plan. Pursuant to the change in control, Neurotrope extended the period to exercise the stock options to be one-year from the closing of the Mergers. Accordingly, the Company did not record any stock-based compensation expense in connection with these stock options.

 

On February 19, 2021, Fady Boctor, the President and Chief Commercial Officer of the Company, was granted an option to purchase 215,669 shares of the Company’s common stock at an exercise price of $3.74 per share. The option vested 50% as of February 19, 2021, the date of grant, and the remainder shall vest in equal installments on the first and second anniversary thereof.

 

12)	Common Stock Warrants

 

Upon the consummation of the Merger as disclosed in Note 1, Neurotrope warrants issued and outstanding as of December 1, 2020 were converted into equivalent warrants to purchase common stock of Petros and were adjusted to give effect to the Exchange Ratio set forth in the Merger Agreement. The following is a summary of warrants for the period from December 1, 2020 through December 31, 2020:

 

		Number of Shares
Warrants outstanding at December 1, 2020			4,407,962
Warrants issued			-
Warrants exercised			-
Warrants outstanding at December 31, 2020			4,407,962

 

 

As of December 31, 2020, the Company’s warrants by expiration date were as follows:

 

Number of Warrants			Exercise Price				Expiration Date
76,569			$	32.00			November 17, 2021
131,344				64.00			November 17, 2021
2,780				1.60			August 23, 2023
18,000				35.65			June 1, 2024
4,800				35.60			June 5, 2024
74,864				21.85			June 17, 2024
20,043				31.25			June 19, 2024
22,800				26.55			September 1, 2024
10,500				12.7382			September 16, 2024
22,800				4.30			December 1, 2024
28,000				5.65			March 2, 2025
28,000				7.30			June 1, 2025
28,000				5.50			September 1, 2025
28,000				4.71			December 1, 2025
2,221,829				7.50			December 1, 2025
908,498				17.50			December 1, 2025
623,303				51.25			December 1, 2025
157,832				125.00			December 1, 2025
4,407,962

 

13)	Basic and Diluted Net Loss per Common Share

 

Upon the consummation of the Mergers on December 1, 2020, the basic weighted average number of common shares outstanding for the year ended December 31, 2019 have been calculated on a pro forma basis using Metuchen’s historical weighted average number of common units outstanding multiplied by the exchange ratio used in the reverse recapitalization. For the year ended December 31, 2020, the basic weighted average shares outstanding has been calculated using the number of common units outstanding of Metuchen from January 1, 2020 through the December 1, 2020 acquisition date multiplied by the exchange ratio used in the transaction and the number of common shares outstanding of the Company from December 1, 2020 through December 31, 2020.

 

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 Years Ended December 31,
		2020				2019
Numerator
Net (loss) income		$	(20,585,925	)		$	(32,511,300	)
Denominator
Weighted-average common shares for basic and diluted net loss per unit			5,340,682				2,460,026
Basic and diluted net loss per common share		$	(3.85	)		$	(13.22	)

 

 

The following table summarizes the potentially dilutive securities convertible into common shares that were excluded from the calculation of diluted net loss per share because their inclusion would have been antidilutive:

 

		For the Years Ended December 31,
		2020				2019
Stock Options			574,331				-
Warrants			4,407,962				127,396
Total			4,982,293				127,396

  

14)	Marketing, Licensing and Distribution Agreements

 

(a)

Vivus

 

On September 30, 2016, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Vivus, Inc (“Vivus”) to purchase and receive the license for the commercialization and exploitation of Stendra® for a one-time fee of $70 million, and for an additional $0.8 million, the Company also acquired the current Stendra® product and sample inventories as of September 30, 2016 that were owned by Vivus. The License Agreement gives the Company the right to sell Stendra® in the U.S and its territories, Canada, South America, and India. In December 2000, Vivus originally was granted the license from Mitsubishi Tanabe Pharma Corporation (“MTPC”) to develop, market, and manufacture Stendra®. Stendra® was approved by the Food and Drug Administration (“FDA”) in April 2012 to treat male erectile dysfunction.

 

The Company will pay MTPC a royalty of 5% on the first $500 million of net sales and 6% of net sales thereafter. In consideration for the trademark assignment and the use of the trademarks associated with the product and the Vivus technology, the Company shall (a) during the first, second, and third years following the expiration of the Royalty Period in a particular country in the Company’s territory, pay to Vivus a royalty equal to 2% of the net sales of products in such territory; and (b) following the fourth and fifth years following the end of the Royalty Period in such territory, pay to Vivus a royalty equal to 1% of the net sales of products in such territory. Thereafter, no further royalties shall be owed with respect to net sales of Stendra® in such territory.

 

In addition, the Company will be responsible for a pro-rata portion of a $6 million milestone payment to be paid once $250 million in sales has been reached on the separate revenue stream of Stendra®. Should the $250 million of sales threshold be reached, the Company will be responsible for $3.2 million of the milestone payment.

 

In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on the effective date of the License Agreement. The Supply Agreement states that Vivus will initially manufacture, test, and supply the product to the Company or its designee, directly or through one or more third parties. The agreement is effective through December 31, 2021. The Company provided Vivus with notice of termination of the supply agreement on September 30, 2019, effective on September 30. 2021. The Company is required to make future minimum annual purchases of Stendra® under the Supply Agreement as follows (based on current prices, however, subject to annual price increases). As of December 31, 2020, the minimum purchase obligation is $4.1 million in 2021.

 

Stendra® can be purchased by written purchase orders submitted to Vivus at least 125 days in advance of the desired shipment date. For each quarter, the Company is required to submit purchase orders for at least 90% of the quantities in the forecast above. Vivus will have no obligation to supply Stendra® in excess of 120% of the quantity specified above but will use reasonable efforts.

 

As of December 31, 2020 and 2019, the Company has $14.2 million and $9.3 million, respectively, of accrued inventory purchases related to the Company’s minimum purchase obligations with Vivus for raw material or API inventory. As API inventory is not a finished good, the Company does not have title to the product and classifies API Inventory in either other current assets or other assets, depending on whether the Company expects to take title to the product within one year from the date of the financial statements. As of December 31, 2020 and 2019, there was $1.3 million and $1.4 million, respectively, included in other current assets (see Note 5 Prepaid and Other Current Assets). As of December 31, 2020 and 2019, there was $11.1 million and $6.7 million included on the accompanying consolidated balance sheets, respectively. The Company reviews its inventory levels and purchase commitments for excess amounts that it is required to purchase but projects it will not be able to sell prior to product expiry. During the years ended December 31, 2020 and 2019, the Company recorded a reserve of $0.8 million and $1.2 million, respectively, which is included in cost of goods sold, to reduce the cost of API inventory to its net realizable value.

 

During the years ended December 31, 2020 and 2019, the Company incurred royalties to MTPC for Stendra of $317,875 and $550,533. Royalties incurred were included in cost of goods sold in the consolidated statements of operations. As of December 31, 2020, the Company had a payable for royalties of $8,728, which is included in accrued expenses in the accompanying consolidated balance sheet. As of December 31, 2019, the Company had a receivable for royalties of $309,147, which is included in other current assets in prepaid expenses and other current assets (see Note 5 Prepaid and Other Current Assets).

 

 

On July 7, 2020, Vivus announced that it has completed the solicitation of an in-court prepackaged plan of reorganization, under which IEH Biopharma LLC will take 100% ownership of Vivus. Vivus is a specialty pharmaceutical company and the Company has a License Agreement with Vivus for commercialization and exploitation of Stendra® as well as the Company and Vivus are parties to a Supply Agreement for which Vivus will manufacture, test and supply Stendra® to the Company. The License Agreement is a sublicense under Vivus’ license agreement with the owner of the Stendra® patent, MTPC.

 

The license agreement between MTPC and Vivus (“MTPC License”) contains certain termination rights that would allow MTPC to terminate the agreement if Vivus were to breach any of the terms of the MTPC License or become insolvent or bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra®.

 

(b)

Hybrid

 

In March 2020, the Company acquired the exclusive license to H100™ from Hybrid. H100™ is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of $100,000, with an additional $900,000 payment due upon obtainment of orphan indication for H100™ and termination of Hybrid’s existing agreement with a compounding pharmacy, and additional annual payments of $125,000, $150,000 and $200,000 due on each of the first, second and third anniversaries of the license agreement and $250,000 annual payments due thereafter. The Company is also required to make a $1,000,000 payment upon first commercial sale and a sliding scale of percentage payments on net sales in the low single digits. Annual anniversary payments will not be required after commercialization. The Company is also obligated to make royalty payments between 3-6% of any net sales. In addition, the Company may terminate at any time after first anniversary, without cause, upon ninety (90) days’ notice.

 

The initial license fee of $100,000 and an extension payment of $100,000 has been recorded in research and development during the year ended December 31, 2020. The Company has treated the acquisition as an asset acquisition and has concluded that the asset acquired and the upfront payment should be expensed as it was considered an IPR&D asset with no alternative future uses.

 

On September 24, 2020, the Company and Hybrid amended the license agreement for H100™ to extend the term of the license agreement for an additional six months to March 24, 2021. In consideration for the amendment, the Company paid Hybrid $50,000 in October 2020 and an additional $100,000 in December 2020.

 

15)	Commitments and Contingencies

 

(a)

Employment Agreements

 

The Company has employment agreements with certain executive officers and key employees that provide for, among other things, salary and performance bonuses.

 

In connection with entry into the Merger Agreement Amendment, Neurotrope, Neurotrope Bioscience, Inc. (a wholly-owned subsidiary of Neurotrope) and Metuchen entered into an Employee Lease Agreement pursuant to which Neurotrope and Neurotrope Bioscience, Inc. agreed to lease the services of Dr. Charles Ryan to Metuchen prior to the Closing. Dr. Ryan was required to devote no more than 75% of his working time performing services to Metuchen under the Employee Lease Agreement and Metuchen paid 75% of the costs associated with Dr. Ryan’s employment from the period beginning on June 1, 2020 through the Closing, including but not limited to, the costs for all compensation and benefits paid to, for or on behalf Dr. Ryan (the “Fees”). Upon consummation of the Mergers, Metuchen paid approximately $0.2 million for the Fees pursuant to the Employee Lease Agreement, which reduced the amount of cash that Petros retained following the Closing.

 

In connection with the consummation of the Mergers, on December 24, 2020, the Company and Mr. Keith Lavan entered into a Separation Agreement (the “Separation Agreement”), pursuant to which Mr. Lavan resigned as Senior Vice President and Chief Financial Officer of the Company and agreed to serve as an advisor to the Company through December 31, 2020 (the “Separation Date”). Pursuant to the Separation Agreement, in addition to other benefits, Mr. Lavan received a stay-on bonus of $50,000 for continuing to remain employed by the Company through the Separation Date. For his services as an advisor, the Company agreed to pay Mr. Lavan an amount equal to 50% of his base salary as of immediately prior to the Separation Date. The Company paid 70% of such amount on January 15, 2021 and 30% of such amount in equal installments from the Separation Date through June 30, 2021. In addition, Mr. Lavan executed a general release of liabilities in favor of the Company.

 

 

(b)

Legal Proceedings

 

On July 14, 2020, Greg Ford, the Chief Executive Officer of the Company, was terminated. On July 14, 2020, Mr. Ford, through his attorney, claimed that he was entitled to severance pay pursuant to an employment agreement following the termination of his employment on that same date. This claim is currently at an early stage where the Company is unable to determine the likelihood of any unfavorable outcome.

 

The Company is not currently involved in any other significant claims or legal actions that, in the opinion of management, will have a material adverse impact on the Company’s operations, financial position or cash flows.

 

(c)

Operating Leases

 

The Company has commitments under operating leases for office and warehouse space used in its operations. The Company’s leases have remaining lease terms ranging from 3.7 years to 6.0 years.

 

The components of lease expense were as follows:

 

		For the Years Ended December 31,
		2020				2019
Operating Lease Cost:
Fixed lease cost		$	179,246			$	88,002

 

Supplemental balance sheet information related to leases was as follows:

 

		As of December 31, 2020				As of December 31, 2019
Operating lease ROU asset:
Other assets		$	579,535			$	672,246
Operating lease liability:
Other current liabilities		$	108,971			$	96,104
Other long-term liabilities			530,597				639,568
Total operating lease liability		$	639,568			$	735,672

 

Supplemental lease term and discount rate information related to leases was as follows:

 

		As of December 31, 2020				As of December 31, 2019
Weighted-average remaining lease terms - operating leases			4.7 years				5.7 years
Weighted-average discount rate - operating leases			12.6	%			12.6	%

 

Supplemental cash flow information related to leases was as follows:

 

		For the Years Ended December 31,
		2020				2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	182,639			$	92,068
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	-			$	698,127

 

 

Future minimum lease payments under non-cancelable leases as of December 31, 2020 were as follows:

 

Lease Liability Maturity Analysis		Operating Leases
2021			184,239
2022			187,739
2023			189,374
2024			155,242
Thereafter			163,432
Total lease payments			880,026
Less: Imputed Interest			(240,458	)
Total		$	639,568

 

As of December 31, 2020, the Company had no operating leases that had not yet commenced.

 

16)	Income Taxes

 

The current and deferred income tax expense (benefit) for the years ended December 31, 2020 and 2019 is as follows:

 

		For the Years Ended December 31,
		2020				2019
Current expense (benefit):
Federal		$	5,085			$	-
State			88				-
Total current expense (benefit)			5,173				-
Deferred expense (benefit):
Federal			(1,378,731	)			(165,483	)
State			(53,435	)			(480,383	)
Total deferred expense (benefit)			(1,432,166	)			(645,866	)
Total income tax expense (benefit)		$	(1,426,993	)		$	(645,866	)

 

A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:

 

		For the Years Ended December 31,
		2020				2019
Income at US statutory rate			21.00	%			21.00	%
State taxes, net of federal benefit			1.56	%			1.59	%
Permanent differences			-2.68	%			-0.02	%
Recapitalization			36.49	%			0.00	%
Pass through income to members			-32.71	%			-21.13	%
Valuation allowance			-17.22	%			0.00	%
Other			0.00	%			0.51	%
Effective income tax rate			6.44	%			1.95	%

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and December 31, 2019 are as follows:

 

		For the Years Ended December 31,
		2020				2019
Accruals		$	90,222			$	5,732
Intangible assets			(1,238,128	)			(1,438,682	)
Depreciation and amortization			5,661,235				-
Expenses no currently deductible			148,708				-
Net operating loss carryforwards			57,266				783
Interest expense limitation			25,547				-
Stock-based compensation			2,505,425				-
Valuation allowance			(7,250,275	)			-
Total deferred tax liability		$	-			$	(1,432,167	)

 

The Company assesses the need for a valuation allowance related to its deferred income tax assets by considering whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. A valuation allowance has been recorded against the Company’s deferred income tax assets, as it is in the opinion of management that it is more likely than not that the net operating loss carryforwards ("NOL") will not be utilized in the foreseeable future.

 

The cumulative valuation allowance as of December 31, 2020 is $7.3 million, which will be reduced if and when the Company determines that the deferred income tax assets are more likely than not to be realized.

 

As of December 31, 2020, the Company’s estimated aggregate total NOLs were $270 thousand for U.S. federal purposes with an indefinite life due to regulations set forth in the Tax Cuts and Jobs Act of 2017. The future utilization of the NOLs are limited to 80% of taxable income.

 

The Company files its tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. The Company is not currently under audit in any taxing jurisdictions.

 

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

 

The Company records uncertain tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2020, the Company has not recorded any uncertain tax positions in its consolidated financial statements.

 

17)	Defined Contribution Plan

 

The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. Eligible employees can contribute to the defined contribution plan, subject to certain limitations, on a pre-tax basis. The Company matches up to 100% of the first 6% of each employee’s contribution and is recognized as expense in general and administrative expenses on the consolidated statement of operations. Employer contributions were $116,364 and $218,361 for the year ended December 31, 2020 and 2019, respectively.

 

18)	Segment Information

 

The Company manages its operations through two segments. The Company’s two segments, Prescription Medications and Medical Devices, focus on the treatment of male erectile dysfunction. The Prescription Medications segment consists primarily of operations related to Stendra®, which is sold generally in the United States, and H100™ for the treatment of Peyronie’s disease. The Medical Devices segment consists primarily of operations related to vacuum erection devices, which are sold domestically and internationally. The Company separately presents the costs associated with certain corporate functions as Corporate, primarily consisting of unallocated operating expenses including costs that were not specific to a particular segment but are general to the group, expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other income (expense), net is also not allocated to the operating segments.

 

 

The Company’s results of operations by reportable segment for the year ended December 31, 2020 are summarized as follows:

 

For the year ended December 31, 2020		Prescription Medications				Medical Devices				Corporate				Consolidated
Net sales		$	6,357,498			$	3,201,971			$	-			$	9,559,469
Cost of goods sold			3,083,417				963,049				-				4,046,466
Selling, general and administrative expenses			8,784,716				2,024,448				4,865,804				15,674,968
Research and development expenses			459,636				-				-				459,636
Depreciation and amortization expense			5,424,292				1,236,146				-				6,660,438
Change in fair value of derivative liability			1,680,000				-				-				1,680,000
Interest expense			-				-				3,050,879				3,050,879
Income tax benefit			-				1,426,993				-				1,426,993
Net loss		$	(13,074,563	)		$	405,321			$	(7,916,683	)		$	(20,585,925	)

 

The Company’s results of operations by reportable segment for the year ended December 31, 2019 are summarized as follows:

 

For the Year Ended December 31, 2019		Prescription Medications				Medical Devices				Corporate				Consolidated
Net sales		$	11,110,660			$	4,466,506			$	-			$	15,577,166
Cost of goods sold			6,057,977				1,369,134				-				7,427,111
Selling, general and administrative expenses			13,873,200				2,735,390				3,118,633				19,727,223
Depreciation and amortization expense			4,145,833				1,145,274				-				5,291,107
Impairment loss			2,443,930				-								2,443,930
Interest expense			-				-				13,844,961				13,844,961
Income tax expense			-				645,866				-				645,866
Net loss		$	(15,410,280	)		$	(137,426	)		$	(16,963,594	)		$	(32,511,300	)

 

The following table reflects net sales by geographic region for the years ended December 31, 2020 and 2019:

 

		For the Years Ended December 31,
Net sales		2020				2019
United States		$	8,555,831			$	14,236,886
International			1,003,638				1,340,280
		$	9,559,469			$	15,577,166

 

No individual country other than the United States accounted for 10% of total sales for the year ended December 31, 2020 and 2019.

 

The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of December 31, 2020 are summarized as follows:

 

		Prescription Medications				Medical Devices				Consolidated
Intangible assets, net		$	24,625,686			$	7,535,233			$	32,160,919
Total segment assets		$	60,725,191			$	9,128,823			$	69,854,014

 

The Company’s assets by reportable segment and reconciliation of segment assets to consolidated assets as of December 31, 2019 are summarized as follows:

 

		Prescription Medications				Medical Devices				Consolidated
Intangible assets, net		$	30,039,758			$	8,771,379			$	38,811,137
Total segment assets		$	47,455,382			$	10,910,911			$	58,366,293

 

 

 

Exhibit 4.4

 

DESCRIPTION OF CAPITAL STOCK

 

General

 

The following description of our capital stock and provisions of our amended and restated certificate of incorporation (the “Articles of Incorporation”), and amended and restated by-laws (the “By-laws”) are summaries and are qualified by reference to the Articles of Incorporation and the By-laws that are on file with the SEC.

 

Authorized Capital Stock

 

Our Articles of Incorporation authorize us to issue 30,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.

 

Common Stock

 

The holders of our common stock are entitled to receive ratably the dividends out of assets or funds legally available for the payment of dividends at such times and in such amounts as our Board of Directors (the “Board”) from time to time may determine, subject to preferences that may be applicable to any then outstanding preferred stock. Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. There is no cumulative voting of the election of directors then standing for election. Our common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption. There are no redemption or sinking fund provisions applicable to our common stock. Upon liquidation, dissolution or winding up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of our common stock after payment of liabilities, accrued dividends and liquidation preferences, if any. All outstanding shares are, when sold, validly issued, fully paid, and nonassessable.

 

Preferred Stock

 

The Board is authorized to issue 10,000,000 shares of preferred stock without further action by the holders of our common stock. The shares of preferred stock may be issued from time to time in one or more series, each of which will have such distinctive designation or title as shall be determined by our Board prior to the issuance of any shares thereof. Preferred stock will have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of preferred stock as may be adopted from time to time by the Board prior to the issuance of any shares thereof.

 

The issuance of preferred stock could adversely affect the rights of the holders of common stock and, therefore, reduce the value of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of the common stock until the Board determines the specific rights of the holders of the preferred stock; however, these effects may include:

 

•

Restricting dividends on the common stock;

 

•

Diluting the voting power of the common stock;

 

•

Impairing the liquidation rights of the common stock; or

 

•

Delaying or preventing a change in control of the Company without further action by the stockholders.

 

Registration Rights

 

On December 1, 2020, Petros entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with JCP III SM AIV, L.P. and its affiliates who hold Petros capital stock (the “Juggernaut Holders”). Under the Registration Rights Agreement, the Juggernaut Holders have the demand registration rights and piggyback registration rights described below, in either case, registering the resale of their shares of Petros Common Stock. These registration rights are subject to conditions and limitations.

 

 

Demand Registration Rights. Petros is obligated to file a shelf registration statement under Rule 415 of the Securities Act covering the resale of all the shares of Petros capital stock held by the Juggernaut Holders and to use commercially reasonable efforts to have such shelf registration statement declared effective. Following the nine month anniversary of the date of the Registration Rights Agreement, Juggernaut Holders of at least $10.0 million worth of Petros’ registrable securities shall have the right to sell all or part of their registrable shares of Petros capital stock by delivering a written request to Petros for an underwritten offering. In the event a shelf registration statement has been declared effective and is unavailable, Juggernaut Holders of at least $10.0 million worth of Petros’s registrable securities shall have the right to require Petros to effect a long-form registration statement. In no event will the Registration Rights Agreement require Petros file more than two long-form registration statements or require Petros to cause a long-form registration statement to be declared effective within a period of 90 days after the effective date of any other registration statement, other than a Form S-4 or Form S-8 or comparable form.

 

Piggyback Registration Rights. If Petros proposes to file a registration statement under the Securities Act for the purposes of registering Petros securities, other than a registration statement on Form S-4 or Form S-8 or any similar successor forms thereto, the Juggernaut Holders are entitled to receive notice of such registration and to request that Petros includes their registrable securities for resale in the registration statement.

 

Expenses of Registration. Petros will pay all registration expenses, other than underwriting discounts and commissions, related to any demand or piggyback registration. The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which Petros is obligated to indemnify the selling Juggernaut Holders, in the event of misstatements or omissions in the registration statement attributable to Petros except in the event of fraud, and the selling Juggernaut Holders are obligated to indemnify Petros for misstatements or omissions attributable to them.

 

Expiration of Registration Right. The registration rights will terminate five years from the date of the Registration Rights Agreement.

 

Anti-Takeover Effects of Delaware Law and Specified Articles of Incorporation and By-laws Provisions

 

Preferred Stock. The existence of authorized but unissued shares of preferred stock may enable the Board to render more difficult or to discourage an attempt to gain control of Petros by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the Board were to determine that a takeover proposal is not in the best interests of us or stockholders, the Board could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, the Articles of Incorporation grant the Board broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of Petros.

 

Stockholder Action; Special Meeting of Stockholders. Our Articles of Incorporation and By-laws provide that stockholders may take action only at a duly called annual or special meeting of stockholders and may not take action by written consent. Our Articles of Incorporation and By-laws further provide that special meetings of our stockholders may be called only by a majority of the Board or by our chief executive officer or, if the office of chief executive officer is vacant, our president. In no event may our stockholders call a special meeting of stockholders.

 

Business Combinations. Our Articles of Incorporation provide that the provisions of Section 203 of the Delaware General Corporation Law, which relate to business combinations with interested stockholders, do not apply to us. Subject to certain exceptions, Section 203 prevents a publicly held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that such person became an interested stockholder, unless either the interested stockholder attained such status with the approval of our board of directors, the business combination is approved by our board of directors and stockholders in a prescribed manner or the interested stockholder acquired at least 85% of our outstanding voting stock in the transaction in which such person became an interested stockholder. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

 

 

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our By-laws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must meet specified procedural requirements. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual or special meeting of stockholders.

 

Exclusive Forum Charter Provision. Our Articles of Incorporation and By-laws require that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for a stockholder (including a beneficial owner) to bring for the following:

 

i)

any derivative action or proceeding brought on behalf of the Company;

 

ii)

any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders;

 

iii)

any action asserting a claim against the Company arising pursuant to any provision of the Delaware General Corporation Law, the Articles of Incorporation or the By-laws; or

 

iv)

any action asserting a claim against the Company, its directors, officers or employees governed by the internal affairs doctrine;

 

except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. Because the applicability of the exclusive forum provision is limited to the extent permitted by applicable law, we do not intend that the exclusive forum provision would apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction, and acknowledge that federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act. We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

 

Directors’ Liability. Our Articles of Incorporation limit the personal liability of directors to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director to the maximum extent permitted by the Delaware General Corporation Law and provides that no director will have personal liability to us or to our stockholders for monetary damages for breach of fiduciary duty. However, these provisions do not eliminate or limit the liability of any of our directors:

 

•

for any breach of the director’s duty of loyalty to us or our stockholders;

 

•

for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

 

•

for voting or assenting to unlawful payments of dividends, stock repurchases or other distributions; or

 

•

for any transaction from which the director derived an improper personal benefit.

 

 

Exhibit 10.1

 

EXECUTION VERSION

 

LOAN AND SECURITY AGREEMENT

 

THIS LOAN AND SECURITY AGREEMENT is made and dated as of September 30, 2016 and is entered into by and between METUCHEN PHARMACEUTICALS LLC, a Delaware limited liability company (the “Borrower”), the several banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “Lender”) and HERCULES CAPITAL, INC., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, the “Agent”).

 

RECITALS

 

A.       Borrower has requested Lender to make available to Borrower a loan in an aggregate principal amount of up to THIRTY FIVE MILLION DOLLARS ($35,000,000) (the “Term Loan”);

 

B.       Lender is willing to make the Term Loan on the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, Borrower, the Agent and Lender agree as follows:

 

SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION

 

1.1       Unless otherwise defined herein, the following capitalized terms shall have the following meanings:

 

“Account Control Agreement(s)” means any agreement entered into by and among the Agent, Borrower and a third party bank or other institution (including a Securities Intermediary) in which Borrower maintains a Deposit Account or an Investment Account and which grants Agent a perfected first priority security interest in the subject account or accounts, subject to customary bankers’ liens.

 

“ACH Authorization” means the ACH Debit Authorization Agreement in substantially the form of Exhibit H, which account numbers shall be redacted for security purposes if and when filed publicly by Borrower.

 

“Advance(s)” means a Term Loan Advance.

 

“Advance Date” means the funding date of any Advance.

 

“Advance Request” means a request for an Advance submitted by Borrower to Agent in substantially the form of Exhibit A.

 

“Affiliate” means, with respect to any Person,each Person that directly or indirectly controls, is controlled by, or is under common control with such Person. For purposes of this definition, “control” of a Person means the possession, directly or indirectly, of either (a) the power to vote, or the beneficial ownership of, 10% or more of the voting stock of such Person, or (b) power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

 

 

“Agent” has the meaning given to it in the preamble to this Agreement.

 

“Agreement” means this Loan and Security Agreement, as amended from time to time.

 

“Akrimax” means Akrimax Pharmaceuticals, LLC.

 

“Akrimax Agreement” means the Sales and Marketing Agreement, dated as of the Closing Date, by and between Borrower, Mist and Akrimax, as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

“Amortization Date” means November 1, 2017; provided that in the event Borrower achieves Performance Milestone A, the Amortization Date shall be extended to May 1, 2018; and provided further that in the event Borrower achieves Performance Milestone A and Performance Milestone B, the Amortization Date shall be extended to November 1, 2018.

 

“Assignee” has the meaning given to it in Section 11.13.

 

“Board” means Borrower’s board of managers, directors or similar governing body.

 

“Borrower” has the meaning given to it in the preamble to this Agreement.

 

“Borrower Products” means all pharmaceuticals, products, software, service offerings, technical data or technology currently being designed, manufactured or sold by Borrower or which Borrower intends to sell, license, or distribute in the future including any products or service offerings under development, collectively, together with all pharmaceuticals, products, software, service offerings, technical data or technology that have been sold, licensed or distributed by Borrower since its organization; “Borrower Products” shall include pharmaceutical compositions and products that contain a selective phosphodiesterase type-5 inhibitor compound including without limitation the compound coded as “T -1790” by MTPC, chemically known as (S)-4-(3-Chloro-4-methoxybenzylamino)-2-(2-hydroxymethylpyrrolidin-1- yl)-N- pyrimidin-2-ylmethyl-5-pyrimidinecarboxyamide and identified by the International Non Proprietary Name avanafil (each a “Compound”), including, without limitation, the drug product known as “STENDRA™” and any improvements, line extensions, delivery mechanisms, dosage strengths, formulations, or forms as may be approved in the future by the FDA, Health Canada or the applicable regulatory agency in any South American country or India that, in each case, contain a Compound.

 

“Business Day” means any day other than Saturday, Sunday and any other day on which banking institutions in New York City, New York are closed for business.

 

“Capital Expenditures” means for any period, with respect to Borrower and its consolidated Subsidiaries, the aggregate of all expenditures (whether paid in cash or other  consideration or accrued as a liability and including that portion of capital lease obligations which is capitalized on the consolidated balance sheet of Borrower) by such Borrower and its consolidated Subsidiaries during such period for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that, in conformity with GAAP, are included in “additions to property, plant or equipment” or comparable items reflected in the consolidated statement of cash flows of Borrower.

 

 

“Cash” means all cash, cash equivalents and liquid funds.

 

“Change in Control” means any (i) reorganization, recapitalization, consolidation or merger (or similar transaction or series of related transactions) of Borrower, sale or exchange of outstanding shares (or similar transaction or series of related transactions) of Borrower in which the Permitted Investors do not, immediately after consummation of such transaction or series of related transactions, retain shares representing more than fifty percent (50%) of the voting power of the surviving entity of such transaction or series of related transactions (or the parent of such surviving entity if such surviving entity is wholly owned by such parent), in each case without regard to whether Borrower is the surviving entity, or (ii) sale or issuance by Borrower of equity securities to one or more purchasers, in a single transaction or series of related transactions not registered under the Securities Act, which securities represent, immediately following the closing (or, if there be more than one, any closing) thereof, thirty-five percent (35%) or more of the then-outstanding total combined voting power of Borrower.

 

“Claims” has the meaning given to it in Section 11.10.

 

“Closing Date” means the date of this Agreement.

 

“Collateral” means the property described in Section 3.

 

“Collateral Assignment of Contracts” means the Collateral Assignment of Material Contracts made by Borrower in favor of the Agent dated as of the Closing Date.

 

“Collateral Assignment of Intellectual Property” means the collateral assignment of Intellectual Property made by Borrower in favor of Agent dated as of the Closing Date.

 

“Commercial Supply Agreement” means the Commercial SupplyAgreement, dated as of the Closing Date, by and between Borrower and VIVUS, Inc., as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

“Confidential Information” has the meaning given to it in Section 11.12.

 

 

“Contingent Obligation” means, as applied to any Person, (i) any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation of another, including any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and (iii) net obligations under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be (x) in the case of clauses (i) and (ii) above, an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith, and (y) in the case of clause (iii) above, the net payment obligations of such Person determined by such Person in good faith as of the relevant time of determination; provided, however, that, in either case, such amount shall not in any event exceed the maximum amount of such Person’s obligations under the guarantee or other support arrangement.

 

“Copyright License” means any written agreement granting any right to use any Copyright or Copyright registration, now owned or hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.

 

“Copyrights” means all copyrights, whether registered or unregistered, held pursuant to the laws of the United States of America, any State thereof, or of any other country.

 

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the UCC, and includes any checking account, savings account, or certificate of deposit.

 

“Domestic Subsidiary” means any Subsidiary that is not a Foreign Subsidiary.

 

“Due Diligence Fee” means $50,000, which fee was paid to Lender prior to the Closing Date, and shall be deemed fully earned as of the date of payment thereof regardless of the early termination of this Agreement.

 

“EBITDA” means with respect to Borrower and its consolidated Subsidiaries for any period, (a) the sum, without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) nonrecurring cash fees, costs and expenses incurred in connection with the closing of the Transactions (including fees and expenses paid pursuant to and in connection with the closing of the transactions contemplated by this Agreement), but only to the extent included in Net Income, plus (vii) other non-cash items reducing Net Income, plus (viii) to the extent covered by insurance proceeds, losses in connection with casualty events, but only to the extent included in Net Income, plus (ix) identifiable and factually supportable adjustments to reflect operating expense reductions and other operating improvements, in each case to the extent approved by Agent, minus (b) the sum, without duplication of the amounts for such period of (i) other non-cash items increasing Net Income for such period, plus (ii) interest income, plus (iii) any “upfront” or “milestone” payments received in connection with any Investment, license agreement or other contractual arrangement.

 

 

End of Term Charge” shall have the meaning assigned to such term in Section 2.6.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

 

“Event of Default” has the meaning given to it in Section 9.

 

“Excess Cash Flow” means for any fiscal year of Borrower and its consolidated Subsidiaries, the excess, if any, of: (i) the sum of (v) Net Income for such fiscal year; plus (w) Interest Expense for such fiscal year related to PIK Interest or any other “pay-in-kind” interest; plus (x) total depreciation expense for such fiscal year; plus (y) total amortization expense; plus (z), an amount equal to any decrease in Working Capital from the first day to the last day of such fiscal year over (ii) the sum, without duplication, of (a) the aggregate amount actually paid by Borrower and its consolidated Subsidiaries in cash during such fiscal year (or other period) on account of Capital Expenditures (excluding any such expenditures financed with the proceeds of any indebtedness or equity investment); plus (b) the aggregate amount of all prepayments of the Term Loan (including regularly scheduled Monthly Installments) during such fiscal year (other than prepayments from Excess Cash Flow from the preceding fiscal year); plus (c) the aggregate amount of any Permitted Distributions paid in cash by Borrower during such fiscal year; plus (d) aggregate taxes of Borrower and its consolidated Subsidiaries (or Tax Distributions) to the extent paid in cash during such fiscal year; plus (e) an amount equal to any increase in Working Capital from the first day to the last day of such fiscal year; plus (g) to the extent included in Net Income, nonrecurring cash fees, costs and expenses incurred in connection with the closing of the Transactions (including fees and expenses paid pursuant to and in connection with the closing of the transactions contemplated by this Agreement).

 

“Excess Cash Flow Application Date” has the meaning given to it in Section 2.2(d).

 

“Excluded Accounts” are Deposit Accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees, and identified to the Agent by Borrower as such.

 

“Facility Charge” means one and three-quarters percent (1.75%) of the Maximum Term Loan Amount ($612,500.00).

 

“FD&C Act” means the United States Federal Food, Drug and Cosmetic Act.

 

“Financial Statements” has the meaning given to it in Section 7.1.

 

“Fixed Charge Coverage Ratio” means with respect to Borrower and its consolidated Subsidiaries for any period, the ratio of (a) the sum of (i) EBITDA for such period minus (ii) the portion of taxes based on income actually paid in cash (net of any cash refunds received) during such period minus (iii) Capital Expenditures (excluding the principal amount funded with the Loans) incurred in connection with such expenditures) to (b) Fixed Charges for such period.

 

 

“Fixed Charges” means with respect to Borrower and its consolidated Subsidiaries for any period, the sum (without duplication) of (a) cash Interest Expense for such period, plus (b) scheduled payments made during such period on account of principal of indebtedness of Borrower and its consolidated Subsidiaries (including scheduled principal payments in respect of the Term Loan).

 

“Foreign Subsidiary” means any Subsidiary other than a Subsidiary organized under the laws of any state within the United States of America.

 

“GAAP” means generally accepted accounting principles in the United States of America, as in effect from time to time.

 

“Guarantor” means Metuchen International and each other Person providing a guaranty of the Secured Obligations pursuant to the Guaranty.

 

“Guaranty” means the guaranty of the Secured Obligations made by the Guarantor in favor of the Agent and Lender.

 

“IND” means an Investigational New Drug Application, as defined in the FD&C Act.

 

“Indebtedness” means, without duplication, indebtedness of any kind, including (a) all indebtedness for borrowed money or the deferred purchase price of property or services (excluding trade credit entered into in the ordinary course of business due within sixty (60) days), including reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations.

 

“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

 

“Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents; Licenses; trade secrets and inventions; mask works; Borrower’s applications therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill associated with any of the foregoing, together with Borrower’s rights to sue for past, present and future infringement of Intellectual Property and the goodwill associated therewith.

 

“Interest Expense” means with respect to Borrower and its consolidated Subsidiaries for any period, total interest expense (including that portion of any capital lease obligations that is treated as interest in accordance with GAAP) of Borrower and its consolidated Subsidiaries for such period with respect to all outstanding Indebtedness of such Persons (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing and net costs under swap agreements in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP).

 

“Inventory” means “inventory” as defined in Article 9 of the UCC.

 

 

“Investment” means any beneficial ownership (including stock, partnership or limited liability company interests) of or in any Person, or any loan, advance or capital contribution to any Person or the acquisition of all, or substantially all, of the assets of another Person.

 

“Investment Account” means any investment account, securities account or other similar account that holds Investment Property as such term is defined in the UCC.

 

“Joinder Agreements” means for each Subsidiary, a completed and executed Joinder Agreement in substantially the form attached hereto as Exhibit G.

 

“Lender” has the meaning given to it in the preamble to this Agreement.

 

“License” means any Copyright License, Patent License, Trademark License or other license of rights or interests.

 

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security interest, encumbrance, levy, lien or charge of any kind, whether voluntarily incurred or arising by operation of law or otherwise, against any property, any conditional sale or other title retention agreement, and any lease in the nature of a security interest.

 

“Loan” means the Term Loan Advance made under this Agreement.

 

“Loan Documents” means this Agreement, the Notes (if any), the ACH Authorization, the Account Control Agreements, the Joinder Agreements, the Collateral Assignment of Contracts, the Collateral Assignment of Intellectual Property, all UCC Financing Statements, the Guaranty, and any other documents executed in connection with the Secured Obligations or the transactions contemplated hereby, as the same may from time to time be amended, modified, supplemented or restated.

 

“Material Adverse Effect” means a material adverse effect upon: (i) the business, operations, properties, assets or financial condition of Borrower; or (ii) the ability of Borrower to perform or pay the Secured Obligations in accordance with the terms of the Loan Documents, or the ability of the Agent or Lender to enforce any of its rights or remedies with respect to the Secured Obligations; or (iii) the Collateral or the Agent’s Liens on the Collateral or the priority of such Liens.

 

“Material Contract” means, with respect to Borrower and its consolidated Subsidiaries, each contract or agreement to which Borrower or any of its Subsidiaries is a party the loss of which, individually could reasonably be expected to result in a Material Adverse Effect. Without limitation, the contracts listed on Schedule 5.15(a) hereto and any replacements or substitutions thereof (the “Existing Material Contracts”) constitute “Material Contracts”.

 

“Material Third Party Contract” means the contracts listed on Schedule 5.15(b) hereto and any replacements or substitutions thereof.

 

“Maximum Term Loan Amount” means THIRTY FIVE MILLION DOLLARS ($35,000,000).

 

 

“Maximum Rate” shall have the meaning assigned to such term in Section 2.3.

 

“Metuchen International” means Metuchen International Pharmaceuticals LLC, a Delaware limited liability company, and a wholly owned Subsidiary of Borrower.

 

“Mist” means Mist Pharmaceuticals, LLC, a Delaware limited liability company.

 

“Mist Agreement” means the Sales, Marketing and Distribution Agreement, dated as of the Closing Date, by and between Borrower and Mist, as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

“Monthly Installments” has the meaning given to it in Section 2.2(d).

 

“MTPC” means Mitsubishi Tanabe Pharma Corporation (as successor in interest to Tanabe Seiyaku Co, Ltd.).

 

“NDA” means a New Drug Application, as defined in the FD&C Act.

 

“Net Income” means for any period, the consolidated net income (or loss) of Borrower and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP.

 

“Note(s)” means a Term Note.

 

“Operating Agreement” means collectively, the Operating Agreement of Borrower dated as of September 26, 2016 as amended and restated by the Amended and Restated Operating Agreement of Borrower, dated as of September 30, 2016 as the same may be further amended from time to time.

 

“Patent License” means any written agreement granting any right with respect to any invention on which a Patent is in existence or a Patent application is pending, in which agreement Borrower now holds or hereafter acquires any interest.

 

“Patents” means all letters patent of, or rights corresponding thereto, in the United States of America or in any other country, all registrations and recordings thereof, and all applications for letters patent of, or rights corresponding thereto, in the United States of America or any other country.

 

“Plan” means Borrower’s projected monthly operating plan and budget attached hereto as Exhibit I.

 

“Performance Milestone A” means Borrower achieves at least 90% of the EBITDA projected in the Plan for the trailing six (6) months ending June 30, 2017.

 

“Performance Milestone B” means Borrower achieves at least 90% of the EBITDA projected in the Plan for the trailing six (6) months ending December 31, 2017.

 

 

“Permitted Distributions” means (i) Tax Distributions payable to Borrower’s equity holders, (ii) payments by Borrower to Timm Medical, Mist and Akrimax in the ordinary course of business in consideration of services provided in accordance with the Timm Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), the Mist Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement) and the Akrimax Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement) and (iii) payments by Borrower to Metuchen International to fund working capital.

 

“Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender or the Agent arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the Closing Date which is disclosed in Schedule 1A; (iii) Indebtedness of up to $350,000 outstanding at any time secured by a Lien described in clause (vii) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the Equipment financed with such Indebtedness; (iv) Indebtedness to trade creditors incurred in the ordinary course of business, including Indebtedness incurred in the ordinary course of business with corporate credit cards; (v) Indebtedness that also constitutes a Permitted Investment; (vi) Subordinated Indebtedness; (vii) reimbursement obligations in connection with letters of credit that are secured by Cash and issued on behalf of Borrower or a Subsidiary thereof in an amount not to exceed $350,000 at any time outstanding, (viii) other Indebtedness in an amount not to exceed $350,000 at any time outstanding, and (ix) extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased (except by the amount of any reasonable fees and expenses in connection with the extension, refinancing, or renewal) or the terms modified to impose materially more burdensome terms upon Borrower or its Subsidiary, as the case may be.

 

“Permitted Investment” means: (i) Investments existing on the Closing Date which are disclosed in Schedule 1B; (ii) (a) cash, (b) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year from the date of acquisition thereof, (c) commercial paper maturing no more than one year from the date of creation thereof and currently having a rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (d) certificates of deposit issued by any bank with assets of at least $500,000,000 maturing no more than one year from the date of investment therein, and (e) money market accounts; (iii) repurchases of stock from former employees, directors, or consultants of Borrower under the terms of applicable repurchase agreements at the original issuance price of such securities in an aggregate amount not to exceed $350,000 in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases; (iv) Investments accepted in connection with Permitted Transfers; (v) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of Borrower’s business; (vi) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (vi) shall not apply to Investments of Borrower in any Subsidiary; (vii) Investments consisting of loans not involving the net transfer on a substantially contemporaneous basis of cash proceeds to employees, officers or directors relating to the purchase of capital stock of Borrower pursuant to employee stock purchase plans or other similar agreements approved by Borrower’s Board; (viii) Investments consisting of travel advances in the ordinary course of business; (ix) Investments consisting of endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (x) Investments consisting of Deposit Accounts and accounts holding Investment Property, in each case (other than with respect to Excluded Accounts) in which Lender has a first priority perfected security interest pursuant to a Control Agreement, subject to customary bankers’ liens; (xi) Investments in newly-formed Domestic Subsidiaries, provided that each such Domestic Subsidiary enters into a Joinder Agreement promptly after its formation by Borrower and executes and delivers such other documents as shall be reasonably requested by the Agent (including documents to perfect or ensure the priority of the Agent’s Lien in the Collateral of such Subsidiary on a basis consistent with the perfection and priority of the Agent’s Lien in Borrower’s Collateral); (xii) Investments in Foreign Subsidiaries approved in advance in writing by the Agent; (xiii) joint ventures or strategic alliances in the ordinary course of Borrower’s business consisting of the nonexclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do not exceed $200,000 in the aggregate in any fiscal year; (xiv) Investments in Metuchen International to fund working capital, and (xv) additional Investments that do not exceed $350,000 in the aggregate.

 

 

“Permitted Investors”: Metuchen Therapeutics LLC and JCP III SM AIV, L.P.

 

“Permitted Liens” means any and all of the following: (i) Liens in favor of Agent or Lender; (ii) Liens existing on the Closing Date which are disclosed in Schedule 1C; (iii) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; provided, that Borrower maintains adequate reserves therefor in accordance with GAAP; (iv) Liens securing claims or demands of materialmen, artisans, mechanics, carriers, warehousemen, landlords and other like Persons arising in the ordinary course of Borrower’s business and imposed without action of such parties; provided, that the payment thereof is not yet required or which is being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto, and in respect of which reserves have been established on the books and records of Borrower in accordance with GAAP; (v) Liens arising from judgments, decrees or attachments in circumstances which do not constitute an Event of Default hereunder; (vi) the following deposits, to the extent made in the ordinary course of business: deposits under worker’s compensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations (other than Liens arising under ERISA or environmental Liens) or surety or appeal bonds, or to secure indemnity, performance or other similar bonds; (vii) Liens on Equipment or software or other intellectual property constituting purchase money Liens and Liens in connection with capital leases securing Indebtedness permitted in clause (iii) of “Permitted Indebtedness”; (viii) Liens incurred in connection with Subordinated Indebtedness; (ix) leasehold interests in leases or subleases and licenses granted in the ordinary course of business and not interfering with or diminishing in any material respect the business of the licensor (provided that neither Borrower nor any of its Subsidiaries may grant any licenses or sublicenses of the licenses granted pursuant to the VIVUS License Agreement (including licenses or sublicenses for territories outside the United States) without the prior written consent of Agent, which consent shall not be unreasonably withheld); (x) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties that are promptly paid on or before the date they become due; (xi) Liens on insurance policies and proceeds thereof securing the payment of financed insurance premiums that are promptly paid on or before the date they become due (provided that such Liens extend only to such insurance proceeds and not to any other property or assets); (xii) statutory and common law rights of set-off and other similar rights as to deposits of cash and securities in favor of banks, other depository institutions and brokerage firms; (xiii) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business so long as they do not materially impair the value or marketability of the related property; (xiv) Liens on Cash securing obligations permitted under clause (vii) of the definition of Permitted Indebtedness; (xv) Liens of financial institutions (solely in their capacity as such) on Borrower’s Deposit Accounts arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set off or similar rights; (xvi) Liens consisting of licenses (under which Borrower is the licensee) of over-the-counter software that is commercially available to the public; (xvii) other Liens securing obligations in an aggregate principal amount not to exceed $100,000 at any time outstanding; and (xviii) Liens incurred in connection with the extension, renewal or refinancing of the Indebtedness secured by Liens of the type described in clauses (i) through (xvii) above; provided, that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced (as may have been reduced by any payment thereon) does not increase.

 

 

“Permitted Transfers” means (i) cash payments to trade creditors in the ordinary course of business of Borrower, provided no Event of Default has occurred and is continuing, and sales of Inventory in the ordinary course of business, (ii) non-exclusive licenses and similar arrangements for the use of Intellectual Property in the ordinary course of business and licenses that could not result in a legal transfer of title of the licensed property but that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discrete geographical areas outside of the United States of America in the ordinary course of business; provided that neither Borrower nor any of its Subsidiaries may grant any licenses or sublicenses of the licenses granted pursuant to the VIVUS License Agreement (including licenses or sublicenses for territories outside the United States) without the prior written consent of Agent, which consent shall not be unreasonably withheld, (iii) dispositions of worn-out, obsolete or surplus Equipment at fair market value in the ordinary course of business, (iv) sales or other dispositions of Inventory of Borrower and its Subsidiaries determined by the management of Borrower to be no longer useful or necessary in the operation of the business of Borrower or any of its Subsidiaries for fair market value, (v) transfers constituting payment of royalties in the ordinary course of business required to be paid pursuant to the terms of the VIVUS License Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), (vi) payments by Borrower to Timm Medical in the ordinary course of business in consideration of services provided in accordance with the Timm Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), (vii) payments by Borrower to Mist in the ordinary course of business in consideration of services provided in accordance with the Mist Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), (viii) payments by Borrower to VIVUS, Inc. in the ordinary course of business in consideration of services provided in accordance with the Commercial Supply Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), (ix) payments by Borrower to Sharp in the ordinary course of business in consideration of services provided in accordance with the Sharp Agreements in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement) (x) payments by Borrower to Akrimax in the ordinary course of business in consideration of services provided in accordance with the Akrimax Agreement in effect on the Closing Date (and as may be amended or otherwise modified in a manner not prohibited by this Agreement), (xi) payments to Metuchen International constituting Permitted Investments and (xii) other Transfers of assets (other than Intellectual Property or any Material Contract) having a fair market value of not more than $350,000 in the aggregate in any fiscal year.

 

 

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, other entity or government.

 

“PIK Interest” shall have the meaning assigned to such term in Section 2.2(c).

 

“Prepayment Charge” shall have the meaning assigned to such term in Section 2.5.

 

“Receivables” means (i) all of Borrower’s Accounts, Instruments, Documents, Chattel Paper, Supporting Obligations, letters of credit, proceeds of any letter of credit, and Letter of Credit Rights, and (ii) all customer lists, software, and business records related thereto.

 

“Required Lenders” means at any time, the holders of more than 50% of the aggregate unpaid principal amount of the Term Loan then outstanding.

 

“SEC” means the Securities and Exchange Commission.

 

“Secured Obligations” means Borrower’s obligations under this Agreement and any Loan Document, including any obligation to pay any amount now owing or later arising (including, without limitation, the End of Term Charge and the Prepayment Charge).

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Sharp” means Sharp Corporation, a Delaware limited liability company.

 

“Sharp Agreements” means (i) the Contract Packaging Quality Agreement, dated as of the Closing Date, by and among Borrower, Mist and Sharp, as the same may be amended from time to time in a manner not prohibited by this Agreement and (ii) the Packaging and Supply Agreement, dated as of the Closing Date, by and among Borrower, Mist and Sharp, as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

 

“Solvent” means when used with respect to any Person, as of any date of determination, (a) the amount of the “fair value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise,” as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the “present fair saleable value” of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim,” and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

 

“Subordinated Indebtedness” means Indebtedness subordinated to the Secured Obligations in amounts and on terms and conditions (including the subordination terms) satisfactory to Agent in its sole discretion.

 

“Subsidiary” means an entity, whether corporate, partnership, limited liability company, joint venture or otherwise, in which Borrower owns or controls 50% or more of the outstanding voting securities, including each entity listed on Schedule 1 hereto.

 

“Tax Distribution” means payments payable to a member of Borrower solely for the payment of actual tax liabilities currently due and payable by such member solely attributable to the operations of Borrower and its consolidated subsidiaries and payable by such member as a result of such Member’s ownership of a beneficial interest in Borrower; provided that the aggregate amount of such Tax Distributions in any fiscal year shall not exceed 45% of the earnings before taxes for Borrower and its consolidated subsidiaries in the fiscal year for which such tax liabilities relate.

 

“Term Commitment” means as to any Lender, the obligation of such Lender, if any, to make a Term Loan Advance to Borrower in a principal amount not to exceed the amount set forth under the heading “Term Commitment” opposite such Lender’s name on Schedule 1.1.

 

“Term Loan Advance” means any Term Loan funds advanced under this Agreement.

 

“Term Loan Cash Interest Rate” means for any day a per annum rate of interest equal to the greater of either (i) the prime rate as reported in The Wall Street Journal plus 10.75% minus 3.50%, and (ii) 10.75%.

 

“Term Loan PIK Interest Rate” means 1.35%.

 

 

“Term Loan Maturity Date” means October 1, 2020; provided that in the event Borrower achieves Performance Milestone A and Performance Milestone B, the Term Loan Maturity Date shall be extended to April 1, 2021.

 

“Term Note” means a Promissory Note in substantially the form of Exhibit B.

 

“Timm Medical” means Timm Medical Technologies, Inc., a Delaware corporation.

 

“Timm Agreement” means the Sales and Distribution Agreement, dated as of the Closing Date, by and between Borrower and Timm Medical, as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

“Trademark License” means any written agreement granting any right to use any Trademark or Trademark registration, now owned or hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.

 

“Trademarks” means all trademarks (registered, common law or otherwise) and any applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States of America, any State thereof or any other country or any political subdivision thereof.

 

“Transactions” has the meaning given to it in Section 4.1(h).

 

“UCC” means the Uniform Commercial Code as the same is, from time to time, in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the Agent’s Lien on any Collateral is governed by the Uniform Commercial Code as the same is, from time to time, in effect in a jurisdiction other than the State of New York, then the term “UCC” shall mean the Uniform Commercial Code as in effect, from time to time, in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions.

 

“VIVUS License Agreement” means the License and Commercialization Agreement, dated as of the Closing Date, by and between Borrower and VIVUS, Inc., as the same may be amended from time to time in a manner not prohibited by this Agreement.

 

“Working Capital” means, as of any date of determination, the current assets of Borrower and its consolidated Subsidiaries as of such date minus the current liabilities of Borrower and its consolidated Subsidiaries as of such date.

 

Unless otherwise specified, all references in this Agreement or any Annex or Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” or “Schedule” shall refer to the corresponding Section, subsection, Exhibit, Annex, or Schedule in or to this Agreement. Unless otherwise specifically provided herein, any accounting term used in this Agreement or the other Loan Documents shall have the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP, consistently applied. Unless otherwise defined herein or in the other Loan Documents, terms that are used herein or in the other Loan Documents and defined in the UCC shall have the meanings given to them in the UCC.

 

 

SECTION 2. THE TERM LOAN

 

2.1       [Reserved].

 

2.2       Term Loan.

 

(a)       Advance. Subject to the terms and conditions of this Agreement, Lender will severally (and not jointly) make in an amount not to exceed its respective Term Commitment, and Borrower agrees to draw, a Term Loan Advance of $35,000,000 on the Closing Date. The aggregate outstanding Term Loan Advances shall not exceed the Maximum Term Loan Amount plus the amount of any accrued PIK Interest. Proceeds of the Term Loan Advance shall be deposited into an account designated by the Agent.

 

(b)       Advance Request. To obtain the Term Loan Advance, Borrower shall complete, sign and deliver an Advance Request (at least three (3) Business Days before the Advance Date). Lender shall fund the Term Loan Advance in the manner requested by the Advance Request provided that each of the conditions precedent to the Term Loan Advance is satisfied as of the requested Advance Date.

 

(c)       Interest.

 

(i)       Term Loan Cash Interest Rate. In addition to PIK Interest in accordance with clause (c)(ii) below, the principal balance (including, for the avoidance of doubt, any PIK Interest added to principal pursuant to Section 2.2(c)(ii)) of the Term Loan Advance shall bear interest thereon from such Advance Date at the Term Loan Cash Interest Rate based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed. The Term Loan Cash Interest Rate will float and change on the day the prime rate changes from time to time.

 

(ii)       Term Loan PIK Interest Rate. In addition to interest accrued pursuant to the Term Loan Cash Interest Rate in accordance with clause (c)(i) above, the principal balance of the Term Loan Advance shall accrue “payment-in kind” interest thereon from the Advance Date at the Term Loan PIK Interest Rate based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed (“PIK Interest”), which PIK Interest shall be added to the outstanding principal balance so as to increase the outstanding principal balance of the Term Loan Advance on each interest payment date set forth in Section 2.2(d) and which amount shall be payable when the principal amount of the Advance is payable in accordance with Section 2.2(d).

 

 

 

(d)       Payment. Borrower will pay interest on the Term Loan Advance on the first Business Day of each month, beginning November 1, 2016. Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding the Amortization Date (excluding all accrued PIK Interest added to such principal balance prior to such date), in equal monthly installments of principal and interest (mortgage style) (the “Monthly Installments”) beginning on the Amortization Date and continuing on the first Business Day of each month thereafter until the Secured Obligations (other than inchoate indemnity obligations) are repaid. If, for any fiscal year of Borrower, there shall be Excess Cash Flow, Borrower shall, on the relevant Excess Cash Flow Application Date (as hereinafter defined), apply an amount equal to 75% of such Excess Cash Flow toward the prepayment of the Term Loan. Each such prepayment from Excess Cash Flow shall be made on a date (each an “Excess Cash Flow Application Date”) occurring no later than the date on which the financial statements of Borrower referred to in Section 7.1 for the fiscal year with respect to which such prepayment is made, are required to be delivered to Lender. Prepayments of the Term Loan from Excess Cash Flow shall be applied to reduce the remaining Monthly Installments on a pro rata basis. The entire Term Loan principal balance (including all accrued PIK Interest added to the principal balance) and all accrued but unpaid interest hereunder, shall be due and payable on the Term Loan Maturity Date. Borrower shall make all payments under this Agreement without setoff, recoupment or deduction and regardless of any counterclaim or defense. Lender will initiate debit entries to Borrower’s account as authorized on the ACH Authorization (i) on each payment date of all periodic obligations payable to Lender under the Term Advance and (ii) in connection with out-of-pocket legal fees and costs incurred by Agent or Lender in connection with Section 11.11 of this Agreement. Once repaid, the Term Loan Advance or any portion thereof may not be reborrowed.

 

2.3       Maximum Interest. Notwithstanding any provision in this Agreement or any other Loan Document, it is the parties’ intent not to contract for, charge or receive interest at a rate that is greater than the maximum rate permissible by law that a court of competent jurisdiction shall deem applicable hereto (which under the laws of the State of New York shall be deemed to be the laws relating to permissible rates of interest on commercial loans) (the “Maximum Rate”). If a court of competent jurisdiction shall finally determine that Borrower has actually paid to Lender an amount of interest in excess of the amount that would have been payable if all of the Secured Obligations had at all times borne interest at the Maximum Rate, then such excess interest actually paid by Borrower shall be applied as follows: first, to the payment of the Secured Obligations consisting of the outstanding principal amount of the Term Loan Advances (including any accrued PIK Interest added to the principal balance); second, after all principal is repaid, to the payment of Lender’s accrued interest, costs, expenses, professional fees and any other Secured Obligations; and third, after all Secured Obligations are repaid, the excess (if any) shall be refunded to Borrower.

 

2.4       Default Interest. Upon the occurrence and during the continuation of an Event of Default hereunder, all Secured Obligations, including principal, interest, compounded interest, and professional fees, shall bear interest at a rate per annum equal to the rate set forth in Section 2.2(c) plus three percent (3%) per annum. In the event any interest is not paid when due hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded at the rate set forth in Section 2.2(c) or this Section 2.4, as applicable.

 

 

2.5       Prepayment. From time to time, and at any time, Borrower may at its option upon at least seven (7) Business Days prior notice to the Agent, Borrower may prepay all or a portion of the outstanding Advances (including, for the avoidance of doubt, any PIK Interest added to principal pursuant to Section 2.2(c)(ii)) by paying the principal balance being prepaid, all accrued and unpaid interest thereon, together with a prepayment charge equal to the following percentage of the principal amount of the Term Loan Advance being prepaid: if such Advance amounts are prepaid in any of the first twelve (12) months following the Closing Date, 3.00%; after twelve (12) months but prior to twenty four (24) months, 2.00%; and after twenty-four (24) months but prior to the Term Loan Maturity Date, 1.00% (each, a “Prepayment Charge”). Borrower agrees that the Prepayment Charge is a reasonable calculation of Lender’s lost profits in view of the difficulties and impracticality of determining actual damages resulting from an early repayment of the Advances. Upon the occurrence of a Change in Control, Borrower shall prepay the outstanding amount of all principal (including all accrued PIK interest added to such principal balance) and accrued interest through the prepayment date and all unpaid fees and expenses of the Agent and Lender accrued to the date of the repayment (including the End of Term Charge) together with the applicable Prepayment Charge. Notwithstanding the foregoing, the Agent and Lender agree to waive the Prepayment Charge if the Agent and Lender (in its sole and absolute discretion) agree in writing to refinance and re-document this Agreement prior to the Term Loan Maturity Date and if in connection with such refinancing and re-documentation, the Agent and Lender expressly agree in writing to waive the Prepayment Charge. No Prepayment Charge shall be due in respect of prepayments of the Term Loan Advance from Excess Cash Flow or regularly scheduled Monthly Installments.

 

2.6       End of Term Charge. On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge of $787,500.00 (the “End of Term Charge”). Notwithstanding the required payment date of such charge, it shall be deemed earned by Lender as of the Closing Date.

 

2.7       Notes. If so requested by Lender by written notice to Borrower, then Borrower shall execute and deliver to Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee of Lender pursuant to Section 11.13) (promptly after Borrower’s receipt of such notice) a Note or Notes to evidence Lender’s Loans.

 

2.8       Pro Rata Treatment. Each payment (including prepayment) on account of any fee and any reduction of the Term Loan shall be made pro rata according to the Term Commitments of the relevant Lender.

 

 

SECTION 3. SECURITY INTEREST

 

3.1       As security for the prompt, complete and indefeasible payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Borrower grants to Agent a security interest in all of Borrower’s right, title, and interest in and to the following: all of Borrower’s personal property whether now owned or hereafter acquired (collectively, the “Collateral”), including the following: (a) Receivables; (b) Equipment; (c) Fixtures; (d) General Intangibles (including all Intellectual Property, licenses, contracts, and contract rights); (e) Inventory; (f) Investment Property; (g) Deposit Accounts; (h) Cash; (i) Goods; (J) Payment Intangibles and all other tangible and intangible personal property of Borrower whether now or hereafter owned or existing, leased, consigned by or to, or acquired by, Borrower and wherever located, and any of Borrower’s property in the possession or under the control of Agent; and, to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing. The Collateral includes, without limitation, (i) the VIVUS License Agreement and each other Material Contract, (ii) any IND or NDA owned by Borrower or in which Borrower has rights, and (iii) all Accounts and General Intangibles that consist of rights to payment and proceeds from the sale, licensing or disposition of all or any part, or rights in, any of Borrower’s Intellectual Property. Notwithstanding anything in this Agreement or any other Loan Document to the contrary, in no event shall the Collateral include, and Borrower shall not be deemed to have granted a security interest in any of Borrower’s rights or interests in or under, any license, contract, permit, instrument, security or franchise to which Borrower is a party (excluding in each case the VIVUS License and each other Material Contract) or any of its rights or interests thereunder (excluding in each case the VIVUS License and each other Material Contract) to the extent, but only to the extent, that such a grant would, under the terms of such license, contract, permit, instrument, security or franchise, result in a breach of the terms of, or constitute a default under, such license, contract, permit, instrument, security or franchise (other than to the extent that any such term would be rendered ineffective pursuant to the UCC or any other applicable law (including the United States Bankruptcy Code) or principles of equity); provided, that immediately upon the ineffectiveness, lapse or termination of any such provision the Collateral shall include, and Borrower shall be deemed to have granted a security interest in, all the rights and interests described in the foregoing clause (iii) as if such provision had never been in effect.

 

SECTION 4. CONDITIONS PRECEDENT TO LOAN

 

The obligations of Lender to make the Term Loan Advance hereunder are subject to the satisfaction by Borrower of the following conditions:

 

4.1       Initial Advance. On or prior to the Closing Date, Borrower shall have delivered to Agent the following:

 

(a)       executed copies of the Loan Documents, Account Control Agreements, a legal opinion of Borrower’s counsel, and all other documents and instruments reasonably required by Agent to effectuate the transactions contemplated hereby or to create and perfect the Liens of Agent with respect to all Collateral, in all cases in form and substance reasonably acceptable to Agent;

 

(b)       certified copy of resolutions of Borrower’s Board evidencing approval of the Loan and other transactions evidenced by the Loan Documents;

 

(c)       certified copies of the Certificate of Formation and Operating Agreement, as amended through the Closing Date, of Borrower;

 

(d)       a certificate of good standing for Borrower from the State of Delaware and similar certificates from all other jurisdictions in which it does business and where the failure to be qualified would have a Material Adverse Effect;

 

 

(e)       payment of the Due Diligence Fee, the Facility Charge and reimbursement of Agent’s and Lender’s current expenses reimbursable pursuant to this Agreement, which amounts may be deducted from the initial Advance; the Agent hereby acknowledges that the Due Diligence Fee has been paid in full prior to the Closing Date;

 

(f)       certified all copies of all Material Contracts and Material Third Party Contracts in effect as of the Closing Date and a certificate from an authorized officer of Borrower certifying to that each such Material Contract is in full force and effect on the Closing Date;

 

(g)       evidence that all governmental approvals and consents and approvals of, or notices to, any other Person (including , without limitation, the Consents listed on Exhibit J hereto) required in connection with the Transactions, the execution and performance of the Loan Documents, the continuing operations of Borrower and its Subsidiaries as expected to result from the execution and delivery of the VIVUS License Agreement and the consummation of the other transactions contemplated hereby, shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that could reasonably be expected to restrain, prevent or otherwise impose burdensome conditions on such transactions or the financing contemplated hereby;

 

(h)       the following transactions (collectively with the initial borrowings hereunder on the Closing Date, the “Transactions”) shall have been consummated, in each case on terms and conditions reasonably satisfactory to Lenders: (i) each of the Material Contracts and Material Third Party Contracts shall have been executed and delivered by the parties thereto; (ii) all conditions to the effectiveness of the Material Contracts and Material Third Party Contracts set forth in the Material Contracts and Material Third Party Contracts shall have been satisfied; (iii) Borrower shall have received aggregate net proceeds from equity capital contributions of at least $28,000,000 from the Permitted Investors, and such proceeds shall have been deposited in an account designated by the Agent and (iv) Borrower shall have received aggregate net proceeds from Subordinated Indebtedness of at least $15,000,000 from JCP III SM AIV, L.P., KFE, LLC and L. Mazur Associates, JV on terms reasonably satisfactory to Borrower, and such proceeds shall have been deposited in an account designated by the Agent; and

 

(i)       such other documents as Agent may reasonably request.

 

4.2       Additional Conditions to Advances. On the Advance Date:

 

(a)       Agent shall have received (i) an Advance Request for the relevant Advance as required by Section 2.2(b), duly executed by Borrower’s Chief Executive Officer or Chief Financial Officer, and (ii) any other documents Agent may reasonably request.

 

(b)       The representations and warranties set forth in this Agreement shall be true and correct in all material respects on and as of the Advance Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

 

 

(c)       Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Advance no Event of Default shall have occurred and be continuing.

 

(d)       Each Advance Request shall be deemed to constitute a representation and warranty by Borrower on the relevant Advance Date as to the matters specified in paragraphs (b) and (c) of this Section 4.2 and as to the matters set forth in the Advance Request.

 

4.3       [Reserved].

 

4.4       No Default. As of the Closing Date, (i) no fact or condition exists that would (or would, with the passage of time, the giving of notice, or both) constitute an Event of Default and (ii) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

 

SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER

 

Borrower represents and warrants that:

 

5.1       Organizational Status. Borrower is a limited liability company duly organized, legally existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign limited liability company in all jurisdictions in which the nature of its business or location of its properties require such qualifications and where the failure to be qualified could reasonably be expected to have a Material Adverse Effect. Borrower’s present name, former names (if any), locations, place of formation, tax identification number, organizational identification number and other information requested in Exhibit C are correctly set forth in Exhibit C, as may be updated by Borrower in a written notice (including any Compliance Certificate) provided to Agent after the Closing Date.

 

5.2       Collateral. Borrower owns the Collateral (including, without limitation, the Intellectual Property), free of all Liens, except for Permitted Liens. Borrower has the power and authority to grant to Agent a Lien in the Collateral as security for the Secured Obligations.

 

5.3       Consents. Borrower’s execution, delivery and performance of the Notes, this Agreement and all other Loan Documents and the consummation of Transactions on the Closing Date (i) have been duly authorized by all necessary limited liability company action of Borrower, (ii) will not result in the creation or imposition of any Lien upon the Collateral, other than Permitted Liens and the Liens created by this Agreement and the other Loan Documents, (iii) do not violate any provisions of Borrower’s Operating Agreement, or any law, regulation, order, injunction, judgment, decree or writ to which Borrower is subject, (iv) do not conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any Material Contract or any Material Third Party Contract, (v) do not require any approval or consent of any Person under any Material Contract or any Material Third Party Contract, other than consents or approvals that have been obtained and that are still in force and effect, and (vi) except as described on Schedule 5.3, do not violate any other contract or agreement or require the consent or approval of any other Person which has not already been obtained. The individual or individuals executing the Loan Documents are duly authorized to do so.

 

5.4       Material Adverse Effect. No event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing. Borrower is not aware of any event likely to occur that is reasonably expected to result in a Material Adverse Effect.

 

5.5       Actions Before Governmental Authorities. Except as described on Schedule 5.5¹, there are no actions, suits or proceedings at law or in equity or by or before any governmental authority now pending or, to the knowledge of Borrower, threatened in writing against or affecting Borrower or its property.

 

5.6       Laws. Borrower is not in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any governmental authority, where such violation or default is reasonably expected to result in a Material Adverse Effect. Borrower is not in default in any manner under any provision of any agreement or instrument evidencing Indebtedness, or any other material agreement to which it is a party or by which it is bound. Borrower, its Affiliates and, to the knowledge of Borrower and its Affiliates, any agent or other party acting on behalf of Borrower or its Affiliates are in compliance with all applicable anti-money laundering, economic sanctions and anti-bribery laws and regulations, and none of the funds to be provided under this Agreement will be used, directly or indirectly, for any activities in violation of such laws and regulations.

 

5.7       Information Correct and Current. No information, report, Advance Request, financial statement, exhibit or schedule furnished, by Borrower to Agent in connection with any Loan Document or included therein or delivered pursuant thereto contained, or, when taken as a whole, contains or will contain any material misstatement of fact or, when taken together with all other such information or documents, omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not materially misleading at the time such statement was made or deemed made. To the knowledge of Borrower, none of the information on Schedule 5.7 hereof furnished to Agent by third parties on behalf of Borrower or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were or are made, not misleading at the time such statement was made or deemed made. Additionally, any and all financial or business projections provided by Borrower to the Agent, whether prior to or after the Closing Date, shall be (i) provided in good faith and based on the most current data and information available to Borrower, and (ii) the most current of such projections provided to Borrower’s Board, it being recognized by the Agent that such projections as they relate to future events are not to be viewed as fact and that actual results during the period or periods covered by such projections may differ from the projected results set forth therein. The parties hereto acknowledge and agree that the Business Plan delivered by Borrower to Lender and the Agent on September 15, 2016 and attached hereto as Exhibit I superseded all previous projections delivered by Borrower to Lender and the Agent and that such prior projections are not subject to the representation and warranty contained in this Section 5.7.

 

 

¹ Please provide Schedule 5.5 for review.

 

 

5.8       Tax Matters. Except as described on Schedule 5.8 and except those being contested in good faith with adequate reserves under GAAP, (a) Borrower has filed all federal, state and local tax returns that it is required to file, (b) Borrower has duly paid or fully reserved for all taxes or installments thereof (including any interest or penalties) as and when due, which have or may become due pursuant to such returns, and (c) Borrower has paid or fully reserved for any tax assessment received by Borrower for the three (3) years preceding the Closing Date, if any (including any taxes being contested in good faith and by appropriate proceedings).

 

5.9       Intellectual Property Claims. Borrower is the sole owner of, or otherwise has the right to use, the Intellectual Property material to Borrower’s business. Except as described on Schedule 5.9, (i) each of the material Copyrights, Trademarks and Patents is valid and enforceable, (ii) no material part of the Intellectual Property utilized by Borrower in its business, directly or indirectly, has been judged invalid or unenforceable, in whole or in part, and (iii) no written claim has been made to Borrower that any material part of the Intellectual Property violates the rights of any third party. Exhibit D is a true, correct and complete list of each of Borrower’s Patents, registered Trademarks, registered Copyrights, and material agreements under which Borrower licenses Intellectual Property from third parties (other than shrink-wrap software licenses and other licenses for over-the-counter software), together with application or registration numbers, as applicable, owned by Borrower or any Subsidiary, in each case as of the Closing Date. Borrower is not in material breach of, nor has Borrower failed to perform any material obligations under, any of the foregoing contracts, licenses or agreements and, to Borrower’s knowledge, no third party to any such contract, license or agreement is in material breach thereof or has failed to perform any material obligations thereunder.

 

5.10       Intellectual Property. Except as described on Schedule 5.10, Borrower has all material rights with respect to Intellectual Property necessary or material in the operation or conduct of Borrower’s business as currently conducted and proposed to be conducted by Borrower. Without limiting the generality of the foregoing, and in the case of Licenses, except for restrictions that are unenforceable under Article 9 of the UCC, Borrower has the right, to the extent required to operate Borrower’s business, to freely transfer, license or assign Intellectual Property necessary or material in the operation or conduct of Borrower’s business as currently conducted and proposed to be conducted by Borrower, without condition, restriction or payment of any kind (other than license payments in the ordinary course of business) to any third party, and Borrower owns or has the right to use, pursuant to valid licenses, all software development tools, library functions, compilers and all other third-party software and other items that are material to Borrower’s business and used in the design, development, promotion, sale, license, manufacture, import, export, use or distribution of Borrower Products.

 

 

5.11       Borrower Products. Except as described on Schedule 5.11, no Intellectual Property owned by Borrower or Borrower Product has been or is subject to any actual or, to the knowledge of Borrower, threatened litigation, proceeding (including any proceeding in the United States Patent and Trademark Office or any corresponding foreign office or agency) or outstanding decree, order, judgment, settlement agreement or stipulation that restricts in any manner Borrower’s use, transfer or licensing thereof or that may affect the validity, use or enforceability thereof. There is no decree, order, judgment, agreement, stipulation, arbitral award or other provision entered into in connection with any litigation or proceeding that obligates Borrower to grant licenses or ownership interest in any future Intellectual Property related to the operation or conduct of the business of Borrower or Borrower Products. Borrower has not received any written notice or claim, or, to the knowledge of Borrower, oral notice or claim, challenging or questioning Borrower’s ownership in any Intellectual Property (or written notice of any claim challenging or questioning the ownership in any licensed Intellectual Property of the owner thereof) or suggesting that any third party has any claim of legal or beneficial ownership with respect thereto nor, to Borrower’s knowledge, is there a reasonable basis for any such claim. Neither Borrower’s use of its Intellectual Property nor the production and sale of Borrower Products infringes the Intellectual Property or other rights of others.

 

5.12       Financial Accounts. Exhibit E, as may be updated by Borrower in a written notice provided to Agent after the Closing Date, is a true, correct and complete list of (a) all banks and other financial institutions at which Borrower or any Subsidiary maintains Deposit Accounts and (b) all institutions at which Borrower or any Subsidiary maintains an account holding Investment Property, and such exhibit correctly identifies the name, address and telephone number of each bank or other institution, the name in which the account is held, a description of the purpose of the account, and the complete account number therefor.

 

5.13       Employee Loans. Borrower has no outstanding loans to any employee, officer or director of Borrower nor has Borrower guaranteed the payment of any loan made to an employee, officer or director of Borrower by a third party.

 

5.14       Capitalization and Subsidiaries. Borrower’s capitalization as of the Closing Date is set forth on Schedule 5.14 annexed hereto. Borrower does not own any stock, partnership interest or other securities of any Person, except for Permitted Investments. Attached as Schedule 5.14, as may be updated by Borrower in a written notice provided after the Closing Date, is a true, correct and complete list of each Subsidiary.

 

5.15       Material Contracts; Material Third Party Contracts. Each Material Contract (a) is in full force and effect and is binding upon and enforceable (except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally) against Borrower or its applicable Subsidiary and, to the best of Borrowers’ knowledge, each other Person that is a party thereto in accordance with its terms, (b) has not been otherwise amended or modified (other than amendments or modifications permitted by Section 7.14), and (c) is not in default due to the action or inaction of Borrower or its applicable Subsidiary. Each Material Third Party Contract (a) is in full force and effect and is binding upon and enforceable (except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally) against each Person that is a party thereto in accordance with its terms, (b) has not been otherwise amended or modified (other than amendments or modifications permitted by Section 7.14), and (c) is not in default by any Person that is a party thereto.

 

 

5.16       Solvency. Borrower and each of its Subsidiaries is, and after giving effect to the consummation of the Transactions and the incurrence of all Indebtedness and obligations in connection therewith and the Indebtedness and obligations being incurred in connection herewith, will be Solvent. No transfer of property is being made by Borrower or any of its Subsidiaries and no obligation is being incurred by Borrower or any of its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower or any of its Subsidiaries.

 

SECTION 6. INSURANCE; INDEMNIFICATION

 

6.1       Coverage. Borrower shall cause to be carried and maintained commercial general liability insurance, on an occurrence form, against risks customarily insured against in Borrower’s line of business. Such risks shall include the risks of bodily injury, including death, property damage, personal injury, advertising injury, and contractual liability. Borrower must maintain a minimum of $2,000,000 of commercial general liability insurance for each occurrence. Borrower has and agrees to maintain a minimum of $2,000,000 of directors’ and officers’ insurance for each occurrence and $5,000,000 in the aggregate. So long as there are any Secured Obligations outstanding, Borrower shall also, commencing on a date not later than forty-five (45) days after the Closing Date, maintain a key man life insurance policy for Joseph Krivulka in form and substance reasonably satisfactory to Agent, naming Agent as designated beneficiary and payee with death benefits of not less than $5,000,000. So long as there are any Secured Obligations outstanding, Borrower shall also cause to be carried and maintained insurance upon the Collateral, insuring against all risks of physical loss or damage howsoever caused, in an amount not less than the full replacement cost of the Collateral, provided that such insurance may be subject to standard exceptions and deductibles.

 

6.2       Certificates. Borrower shall deliver to Agent certificates of insurance that evidence Borrower’s compliance with its insurance obligations in Section 6.1 and the obligations contained in this Section 6.2. Borrower’s insurance certificate shall state Agent (shown as “Hercules Capital, Inc.”, as Agent”) is an additional insured for commercial general liability, a designated payee for the key man life insurance policy, a loss payee for all risk property damage insurance, subject to the insurer’s approval, and a loss payee for property insurance and additional insured for liability insurance for any future insurance that Borrower may acquire from such insurer. Attached to the certificates of insurance will be additional insured endorsements for liability and lender’s loss payable endorsements for all risk property damage insurance. All certificates of insurance will provide that the insurer shall endeavor to provide for a minimum of thirty (30) days advance written notice to Agent of cancellation (other than cancellation for non-payment of premiums, for which ten (10) days’ advance written notice shall be sufficient). Any failure of Agent to scrutinize such insurance certificates for compliance is not a waiver of any of Agent’s rights, all of which are reserved.

 

6.3       Indemnity. Borrower agrees to indemnify and hold Agent, Lender and their officers, directors, employees, agents, in-house attorneys, representatives and shareholders (each, an “Indemnified Person”) harmless from and against any and all claims, costs, expenses, damages and liabilities (including such claims, costs, expenses, damages and liabilities based on liability in tort, including strict liability in tort), including reasonable attorneys’ fees and disbursements and other costs of investigation or defense (including those incurred upon any appeal) (collectively, “Liabilities”), that may be instituted or asserted against or incurred by such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents or the administration of such credit, or in connection with or arising out of the transactions contemplated hereunder and thereunder, or any actions or failures to act in connection therewith, or arising out of the disposition or utilization of the Collateral, excluding in all cases Liabilities to the extent resulting solely from any Indemnified Person’s gross negligence or willful misconduct. Borrower agrees to pay, and to save Agent and Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes (excluding taxes imposed on or measured by the net income of Agent or Lender) that may be payable or determined to be payable with respect to any of the Collateral or this Agreement. In no event shall any Indemnified Person be liable on any theory of liability for any special, indirect, consequential or punitive damages (including any loss of profits, business or anticipated savings). This Section 6.3 shall survive the repayment of indebtedness under, and otherwise shall survive the expiration or other termination of, the Loan Agreement.

 

 

SECTION 7. COVENANTS OF BORROWER

 

Borrower agrees as follows:

 

7.1       Financial Reports. Borrower shall furnish to Agent the financial statements and reports listed hereinafter (the “Financial Statements”):

 

(a)       as soon as practicable (and in any event within 30 days) after the end of each month, unaudited interim and year-to-date financial statements as of the end of such month (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows accompanied by a report detailing any material contingencies (including the commencement of any material litigation by or against Borrower) or any other occurrence that would reasonably be expected to have a Material Adverse Effect, all certified by Borrower’s Chief Executive Officer or Chief Financial Officer to the effect that they have been prepared in accordance with GAAP, except (i) for the absence of footnotes, (ii) that they are subject to normal year-end and quarter-end adjustments, and (iii) they do not contain certain non-cash items that are customarily included in quarterly and annual financial statements;

 

(b)       as soon as practicable (and in any event within forty-five (45) days) after the end of each fiscal quarter, unaudited interim and year-to-date financial statements as of the end of such calendar quarter (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows accompanied by a report detailing any material contingencies (including the commencement of any material litigation by or against Borrower) or any other occurrence that would reasonably be expected to have a Material Adverse Effect, certified by Borrower’s Chief Executive Officer or Chief Financial Officer to the effect that they have been prepared in accordance with GAAP, except (i) for the absence of footnotes, and (ii) that they are subject to normal year end adjustments;

 

 

(c)       as soon as practicable (and in any event within one hundred fifty (150) days) after the end of each fiscal year, unqualified audited financial statements as of the end of such year (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows, and setting forth in comparative form the corresponding figures for the preceding fiscal year, certified by a firm of independent certified public accountants selected by Borrower and reasonably acceptable to Agent (it being understood that Eisner Amper LLP is reasonably acceptable to Agent), accompanied by any management report from such accountants;

 

(d)       as soon as practicable (and in any event within 30 days) after the end of each month, a Compliance Certificate in the form of Exhibit F;

 

(e)       as soon as practicable (and in any event within 7 days) after the end of each month, a report showing agings of accounts receivable and accounts payable;

 

(f)       promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports that Borrower has made available to holders of its capital stock and copies of any regular, periodic and special reports or registration statements, if any, that Borrower files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or any national securities exchange;

 

(g)       at the same time and in the same manner as it gives to its managers or directors, copies of all notices, minutes, consents and other materials that Borrower provides to its managers or directors in connection with meetings of Borrower’s Board, and, when available, minutes of such meetings (provided, however, that Borrower shall not be obligated to furnish any such information or materials to the extent that (i) the non-disclosure of which is necessary in order to preserve the attorney-client privilege and (ii) that relate to this Agreement, Borrower’s compliance or noncompliance therewith or performance thereunder, or any amendment, refinancing or replacement thereof) (it being understood that such portions of the minutes may be redacted with the remaining portions of the minutes delivered to Agent);

 

(h)       promptly following its approval by Borrower’s Board, and in any event, within thirty (30) days after the end of Borrower’s fiscal year, Borrower’s annual budget;

 

(i)       prompt notice (by delivery of a copy of the applicable wire transfer confirmation) of the pass-through royalty payments made by (A) Borrower to VIVUS and (B) VIVUS to Mitsubishi Tanabe Pharma Corporation (“MTPC”) pursuant to that certain agreement dated as of December 28, 2000 between VIVUS and MTPC; and

 

(j)       such other financial information reasonably requested by Agent.

 

Borrower shall not make any change in its (a) accounting policies or reporting practices, except as required by GAAP or (b) fiscal years or fiscal quarters. The fiscal year of Borrower shall end on December 31.

 

 

The executed Compliance Certificate may be sent via email to Agent at [email protected]. All Financial Statements required to be delivered pursuant to clauses (a), (b) and (c) shall be sent via e-mail to [email protected] with a copy to [email protected] provided, that if e-mail is not available or sending such Financial Statements via e-mail is not possible, they shall be sent to Agent at: 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, attention Legal Department.

 

7.2       Audits; Management Rights. Borrower shall permit any representative that Agent or Lender authorizes, including its attorneys and accountants, to conduct filed exams and to inspect the Collateral and examine and make copies and abstracts of the books of account and records of Borrower at reasonable times and upon reasonable notice during normal business hours. In addition, any such representative shall have the right to meet with management and officers of Borrower to discuss such books of account and records. In addition, the Agent or Lender shall be entitled at reasonable times and intervals to consult with and advise the management and officers of Borrower concerning significant business issues affecting Borrower. Such consultations shall not unreasonably interfere with Borrower’s business operations. In addition, Borrower hereby agrees to permit a representative designated by the Agent (each, an “Agent_Representative”) to attend as an observer at all meetings of Borrower’s Board and all meetings of any committee of any such Board. Borrower agrees to give the Agent Representative the same notice of all such meetings and copies of all materials distributed to members of such Board at approximately the same time as such notice and materials are given to the members of the Board, and the Agent Representative will be given the opportunity to participate in any telephonic meetings of such Board. Notwithstanding anything to the contrary in this paragraph, the Agent Representative may be excused by the Board from attending any portion of a Board or committee meeting (i) to the extent that attendance by the Agent Representative would jeopardize Borrower’s ability to assert the attorney-client privilege as determined by the Board in good faith or (ii) during which matters relating to this Agreement, Borrower’s compliance or noncompliance therewith or performance thereunder, or any amendment, refinancing or replacement thereof are to be discussed. The parties intend that the rights granted Agent and Lender shall constitute “management rights” within the meaning of 29 C.F.R. Section 2510.3-101(d)(3)(ii), but that any advice, recommendations or participation by Agent or Lender with respect to any business issues shall not be deemed to give Agent or Lender, nor be deemed an exercise by Agent or Lender of, control over Borrower’s management or policies. Information provided or to be provided to Lender or its representatives pursuant to this Section 7.2 is subject to the confidentiality provisions contained in this Agreement.

 

7.3       Further Assurances. Borrower shall from time to time execute, deliver and file, alone or with Agent, any financing statements, security agreements, collateral assignments, notices, control agreements, or other documents to perfect or give the highest priority to Agent’s Lien on the Collateral (subject to Permitted Liens). Borrower shall from time to time procure any instruments or documents as may be reasonably requested by Agent, and take all further action that may be necessary, or that Agent may reasonably request, to perfect and protect the Liens granted hereby and thereby. In addition, and for such purposes only, Borrower hereby authorizes Agent to execute and deliver on behalf of Borrower and to file such financing statements (including an indication that the financing statement covers “all assets or all personal property” of Borrower in accordance with Section 9-504 of the UCC), collateral assignments, notices, control agreements, security agreements and other documents without the signature of Borrower either in Agent’s name or in the name of Agent as agent and attorney-in-fact for Borrower. Borrower shall protect and defend Borrower’s title to the Collateral and Agent’s Lien thereon against all Persons claiming any interest adverse to Borrower or Agent other than Permitted Liens.

 

 

7.4       [Reserved].

 

7.5       Indebtedness. Borrower shall not create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness (other than the Secured Obligations pursuant to the terms hereof) or take any actions which impose on Borrower an obligation to prepay any Indebtedness, except for the conversion of Indebtedness into equity securities and the payment of cash in lieu of fractional shares in connection with such conversion.

 

7.6       Collateral. Borrower shall at all times keep the Collateral (including, without limitation, the Intellectual Property) and all other property and assets used in Borrower’s business or in which Borrower now or hereafter holds any interest free and clear from any legal process or Liens whatsoever (except for Permitted Liens), and shall give Agent prompt written notice of any legal process affecting the Collateral (including, without limitation, the Intellectual Property), such other property and assets, or any Liens thereon (other than Permitted Liens), provided however, that the Collateral and such other property and assets may be subject to Permitted Liens except that there shall be no Liens whatsoever on Borrower’s Intellectual Property. Borrower shall not agree with any Person other than Agent or Lender not to encumber its property. Borrower shall cause its Subsidiaries to protect and defend such Subsidiary’s title to its assets from and against all Persons claiming any interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries at all times to keep such Subsidiary’s property and assets free and clear from any legal process or Liens whatsoever (except for Permitted Liens, provided however, that there shall be no Liens whatsoever on Intellectual Property or any Material Contract), and shall give Agent prompt written notice of any legal process affecting such Subsidiary’s assets. Except in connection with Permitted Liens (but only in respect of the assets secured by such Permitted Liens), Borrower shall not agree with any Person other than Agent or Lender not to encumber its property.

 

7.7       Investments. Borrower shall not directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments.

 

7.8       Distributions. Borrower shall not, and shall not allow any Subsidiary to, (a) repurchase or redeem any class of stock or other equity interest other than (i) pursuant to employee, director or consultant repurchase plans or other similar agreements, provided, however, in each case the repurchase or redemption price does not exceed the original consideration paid for such stock or equity interest, (ii) noncash repurchases of equity interests of Borrower deemed to occur upon exercise of stock options if such equity interests represent a portion of the exercise price of such options, or (iii) the retaining of any of its capital stock by Borrower, or the reacquisition of any such stock by Borrower from any employee, officer or director of Borrower, in each case as full or partial payment in connection with any award under an employee stock purchase or incentive plan or other similar agreement approved by Borrower’s Board (or its delegate) or to satisfy the tax withholding obligations related to any such award, provided that all such reacquisitions do not exceed $100,000 per fiscal year in the aggregate, or (b) declare or pay any cash dividend or make a cash distribution on any class of stock or other equity interest, except that (i) a Subsidiary may pay dividends or make distributions to Borrower and (ii) Borrower may make payments in cash, in lieu of the issuance of fractional shares, upon the exercise of warrants or upon the conversion or exchange of equity interests of Borrower, or (c) lend money to any employees, officers or directors or guarantee the payment of any such loans granted by a third party in excess of $100,000 in the aggregate or (d) waive, release or forgive any Indebtedness owed by any employees, officers or directors in excess of $100,000 in the aggregate or (e) pay any management or other fees to any Affiliate; provided that Borrower may make Permitted Distributions provided that at the time of any such payment (i) (A) no Event of Default has occurred and is continuing or would result from the making of the payment and (B) Borrower is in compliance with each of the financial covenants set forth in Section 8 hereof before and after giving effect to the making of such Permitted Distribution and (ii) Borrower has provided Lender with evidence reasonably satisfactory to Lender of compliance with the foregoing clause (i).

 

 

7.9       Transfers. Except for Permitted Transfers, Borrower shall not, and shall not allow any Subsidiary to, voluntarily or involuntarily transfer, sell, lease, license, lend or in any other manner convey any equitable, beneficial or legal interest in any material portion of its assets.

 

7.10       Mergers or Acquisitions. Borrower shall not merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of (a) a Subsidiary which is not a Borrower into another Subsidiary or into Borrower or (b) a Borrower into another Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person.

 

7.11       Taxes. Except as otherwise provided for in the last sentence of this Section 7.11, Borrower and its Subsidiaries shall pay when due (subject to permitted extensions) all taxes, fees or other similar charges of any nature whatsoever (together with any related interest or penalties) now or hereafter imposed or assessed against Borrower, Agent, Lender (in its capacity as such) or the Collateral (excluding taxes imposed on or measured by the net income of Agent or Lender) or upon Borrower’s ownership, possession, use, operation or disposition thereof or upon Borrower’s rents, receipts or earnings arising therefrom. Borrower shall file on or before the due date therefor (subject to permitted extensions) all personal property tax returns in respect of the Collateral. Notwithstanding the foregoing, Borrower may contest, in good faith and by appropriate proceedings, taxes for which Borrower maintains adequate reserves therefor in accordance with GAAP.

 

7.12       Fundamental Changes. Neither Borrower nor any Subsidiary shall change its legal name, legal form or jurisdiction of formation without twenty (20) days’ prior written notice to the Agent. Neither Borrower nor any Subsidiary shall suffer a Change in Control. Neither Borrower nor any Subsidiary shall relocate its chief executive office or its principal place of business unless: (i) it has provided prior written notice to Agent; and (ii) such relocation shall be within the continental United States of America. Neither Borrower nor any Subsidiary shall relocate any item of Collateral (other than (x) sales of Inventory in the ordinary course of business, (y) relocations of Equipment having an aggregate value of up to $250,000 in any fiscal year, and (z) relocations of Collateral from a location described on Exhibit C to another location described on Exhibit C) unless (i) it has provided prompt written notice to Agent, (ii) such relocation is within the continental United States and, (iii) with respect to Collateral with a fair market value in excess of $250,000, individually or in the aggregate, if such relocation is to a third party bailee, it has delivered a bailee agreement in form and substance reasonably acceptable to Agent (or with respect to locations at which Collateral other than Borrower Products are located, used commercially reasonable efforts to so deliver such a bailee agreement).

 

 

7.13       Deposit Accounts. Commencing with the date that is seven (7) days after the Closing Date, neither Borrower nor any Subsidiary shall maintain any Deposit Accounts, or accounts holding Investment Property (other than in each case Excluded Accounts), except with respect to which the Agent has an Account Control Agreement.

 

7.14       Subsidiaries. Borrower shall notify Agent of each Subsidiary formed subsequent to the Closing Date and, within fifteen (15) days of formation, shall cause any such Domestic Subsidiary to execute and deliver to Agent a Joinder Agreement.

 

7.15       Material Contracts. Neither Borrower nor its Subsidiaries shall directly or indirectly, terminate, amend, modify, or change any of the terms or provisions of any Material Contract or permit any of the foregoing to occur, other than amendments that are not adverse to the interests of Borrower, the Agent or Lender. Borrower and its Subsidiaries shall comply in all material respects with all of the obligations of Borrower arising under all Material Contracts. Borrower and its Subsidiaries shall enforce, in a commercially reasonable manner, all material rights of Borrower and its Subsidiaries (including rights to indemnification) under each Material Contract. Borrower shall provide Agent with all material notices received by Borrower from any other party to a Material Contract. Borrower shall provide Agent prompt (and in any event within two Business Days) notice of any event or occurrence that would entitle any party to a Material Contract or Material Third Party Contract to terminate such Material Contract or Material Third Party Contract

 

7.16       Notification of Event of Default. Borrower shall notify Agent immediately of the occurrence of any Event of Default.

 

7.17       Use of Proceeds. The proceeds of the Term Loan shall be used to finance a portion of the costs and expenses of the Transactions to pay related fees and expenses and for general working capital corporate purposes.

 

7.18       Capital Expenditures. Borrower and its Subsidiaries shall not incur Capital Expenditures in excess of $100,000 in any calendar year.

 

7.19       Post-Closing Conditions Subsequent. Borrower shall satisfy each of the conditions subsequent to the Closing Date specified in this Section 7.19 to the satisfaction of the Agent, in each case by no later than the date specified for such condition below (or such later date as the Agent shall agree in its sole discretion):

 

 

(a)       Borrower shall cause to be delivered to the Agent by no later than the date occurring thirty (30) days after the Closing Date a Guaranty, in form and substance reasonably satisfactory to the Agent, executed by Metuchen International, together with (i) the certified copy of resolutions of Metuchen International’s board of managers, directors or similar governing body evidencing approval of the execution and delivery of the Guaranty and the other transactions evidenced by the Loan Documents, (ii) certified copies of the Certificate of Formation and Operating Agreement, as amended, of Metuchen International, (iii) a certificate of good standing for Metuchen International from the State of Delaware and similar certificates from all other jurisdictions in which it does business and where the failure to be qualified would have a Material Adverse Effect and (iv) such other documents as Agent may reasonably request. Metuchen International shall take such actions as are necessary or advisable in the opinion of the Agent to grant to the Agent for the benefit of Lender a perfected first priority security interest in the collateral described in Section 3 hereof with respect to Metuchen International, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by law or as may be requested by the Agent and (C) to deliver to the Agent a certificate of such Subsidiary, in a form reasonably satisfactory to the Agent, with appropriate insertions and attachments;

 

(b)       Borrower shall cause to be delivered to the Agent by no later than the date occurring thirty (30) days after the Closing Date bailee letters, in form and substance reasonably satisfactory to the Agent, executed by Dohmen Life Science Services, LLC, Qpharma, Inc. and Sharp;

 

(c)       Borrower shall cause to be delivered to the Agent by no later than the date occurring ten (10) days after the Closing Date the insurance certificates and endorsements required by Section 6.2 hereof;

 

(d)       Borrower shall cause to be delivered to the Agent by no later than the date occurring seven (7) days after the Closing Date an Account Control Agreement, in form and substance reasonably satisfactory to the Agent, with respect to Borrower’s accounts at TD Bank; and

 

(e)       Borrower shall cause to be delivered to the Agent by no later than the date occurring forty-five (45) days after the Closing Date the Key Man required by Section 6.2 hereof.

 

SECTION 8. FINANCIAL COVENANTS

 

Borrower shall not:

 

8.1       Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any quarter of Borrower and its Subsidiaries for the period of four consecutive fiscal quarters of Borrower and its Subsidiaries then ended (provided that (i) for the fiscal quarter ending March 31, 2017, it shall be for the period of two consecutive fiscal quarters then ended, and (ii) for the fiscal quarter ending June 30, 2017, it shall be for the period of three consecutive fiscal quarters then ended), to be less than the ratio set forth below:

 

 

Quarter Ending	Fixed Charge Coverage Ratio
March 31, 2017 through December	1.25:1.00
31, 2017 (through June 30, 2018 if
Borrower achieves Performance
Milestone A; through December
31, 2018 if Borrower achieves
Performance Milestone A and
Performance Milestone B)
Thereafter	1.00:1.00

 

8.2       Minimum EBITDA. Permit EBITDA on the last day of any quarter of Borrower and its Subsidiaries for the period of three or six (as noted below) consecutive months of Borrower and its Subsidiaries then ended to be less than as set forth below:

 

Six Consecutive Months Ending		EBITDA
March 31, 2017		$	4,144,000
June 30, 2017		$	4,513,000
September 30, 2017		$	4,570,000
December 31, 2017		$	4,163,000
March 31, 2018		$	4,332,000
June 30, 2018		$	5,199,000
September 30, 2018		$	5,645,000
December 31, 2018		$	6,412,000
March 31, 2019		$	7,785,000
June 30, 2019		$	8,851,000
September 30, 2019		$	9,575,000
December 31, 2019		$	11,274,000
March 31, 2020		$	13,443,000
June 30, 2020		$	14,605,000
September 30, 2020		$	15,257,000
December 31, 2020		$	16,802,000
The last day of each fiscal quarter thereafter		$	16,802,000

 

SECTION 9. EVENTS OF DEFAULT

 

The occurrence of any one or more of the following events shall be an Event of Default:

 

9.1       Payments. Borrower fails to pay any amount due under this Agreement or any of the other Loan Documents on the due date; provided, however, that an Event of Default shall not occur on account of a failure to pay due solely to an administrative or operational error of Agent or Lender or Borrower’s bank if Borrower had the funds to make the payment when due and makes the payment within three (3) Business Days following Borrower’s knowledge of such failure to pay; or

 

 

9.2       Covenants. Borrower breaches or defaults in the performance of any covenant or Secured Obligation under this Agreement, or any of the other Loan Documents or any other agreement among Borrower, Agent and Lender, and (a) with respect to a default under any covenant under this Agreement (other than under Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.15, 7.16, 7.17, 7.19 and 8), any other Loan Document or any other agreement among Borrower, Agent and Lender, such default continues for more than fifteen (15) days after the earlier of the date on which (i) Agent or Lender has given notice of such default to Borrower and (ii) Borrower has actual knowledge of such default or (b) with respect to a default under any of Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.15, 7.16, 7.17, 7.19 and 8, the occurrence of such default; or

 

9.3       Material Adverse Effect. A circumstance has occurred that would reasonably be expected to have a Material Adverse Effect; or

 

9.4       Representations. Any representation or warranty made by Borrower in any Loan Document shall have been false or misleading in any material respect when made or when deemed made; or

 

9.5       Insolvency. Borrower (A) (i) shall make an assignment for the benefit of creditors; or (ii) shall be unable to pay its debts as they become due, or be unable to pay or perform under the Loan Documents, or shall become insolvent; or (iii) shall file a voluntary petition in bankruptcy; or (iv) shall file any petition, answer, or document seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation pertinent to such circumstances; or (v) shall seek or consent to or acquiesce in the appointment of any trustee, receiver, or liquidator of Borrower or of all or any substantial part (i.e., 33-1/3% or more) of the assets or property of Borrower; or (vi) shall cease operations of its business as its business has normally been conducted, or terminate substantially all of its employees; or (vii) Borrower or its managers or directors or majority shareholders shall take any action initiating any of the foregoing actions described in clauses (i) through (vi); or (B) either (i) thirty (30) days shall have expired after the commencement of an involuntary action against Borrower seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, without such action being dismissed or all orders or proceedings thereunder affecting the operations or the business of Borrower being stayed; or (ii) a stay of any such order or proceedings shall thereafter be set aside and the action setting it aside shall not be timely appealed; or (iii) Borrower shall file any answer admitting or not contesting the material allegations of a petition filed against Borrower in any such proceedings; or (iv) the court in which such proceedings are pending shall enter a decree or order granting the relief sought in any such proceedings; or (v) thirty (30) days shall have expired after the appointment, without the consent or acquiescence of Borrower, of any trustee, receiver or liquidator of Borrower or of all or any substantial part of the properties of Borrower without such appointment being vacated; or

 

 

9.6       Attachments; Judgments. Any portion of Borrower’s assets is attached or seized, or a levy is filed against any such assets, or a judgment or judgments is/are entered for the payment of money (not covered by independent third party insurance as to which liability has not been rejected by such insurance carrier), individually or in the aggregate, of at least $150,000, which judgment or judgments is/are not discharged or effectively waived or stayed for a period of thirty (30) consecutive days, or Borrower is enjoined or in any way prevented by court order from conducting any part of its business; or

 

9.7       Other Obligations. The occurrence of any event of default under any agreement or obligation of Borrower involving any Indebtedness in excess of $100,000, or the occurrence of any default under any agreement or obligation of Borrower that could reasonably be expected to have a Material Adverse Effect or the effect of such event of default is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on its or their behalf) to cause such Indebtedness to become due, or to be prepaid, redeemed, purchased or defeased, prior to its stated maturity; or

 

9.8       Change in Control. The occurrence of a Change in Control; or

 

9.9       Material Contracts/Material Third Party Contracts. A material breach of any Material Agreement or any Material Third Party Contract by any party to such Material Agreement or any Material Third Party Contract, the termination of any Material Agreement or any Material Third Party Contract prior to its stated term or the occurrence or any event or occurrence that would entitle any party to any Material Agreement or any Material Third Party Contract to terminate any Material Agreement or any Material Third Party Contract prior to its stated term; or

 

9.10       Generic Entry. A Generic Product (as defined in the VIVUS License Agreement) is approved for or registered for use in the Licensee Territory (as defined in the VIVUS License Agreement).

 

SECTION 10. REMEDIES

 

10.1       General. Upon and during the continuance of any one or more Events of Default, (i) Agent may, and at the direction of the Required Lenders shall, accelerate and demand payment of all or any part of the Secured Obligations together with a Prepayment Charge, if applicable, and declare them to be immediately due and payable (provided, that upon the occurrence of an Event of Default of the type described in Section 9.5, all of the Secured Obligations shall automatically be accelerated and made due and payable, in each case without any further notice or act), (ii) Agent may, at its option, sign and file in Borrower’s name any and all collateral assignments, notices, control agreements, security agreements and other documents it deems necessary or appropriate to perfect or protect the repayment of the Secured Obligations, and in furtherance thereof, Borrower hereby grants Agent an irrevocable power of attorney coupled with an interest, and (iii) Agent may notify any of Borrower’s account debtors to make payment directly to Agent, compromise the amount of any such account on Borrower’s behalf and endorse Agent’s name without recourse on any such payment for deposit directly to Agent’s account. Agent may, and at the direction of the Required Lenders shall, exercise all rights and remedies with respect to the Collateral under the Loan Documents or otherwise available to it under the UCC and other applicable law, including the right to release, hold, sell, lease, liquidate, collect, realize upon, or otherwise dispose of all or any part of the Collateral and the right to occupy, utilize, process and commingle the Collateral. All of the Agent’s rights and remedies shall be cumulative and not exclusive.

 

 

10.2       Collection; Foreclosure. Upon the occurrence and during the continuance of any Event of Default, Agent may, and at the direction of the Required Lenders shall, at any time or from time to time, apply, collect, liquidate, sell in one or more sales, lease or otherwise dispose of, any or all of the Collateral, in its then condition or following any commercially reasonable preparation or processing, in such order as Agent may elect. Any such sale may be made either at public or private sale at its place of business or elsewhere. Borrower agrees that any such public or private sale may occur upon ten (10) calendar days’ prior written notice to Borrower. Agent may require Borrower to assemble the Collateral and make it available to Agent at a place designated by Agent that is reasonably convenient to Agent and Borrower. The proceeds of any sale, disposition or other realization upon all or any part of the Collateral shall be applied by Agent in the following order of priorities:

 

First, to Agent and Lender in an amount sufficient to pay in full Agent’s and Lender’s reasonable costs and professionals’ and advisors’ fees and expenses as described in Section 11.11;

 

Second, to Lender in an amount equal to the then unpaid amount of the Secured Obligations (including principal, interest, and the Default Rate interest), in such order and priority as Agent may choose in its sole discretion; and

 

Finally, after the full, final and indefeasible payment in cash of all of the Secured Obligations (other than inchoate obligations), to any creditor holding a junior Lien on the Collateral, or to Borrower or its representatives or as a court of competent jurisdiction may direct.

 

Agent shall be deemed to have acted reasonably in the custody, preservation and disposition of any of the Collateral if it complies with the obligations of a secured party under the UCC.

 

10.3       No Waiver. Agent shall be under no obligation to marshal any of the Collateral for the benefit of Borrower or any other Person, and Borrower expressly waives all rights, if any, to require Agent to marshal any Collateral.

 

10.4       Cumulative Remedies. The rights, powers and remedies of Agent hereunder shall be in addition to all rights, powers and remedies given by statute or rule of law and are cumulative. The exercise of any one or more of the rights, powers and remedies provided herein shall not be construed as a waiver of or election of remedies with respect to any other rights, powers and remedies of Agent.

 

 

10.5       Cure Right.

 

(a)       Notwithstanding anything to the contrary contained in Section 9 or this Section 10, in the event that Borrower fails to comply with any of the covenants set forth in Sections 8.1 or 8.2 (together, the “Financial Condition Covenants”) as of the end of any quarter, until the expiration of the tenth day subsequent to the date the Compliance Certificate for the last month of such quarter is required to be delivered pursuant to Section 7.1(d), Borrower shall have the right to issue equity units (the “Cure Securities”) for cash (the amount thereof, the “Cure Amount”), so long as such cash is immediately contributed to the capital of Borrower as common equity (the “Cure Right”); provided, (i) no more than two Cure Rights may be exercised during any period of four consecutive quarters (provided, further, that no such two Cure Rights may be exercised in respect of any two consecutive quarters); (ii) no Cure Amount shall exceed the lesser of (x) $700,000 or (y) the amount necessary to cause compliance with the applicable Financial Condition Covenants for the measurement period then ended and (iii) such Cure Rights may not be exercised more than three (3) times during the term of this Agreement.

 

(b)       Upon the receipt by Borrower of the cash proceeds of any Cure Securities referred to in Section 10.5(a), EBITDA for the quarter as to which such Cure Right is exercised (the “Cure Right Quarter”) shall be deemed to have been increased by the Cure Amount in calculating the Financial Condition Covenants for such Cure Right Quarter and for any subsequent period that includes such Cure Right Quarter; provided, that no increase in EB1TDA on account of the exercise of any Cure Right shall be applicable for any other purpose under this Agreement or any other Loan Document, including determining the availability or amount of any covenant basket, carve-out or compliance on a pro forma basis with any of the Financial Condition Covenants or determining Excess Cash Flow.

 

(c)       If after giving effect to the recalculations set forth in this Section 10.5, Borrower shall then be in compliance with all Financial Condition Covenants, Borrower shall be deemed to have satisfied the requirements of such covenants as of the relevant date of determination with the same effect as though there had been no failure to comply therewith at such date, and the applicable Event of Default with respect to any such covenant that had occurred shall be deemed cured for all purposes of this Agreement and the other Loan Documents.

 

SECTION 11. MISCELLANEOUS

 

11.1       Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent and duration of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

 

11.2       Notice. Except as otherwise provided herein, any notice, demand, request, consent, approval, declaration, service of process or other communication (including the delivery of Financial Statements) that is required, contemplated, or permitted under the Loan Documents or with respect to the subject matter hereof shall be in writing, and shall be deemed to have been validly served, given, delivered, and received upon the earlier of: (i) the day of transmission by electronic mail or hand delivery or delivery by an overnight express service or overnight mail delivery service; or (ii) the third calendar day after deposit in the United States of America mails, with proper first class postage prepaid, in each case addressed to the party to be notified as follows:

 

 

(a)       If to Agent:

 

HERCULES CAPITAL, INC.

Legal Department

Attention: Chief Legal Officer and Ms. Janice Bourque

400 Hamilton Avenue, Suite 310

Palo Alto, California 94301

email: [email protected]

Telephone: 650-289-3060

 

(b)       If to Lender:

 

HERCULES CAPITAL, INC.

Legal Department

Attention: Chief Legal Officer and Ms. Janice Bourque

400 Hamilton Avenue, Suite 310

Palo Alto, California 94301

email: [email protected]

Telephone: 650-289-3060

 

(c)       If to Borrower:

 

METUCHEN PHARMACEUTICALS LLC

Attention: Greg Ford

c/o Akrimax

11 Commerce Drive – 1^st Floor

Cranford, NJ 07016

email: [email protected]

Telephone: 908-372-1232

 

or to such other address as each party may designate for itself by like notice.

 

11.3       Entire Agreement; Amendments.

 

(a)       This Agreement and the other Loan Documents constitute the entire agreement and understanding of the parties hereto in respect of the subject matter hereof and thereof, and supersede and replace in their entirety any prior proposals, term sheets, non-disclosure or confidentiality agreements, letters, negotiations or other documents or agreements, whether written or oral, with respect to the subject matter hereof or thereof (including Agent’s proposal letter dated August 11, 2016).

 

 

(b)       Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 11.3(b). The Required Lenders and Borrower party to the relevant Loan Document may, or, with the written consent of the Required Lenders, the Agent and Borrower party to the relevant Loan Document may, from time to time, (i) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of Lender or of Borrower hereunder or thereunder or (ii) waive, on such terms and conditions as the Required Lenders or the Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (A) forgive the principal amount or extend the final scheduled date of maturity of any Term Loan, extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest or fee payable hereunder) or extend the scheduled date of any payment thereof, in each case without the written consent of each Lender directly affected thereby; (B) eliminate or reduce the voting rights of any Lender under this Section 11.3(b) without the written consent of such Lender; (C) reduce any percentage specified in the definition of Required Lenders, consent to the assignment or transfer by Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or substantially all of the Collateral or release a Borrower from its obligations under the Loan Documents, in each case without the written consent of all Lenders; or (D) amend, modify or waive any provision of Section 11.17 without the written consent of the Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each Lender and shall be binding upon Borrower, Lender, the Agent and all future holders of the Loans.

 

11.4       No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

 

11.5       No Waiver. The powers conferred upon Agent and Lender by this Agreement are solely to protect its rights hereunder and under the other Loan Documents and its interest in the Collateral and shall not impose any duty upon Agent or Lender to exercise any such powers. No omission or delay by Agent or Lender at any time to enforce any right or remedy reserved to it, or to require performance of any of the terms, covenants or provisions hereof by Borrower at any time designated, shall be a waiver of any such right or remedy to which Agent or Lender is entitled, nor shall it in any way affect the right of Agent or Lender to enforce such provisions thereafter.

 

11.6       Survival. All agreements, representations and warranties contained in this Agreement and the other Loan Documents or in any document delivered pursuant hereto or thereto shall be for the benefit of Agent and Lender and shall survive the execution and delivery of this Agreement. Section 6.3 shall survive the expiration or termination of this Agreement.

 

11.7       Successors and Assigns. The provisions of this Agreement and the other Loan Documents shall inure to the benefit of and be binding on Borrower and its permitted assigns (if any). Borrower shall not assign its obligations under this Agreement or any of the other Loan Documents without Agent’s express prior written consent, and any such attempted assignment shall be void and of no effect. Agent or any Lender may sell, assign transfer, or endorse all or part of its respective interest hereunder and under the Loan Documents to any entity (but not a natural person) with Borrower’s prior written consent, such consent not to be unreasonably withheld (provided that Borrower’s consent shall not be required during the existence of an Event of Default or in connection with any sale, assignment, or transfer to any Affiliate to any Lender or the Agent), and all of such rights shall inure to the benefit of Agent’s and Lender’s successors and assigns; provided that as long as no Event of Default has occurred and is continuing, neither Agent nor any Lender may assign, transfer or endorse its rights hereunder or under the Loan Documents to any party that is a direct competitor of Borrower (as reasonably determined by Agent), it being acknowledged that in all cases, any transfer to an Affiliate of any Lender or Agent shall be allowed.

 

 

11.8       Governing Law. This Agreement and the other Loan Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of New York (including Sections 5-1401 and 5-1402 of the New York General Obligations Law, but excluding all other choice of law and conflicts of law rules).

 

11.9       Consent to Jurisdiction and Venue. All judicial proceedings (to the extent that the reference requirement of Section 11.10 is not applicable) arising in or under or related to this Agreement or any of the other Loan Documents may be brought in any state or federal court located in the Borough of Manhattan in the City and State of New York. By execution and delivery of this Agreement, each party hereto generally and unconditionally: (a) consents to nonexclusive personal jurisdiction in the Borough of Manhattan in the City and State of New York; (b) waives any objection as to jurisdiction or venue in the Borough of Manhattan in the City and State of New York; (c) agrees not to assert any defense based on lack of jurisdiction or venue in the aforesaid courts; and (d) irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement or the other Loan Documents. Service of process on any party hereto in any action arising out of or relating to this Agreement shall be effective if given in accordance with the requirements for notice set forth in Section 11.2, and shall be deemed effective and received as set forth in Section 11.2. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of either party to bring proceedings in the courts of any other jurisdiction.

 

11.10       Mutual Waiver of Jury Trial/Judicial Reference. Because disputes arising in connection with complex financial transactions are most quickly and economically resolved by an experienced and expert Person and the parties wish applicable state and federal laws to apply (rather than arbitration rules), the parties desire that their disputes be resolved by a judge applying such applicable laws. EACH OF BORROWER, AGENT AND LENDER SPECIFICALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM (COLLECTIVELY, “CLAIMS”) ASSERTED BY BORROWER AGAINST AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE OR BY AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE AGAINST BORROWER. This waiver extends to all such Claims, including Claims that involve Persons other than Agent, Borrower and Lender; Claims that arise out of or are in any way connected to the relationship among Borrower, Agent and Lender; and any Claims for damages, breach of contract, tort, specific performance, or any equitable or legal relief of any kind, arising out of this Agreement, any other Loan Document.

 

 

11.11       Professional Fees. Borrower promises to pay Agent’s and Lender’s documented, out-of-pocket fees and expenses necessary to finalize the loan documentation, including but not limited to reasonable out-of-pocket attorneys’ fees, UCC searches, filing costs, and other miscellaneous expenses. In addition, Borrower promises to pay any and all reasonable attorneys’ and other professionals’ fees and expenses (including fees and expenses of in-house counsel) incurred by Agent and Lender after the Closing Date in connection with or related to: (a) the Loan; (b) the administration, collection, or enforcement of the Loan; (c) the amendment or modification of the Loan Documents; (d) any waiver, consent, release, or termination under the Loan Documents; (e) the protection, preservation, audit, field exam, sale, lease, liquidation, or disposition of Collateral or the exercise of remedies with respect to the Collateral; (f) any legal, litigation, administrative, arbitration, or out of court proceeding in connection with or related to Borrower or the Collateral, and any appeal or review thereof; and (g) any bankruptcy, restructuring, reorganization, assignment for the benefit of creditors, workout, foreclosure, or other action related to Borrower, the Collateral, the Loan Documents, including representing Agent or Lender in any adversary proceeding or contested matter commenced or continued by or on behalf of Borrower’s estate, and any appeal or review thereof.

 

11.12       Confidentiality. Agent and Lender acknowledge that certain items of Collateral and information provided to Agent and Lender by Borrower are confidential and proprietary information of Borrower, if and to the extent such information either (x) is marked as confidential by Borrower at the time of disclosure, or (y) should reasonably be understood to be confidential (the “Confidential Information”). Accordingly, Agent and Lender agree that any Confidential Information it may obtain in the course of acquiring, administering, or perfecting Agent’s security interest in the Collateral shall not be disclosed to any other Person or entity in any manner whatsoever, in whole or in part, without the prior written consent of Borrower, except that Agent and Lender may disclose any such information: (a) to its own directors, officers, employees, accountants, counsel and other professional advisors and to its Affiliates if Agent or Lender in their sole discretion determines that any such party should have access to such information in connection with such party’s responsibilities in connection with the Loan or this Agreement and, provided that such recipient of such Confidential Information either (i) agrees to be bound by the confidentiality provisions of this paragraph or (ii) is otherwise subject to confidentiality restrictions that are as restrictive as the confidentiality provisions of this Section 11.12; (b) if such information is generally available to the public; (c) if required or appropriate in any report, statement or testimony submitted to any governmental authority having or claiming to have jurisdiction over Agent or Lender; (d) if required or appropriate in response to any summons or subpoena or in connection with any litigation, to the extent permitted or deemed advisable by Agent’s or Lender’s counsel; (e) to comply with any legal requirement or law applicable to Agent or Lender; (f) to the extent reasonably necessary in connection with the exercise of any right or remedy under any Loan Document, including Agent’s sale, lease, or other disposition of Collateral after default; (g) to any participant or assignee of Agent or Lender or any prospective participant or assignee; provided, that such participant or assignee or prospective participant or assignee agrees in writing to be bound by this Section prior to disclosure; or (h) otherwise with the prior consent of Borrower; provided, that any disclosure made in violation of this Agreement shall not affect the obligations of Borrower or any of its Affiliates or any guarantor under this Agreement or the other Loan Documents.

 

 

It is further understood that, in respect of any proposed disclosure of Confidential Information by Agent or Lender pursuant to any of clauses (c), (d) or (e) above, prior to making any such disclosure, Agent or such Lender shall (x) to the extent reasonably practicable, promptly notify Borrower of the need to make such disclosure, (y) consult with Borrower on the advisability of taking steps to resist or narrow such request, and (z) if disclosure is required or deemed advisable, reasonably cooperate with Borrower in any attempt that it may make to obtain an order or other reliable assurance that confidential treatment will be accorded to designated portions of the Confidential Information.

 

11.13       Assignment of Rights. Borrower acknowledges and understands that Agent or Lender may, subject to Section 11.7, sell and assign all or part of its interest hereunder and under the Loan Documents to any Person or entity (an “Assignee”). After such permitted assignment the term “Agent” or “Lender” as used in the Loan Documents shall mean and include such Assignee, and such Assignee shall be vested with all rights, powers and remedies of, and assume all obligations of, Agent or Lender, as applicable, hereunder with respect to the interest so assigned; but with respect to any such interest not so transferred, Agent or Lender, as applicable, shall retain all rights, powers and remedies hereby given and all obligations hereby required. No such assignment by Agent or Lender shall relieve Borrower of any of its obligations hereunder or limit any of its rights, powers and remedies. Lender agrees that in the event of any transfer by it of the Note(s)(if any), it will endorse thereon a notation as to the portion of the principal of the Note(s), which shall have been paid at the time of such transfer and as to the date to which interest shall have been last paid thereon.

 

11.14       Revival of Secured Obligations. This Agreement and the Loan Documents shall remain in full force and effect and continue to be effective if any petition is filed by or against Borrower for liquidation or reorganization, if Borrower becomes insolvent or makes an assignment for the benefit of creditors, if a receiver or trustee is appointed for all or any significant part of Borrower’s assets, or if any payment or transfer of Collateral is recovered from Agent or Lender. The Loan Documents and the Secured Obligations and Collateral security shall continue to be effective, or shall be revived or reinstated, as the case may be, if at any time payment and performance of the Secured Obligations or any transfer of Collateral to Agent, or any part thereof is rescinded, avoided or avoidable, reduced in amount, or must otherwise be restored or returned by, or is recovered from, Agent, Lender or by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment, performance, or transfer of Collateral had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, avoided, avoidable, restored, returned, or recovered, the Loan Documents and the Secured Obligations shall be deemed, without any further action or documentation, to have been revived and reinstated except to the extent of the full, final, and indefeasible payment to Agent or Lender in Cash.

 

11.15       Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so delivered shall be deemed an original, but all of which counterparts shall constitute but one and the same instrument.

 

11.16       No Third Party Beneficiaries. No provisions of the Loan Documents are intended, nor will be interpreted, to provide or create any third-party beneficiary rights or any other rights of any kind in any Person other than Agent, Lender and Borrower unless specifically provided otherwise herein, and, except as otherwise so provided, all provisions of the Loan Documents will be personal and solely among Agent, Lender and Borrower.

 

 

11.17 Agency.

 

(a)       Lender hereby irrevocably appoints Hercules Capital, Inc. to act on its behalf as the Agent hereunder and under the other Loan Documents and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.

 

(b)       Lender agrees to indemnify the Agent in its capacity as such (to the extent not reimbursed by Borrower and without limiting the obligation of Borrower to do so), according to its respective Term Commitment percentage (based upon the total outstanding Term Loan) in effect on the date on which indemnification is sought under this Section 11.17, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder.

 

(c)       Agent in Its Individual Capacity. The Person serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent and the term “Lender” shall, unless otherwise expressly indicated or unless the context otherwise requires, include each such Person serving as Agent hereunder in its individual capacity.

 

(d)       Exculpatory Provisions. The Agent shall have no duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Agent shall not:

 

(i)

be subject to any fiduciary or other implied duties, regardless of whether any default or any Event of Default has occurred and is continuing;

 

(ii)

have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Agent is required to exercise as directed in writing by Lender, provided that the Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Agent to liability or that is contrary to any Loan Document or applicable law; and

 

 

(iii)

except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and the Agent shall not be liable for the failure to disclose, any information relating to Borrower or any of its Affiliates that is communicated to or obtained by any Person serving as the Agent or any of its Affiliates in any capacity.

 

(e)       The Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of Lender or as the Agent shall believe in good faith shall be necessary, under the circumstances or (ii) in the absence of its own gross negligence or willful misconduct.

 

(f)       The Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any default or Event of Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Section 4 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Agent.

 

(g)       Reliance by Agent. Agent may rely, and shall be fully protected in acting, or refraining to act, upon, any resolution, statement, certificate, instrument, opinion, report, notice, request, consent, order, bond or other paper or document that it has no reason to believe to be other than genuine and to have been signed or presented by the proper party or parties or, in the case of cables, telecopies and telexes, to have been sent by the proper party or parties. In the absence of its gross negligence or willful misconduct, Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to Agent and conforming to the requirements of the Loan Agreement or any of the other Loan Documents. Agent may consult with counsel, and any opinion or legal advice of such counsel shall be full and complete authorization and protection in respect of any action taken, not taken or suffered by Agent hereunder or under any Loan Documents in accordance therewith. Agent shall have the right at any time to seek instructions concerning the administration of the Collateral from any court of competent jurisdiction. Agent shall not be under any obligation to exercise any of the rights or powers granted to Agent by this Agreement, the Loan Agreement and the other Loan Documents at the request or direction of Lenders unless Agent shall have been provided by Lender with adequate security and indemnity against the costs, expenses and liabilities that may be incurred by it in compliance with such request or direction.

 

 

11.18       Publicity. None of the parties hereto nor any of its respective member businesses and Affiliates shall, without the other parties’ prior written consent (which shall not be unreasonably withheld or delayed), publicize or use (a) the other party’s name (including a brief description of the relationship among the parties hereto), logo or hyperlink to such other parties’ web site, separately or together, in written and oral presentations, advertising, promotional and marketing materials, client lists, public relations materials or on its web site (together, the “ Publicity Materials”); (b) the names of officers of such other parties in the Publicity Materials; and (c) such other parties’ name, trademarks, servicemarks in any news or press release concerning such party; provided however, notwithstanding anything to the contrary herein, no such consent shall be required (i) to the extent necessary to comply with the requests of any regulators, legal requirements or laws applicable to such party, pursuant to any listing agreement with any national securities exchange (so long as such party provides prior notice to the other party hereto to the extent reasonably practicable) and (ii) to comply with Section 11.12.

 

(SIGNATURES TO FOLLOW)

 

 

IN WITNESS WHEREOF, Borrower, Agent and Lender have duly executed and delivered this Loan and Security Agreement as of the day and year first above written.

 

	BORROWER:
	METUCHEN PHARMACEUTICALS LLC
	Signature:	/s/ Gregory Ford
	Print Name:	J. Gregory Ford
	Title:	CEO
Accepted in Palo Alto, California:
	AGENT
	HERCULES CAPITAL, INC.
	Signature:
	Print Name:
	Title:
	LENDER:
	HERCULES CAPITAL, INC.
	Signature:
	Print Name:
	Title:

 

 

Accepted in Palo Alto, California;
	AGENT:
	HERCULES CAPITAL, INC.
	Signature:	/s/ Melanie Grace
	Print Name:	Melanie Grace
	Title:	General Counsel, Chief Compliance Officer, and Secretary
	LENDER:
	HERCULES CAPITAL, INC.
	Signature:	/s/ Melanie Grace
	Print Name:	Melanie Grace
	Title:	General Counsel, Chief Compliance Officer, and Secretary

 

[Signature Page to Loan and Security Agreement]

 

 

Table of Exhibits and Schedules

 

Exhibit A:	Advance Request
	Attachment to Advance Request
Exhibit B:	Term Note
Exhibit C:	Name, Locations, and Other Information for Borrower
Exhibit D:	Borrower’s Patents, Trademarks, Copyrights and Licenses
Exhibit E:	Borrower’s Deposit Accounts and Investment Accounts
Exhibit F:	Compliance Certificate
Exhibit G:	Joinder Agreement
Exhibit H:	ACH Debit Authorization Agreement
Exhibit I:	Borrower’s Business Plan
Exhibit J:	Required Consents
Schedule 1	Subsidiaries
Schedule 1.1	Commitments
Schedule 1A	Existing Permitted Indebtedness
Schedule 1B	Existing Permitted Investments
Schedule 1C	Existing Permitted Liens
Schedule 5.3	Consents, Etc.
Schedule 5.5	Actions Before Governmental Authorities Tax Matters
Schedule 5.8	Tax Matters
Schedule 5.9	Intellectual Property Claims
Schedule 5.10	Intellectual Property
Schedule 5.11	Borrower Products
Schedule 5.14	Capitalization
Schedule 5.15(a)	Material Contracts
Schedule 5.15(b)	Material Third Party Contracts

 

 

 

Exhibit 10.2

 

FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT

 

This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of November 22, 2017 (the “First Amendment Date”), is by and among METUCHEN PHARMACEUTICALS LLC, a Delaware limited liability company (the “Borrower”), the several banks and other financial institutions or entities party hereto a lenders (collectively, referred to as “Lender”) and HERCULES CAPITAL, INC., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, the “Agent”).

 

WHEREAS, Borrower, Lender and the Agent are parties to a certain Loan and Security Agreement, dated as of September 30, 2016 (as the same may from time to time be further amended, modified or supplemented in accordance with its terms, the “Loan Agreement”); and

 

WHEREAS, in accordance with Section 11.3 of the Loan Agreement, Borrower, Lender and the Agent desire to amend the Loan Agreement as provided herein.

 

NOW THEREFORE, in consideration of the mutual agreements contained in the Loan Agreement and herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.       Defined Terms. Terms not otherwise defined herein which are defined in the Loan Agreement shall have the same respective meanings herein as therein.

 

2.       Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 4 of this Amendment, as of the First Amendment Date, the Loan Agreement is hereby amended as follows:

 

(a)       The Loan Agreement shall be amended by inserting the following new definitions to appear alphabetically in Section 1.1 thereof:

 

“Additional Subordinated Indebtedness” means Borrower’s Subordinated Indebtedness in an original aggregate principal amount of at least $13,500,000 provided by KFE, LLC (“KFE”), L. Mazur Associates, JV (“LMA”), and JCP III SM AIV, L.P. (“JCP”; and together with KFE and LMA, collectively the “Subordinated Lenders”) on the First Amendment Date in accordance with the terms and conditions of that certain Amended and Restated Promissory Note by Borrower in favor of the Subordinated Lenders, a copy of which is annexed hereto as Exhibit A, and subject to the terms of that certain Amended and Restated Subordination Agreement dated as of November 22, 2017 made by the Subordinated Lenders in favor of the Agent (the “Amended and Restated Subordination Agreement”) a copy of which is annexed hereto as Exhibit B, which Amended and Restated Subordination Agreement amends and restates that certain Subordination Agreement dated as of September 30, 2016 made by the Subordinated Lenders in favor of the Agent.

 

 

“Additional Subordinated Indebtedness Proceeds” means unrestricted net cash proceeds of the Additional Subordinated Indebtedness not subject to any redemption, clawback, escrow or similar encumbrance or restriction of any kind (it being understood that Borrower may pay the payments required by Sections 4(a), 4(d), 4(g) hereof and the other reasonable costs and expenses incurred by Borrower in connection with the transactions contemplated by this Amendment with such proceeds), which proceeds have been deposited into an account designated by the Agent which is subject to an Account Control Agreement in favor of Agent.

 

“First Amendment Date” means November 22, 2017.

 

“Performance Milestone C” means Borrower achieves EBITDA of at least $5,642,407 for the trailing twelve (12) month period ending June 30, 2018.

 

(b)       The Loan Agreement shall be amended by amending and restating the following definitions in Section 1.1 thereof to read as follows:

 

“Amortization Date” means February 1, 2018; provided that- in the event that, as of said date (i) Borrower has achieved Performance Milestone A and (ii) no Event of Default has occurred and is continuing, the Amortization Date shall be extended to May 1, 2018; and provided further that in the event that, as of said date (i) Borrower has achieved Performance Milestone A and Performance Milestone B and (ii) no Event of Default has occurred and is continuing, the Amortization Date shall be extended to August 1, 2018; and provided further that in the event that, as of said date (i) Borrower has achieved Performance Milestone A, Performance Milestone B and Performance Milestone C and (ii) no Event of Default has occurred and is continuing, the Amortization Date shall be extended to November 1, 2018.

 

“EBITDA” means with respect to Borrower and its consolidated Subsidiaries for any period, (a) the sum, without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) nonrecurring cash fees, costs and expenses incurred in connection with the closing of the Transactions (including fees and expenses paid pursuant to and in connection with the closing of the transactions contemplated by this Agreement), but only to the extent included in Net Income, plus (vii) other non-cash items reducing Net Income, plus (viii) to the extent covered by insurance proceeds, losses in connection with casualty events, but only to the extent included in Net Income, plus (ix) identifiable and factually supportable adjustments to reflect operating expense reductions and other operating improvements, in each case to the extent approved by Agent, minus (b) the sum, without duplication of the amounts for such period of (i) other non-cash items increasing Net Income for such period, plus (ii) interest income, plus (iii) any “upfront” or “milestone” payments received in connection with any Investment, license agreement or other contractual arrangement. In the event that Borrower receives Additional Subordinated Indebedness Proceeds of at least $13,500,000, then Borrower may add back to EBITDA up to $1,500,000 of costs related to Borrower engaging a contract sales organization incurred between October 1, 2017 and June 30, 2018, but only to the extent such costs are included in Net Income.

 

 

“Performance Milestone A” means Borrower achieves EBITDA of at least $5,853,239 for the trailing twelve (12) month period ending December 31, 2017.

 

“Performance Milestone B” means Borrower achieves EBITDA of at least $5,388,939 for the trailing twelve (12) month period ending March 31, 2018.

 

“Term Loan Maturity Date” means October 1, 2020.

 

“Working Capital” means, as of any date of determination, the current assets (excluding unrestricted cash) of Borrower and its consolidated Subsidiaries as of such date minus the current liabilities (excluding the current portion of long-term debt) of Borrower and its consolidated Subsidiaries as of such date.

 

(c)       The Loan Agreement shall be amended by amending and restating the second sentence of Section 2.2(d) in its entirety, and inserting in lieu thereof the following:

 

“Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding the Amortization Date (excluding all accrued PIK Interest added to such principal balance prior to such date), in equal monthly installments of principal and interest (mortgage style) based on a 36-month amortization period (the “Monthly Installments”) beginning on the Amortization Date and continuing on the first Business Day of each month thereafter until the Secured Obligations (other than inchoate indemnity obligations) are repaid (which for the avoidance of doubt, shall include a bullet payment of the remaining outstanding principal balance (including all accrued PIK Interest added to the principal balance) on the Term Loan Maturity Date).”

 

(d)       The Loan Agreement shall be amended by amending and restating Section 2.6 thereof (End of Term Charge) in its entirety, and inserting in lieu thereof the following:

 

“2.6        End of Term Charge. On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge of $1,068,750.00 (the “End of Term Charge”). Notwithstanding the required payment date of such charge, (i) $787,500.00 of the End of Term Charge shall be deemed earned by Lender as of the Closing Date and (ii) $281,250.00 of the End of Term Charge shall be deemed earned by Lender as of the First Amendment Date.”

 

(e)       The Loan Agreement shall be amended by amending and restating Sections 8.1 and 8.2 thereof to read as follows:

 

“8.1       Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any quarter of Borrower and its Subsidiaries for the period of four (4) consecutive fiscal quarters of Borrower and its Subsidiaries then ended (provided that (i) for the fiscal quarter ending March 31, 2017, it shall be for the period of two consecutive fiscal quarters then ended, and (ii) for the fiscal quarter ending June 30, 2017, it shall be for the period of three (3) consecutive fiscal quarters then ended), to be less than the ratio set forth below:

 

 

Quarter Ending		Fixed Charge Coverage Ratio
March 31, 2017 through December31, 2017 (through March 31, 2018if Borrower achieves PerformanceMilestone A; through June 30,2018 if Borrower achievesPerformance Milestone A andPerformance Milestone B; throughSeptember 30, 2018 if Borrowerachieves Performance Milestone A,Performance Milestone B, andPerformance Milestone C)		1.25:1.00
Each quarter thereafter		0.90:1.00

 

8.2       Minimum EBITDA. Permit EBITDA on the last day of any quarter of Borrower and its Subsidiaries for the period of six (6) consecutive months of Borrower and its Subsidiaries then ended to be less than as set forth below:

 

Six Consecutive Months Ending		EBITDA
March 31, 2017		$	4,144,000
June 30, 2017		$	3,335,000
September 30, 2017		$	2,841,000
December 31, 2017		$	2,240,000
March 31, 2018		$	2,264,000
June 30, 2018		$	2,776,000
September 30, 2018		$	3,466,000
December 31, 2018		$	4,351,000
March 31, 2019		$	4,964,000
June 30, 2019		$	5,309,000
September 30, 2019		$	5,757,000
December 31, 2019		$	6,235,000
March 31, 2020		$	6,536,000
June 30, 2020		$	6,978,000
September 30, 2020		$	7,862,000

 

 

3.       Waiver. Borrower has notified Lender and the Agent that Borrower is not in compliance with Section 8.2 of the Loan Agreement by virtue of the fact that Borrower and its Subsidiaries failed to achieve EBITDA of at least $4,513,000 for the six (6) month period ended June 30, 2017 and at least $4,570,000 for the six (6) months ended September 30, 2017 (the “Existing Events of Default”). Borrower has notified Lender and the Agent that each of the Existing Events of Default constitute an “Event of Default” under Section 9 of the Loan Agreement. Borrower has requested that Lender waive the Existing Events of Default. Subject to the terms and conditions of this Amendment, Lender hereby waives the Events of Default arising as a result of the Existing Events of Default. The foreging waiver shall be limited precisely as written and shall not be deemed (a) to be a forbearance, waiver, or modification of any other term or condition of the Loan Agreement or of any Loan Documents or to prejudice any right or remedy which Lender may now have or may have in the future under or in connection with the Loan Documents; (b) to be a consent to any future consent or modification, forbearance, or waiver to the Loan Agreement or any other Loan Document, or to any waiver of any of the provisions thereof; or (c) to limit or impair Lender’s right to demand strict performance of all terms and covenants of the Loan Agreement as of any date.

 

4.       Conditions to Effectiveness. Borrower, Lender and the Agent agree that this Amendment shall become effective upon the satisfaction of the following conditions precedent, each in form and substance satisfactory to the Agent:

 

(a)       The Agent and Lender shall have received a principal prepayment of the Term Loan Advance in the amount of $10,000,000 for application to the reduction of outstanding principal amount of the Term Loan Advance in accordance with Section 2.5 of the Loan Agreement (the “First Amendment Prepayment”). Lender hereby waives payment of the Prepayment Charge in connection with the First Amendment Prepayment;

 

(b)       The Agent and Lender shall have received a fully-executed counterpart of this Amendment signed by Borrower;

 

(c)       The Agent shall have received certified resolutions of Borrower’s Board of Directors evidencing approval of this Amendment;

 

(d)       Borrower shall have paid to the Agent, for the account of Lender, a fee (the “First Amendment Facility Charge”) of Sixty Two Thousand Five Hundred Dollars ($62,500.00). The First Amendment Facility Charge shall be deemed earned on the effective date of this Amendment;

 

(e)       Borrower shall have received aggregate Additional Subordinated Indebtedness Proceeds of at least $13,500,000 from the Subordinated Lenders;

 

(f)       The Agent shall have received a fully-executed counterpart of the Amended and Restated Subordination Agreement; and

 

(g)       The Agent shall have received payment for all reasonable and documented out-of-pocket fees and expenses incurred by Lender and the Agent in connection with this Amendment, including, but not limited to, all legal fees and expenses, payable pursuant to Section 11.11 of the Loan Agreement.

 

 

4.       Representations and Warranties. Borrower hereby represents and warrants to Lender and the Agent as follows:

 

(a)       Representations and Warranties in the Agreement. The representations and warranties of Borrower set forth in Section 5 of the Loan Agreement are true and correct in all material respects on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date in which case they shall be true and correct in all material respects on and as of such earlier date.

 

(b)       Authority, Etc. The execution and delivery by Borrower of this Amendment and the performance by Borrower of all of its agreements and obligations under the Loan Agreement and the other Loan Documents, as amended hereby, are within the limited liability company authority of Borrower and have been duly authorized by all necessary limited liability company action on the part of Borrower. With respect to Borrower, the execution and delivery by Borrower of this Amendment does not and will not require any registration with, consent or approval of, or notice to any Person (including any governmental authority).

 

(c)       Enforceability of Obligations. This Amendment, the Loan Agreement and the other Loan Documents, as amended hereby, constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium, general equitable principles or other laws relating to or affecting generally the enforcement of, creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.

 

(d)       No Default. Immediately after giving effect to this Amendment (i) no fact or condition exists that would (or would, with the passage of time, the giving of notice, or both) constitute an Event of Default, and (ii) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

 

(e)       Event of Default. By its signature below, Borrower hereby agrees that it shall constitute an Event of Default if any representation or warranty made herein should be false or misleading in any material respect when made.

 

5.       Reaffirmations. All of the terms and conditions of the Loan Agreement and the other Loan Documents as amended hereby remain in full force and effect. Nothing contained in this Amendment shall in any way prejudice, impair or effect any rights or remedies of Lender or the Agent under the Loan Agreement and the other Loan Documents. Except as specifically amended hereby, Borrower hereby ratifies, confirms, and reaffirms all covenants contained in the Loan Agreement and the other Loan Documents. The Loan Agreement, together with this Amendment, shall be read and construed as a single agreement. All references in the Loan Documents to the Loan Agreement or any other Loan Document shall hereafter refer to the Loan Agreement or such other Loan Document as amended hereby.

 

 

6.       Release. In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lenders and all such other persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

 

7.       Execution in Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one instrument.

 

8.       Miscellaneous.

 

(a)       THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE s STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).

 

(b)       The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof.

 

(c)       This Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.

 

(d)       Any determination that any provision of this Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Amendment.

 

[Signature Pages to Follow]

 

 

IN WITNESS WHEREOF, Borrower, Lender and the Agent have duly executed and delivered this Amendment as of the day and year first above written.

 

	BORROWER:
	METUCHEN PHARMACEUTICALS LLC
	Signature:	/s/ J. Gregory Ford
	Print Name:	J. Gregory Ford
	Title:	President and CEO

 

Accepted in Palo Alto, California:
	AGENT:
	HERCULES CAPITAL, INC.
	Signature:
	Print Name:
	Title:
	LENDER:
	HERCULES FUNDING II, LLC
	Signature:
	Print Name:
	Title:

 

 

IN WITNESS WHEREOF, Borrower, Lender and the Agent have duly executed and delivered this Amendment as of the day and year first above written.

 

	BORROWER:
	METUCHEN PHARMACEUTICALS LLC
	Signature:
	Print Name:
	Title:

 

Accepted in Palo Alto, California:
	AGENT:
	HERCULES CAPITAL, INC.
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Assistant General Counsel
	LENDER:
	HERCULES FUNDING II, LLC
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Assistant General Counsel

 

 

 

Exhibit 10.3 

 

SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT

 

This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of April 13, 2020 (the “Second Amendment Date”), is by and among METUCHEN PHARMACEUTICALS LLC, a Delaware limited liability company (“Metuchen”), Pos-T-Vac, LLC, a Delaware limited liability company (“PTV”), and Timm Medical Technologies, Inc., a Delaware corporation (“Timm”, and together with Metuchen and PTV, collectively, jointly and severally, the “Borrower”), the several banks and other financial institutions or entities party hereto as lenders (collectively, referred to as “Lender”) and HERCULES CAPITAL, INC., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, the “Agent”).

 

WHEREAS, Borrower, Lender and the Agent are parties to a certain Loan and Security Agreement, dated as of September 30, 2016, as amended by that certain First Amendment to Loan and Security Agreement dated November 22, 2017 (as the same may from time to time be further amended, modified or supplemented in accordance with its terms, the “Loan Agreement”); and

 

WHEREAS, in accordance with Section 11.3 of the Loan Agreement, Borrower, Lender and the Agent desire to amend the Loan Agreement as provided herein.

 

NOW THEREFORE, in consideration of the mutual agreements contained in the Loan Agreement and herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.       Defined Terms. Terms not otherwise defined herein which are defined in the Loan Agreement shall have the same respective meanings herein as therein.

 

2.       Outstanding Principal Amount. Borrower, Lender and Agent acknowledge and agree that as of the Second Amendment Date, the outstanding principal balance of the Term Loan Advances under the Loan Agreement is $10,664,003.06, and that any previously accrued PIK Interest has been capitalized and included in such amount.

 

3.       Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 5 of this Amendment, as of the Second Amendment Date, the Loan Agreement is hereby amended as follows:

 

(a)       The Loan Agreement shall be amended by inserting the following new definitions to appear alphabetically in Section 1.1 thereof:

 

“Amortization Date II” means May 1, 2020.

 

“End of Term Charge I” shall have the meaning assigned to such term in Section 2.6.

 

“End of Term Charge II” shall have the meaning assigned to such term in Section 2.6.

 

“Financing Milestone I” shall have the meaning assigned to such term in Section 8.1.

 

“Financing Milestone II” means (i) no default or Event of Default shall have occurred and be continuing and (ii) Borrower shall have received, after March 31, 2020 and on or prior to September 30, 2020, unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) net cash proceeds in an aggregate amount of at least $20,000,000, which proceeds shall be immediately deposited in a Deposit Account or Investment Account of Borrower subject to an Account Control Agreement in favor of Agent, from (A) the sale of equity interests of Metuchen and/or Subordinated Indebtedness (inclusive of amounts raised to satisfy Financing Milestone I) and (B) a merger, acquisition or similar transaction involving Borrower.

 

 

“Net Revenue” means the net revenue earned by Borrower and its Subsidiaries in accordance with GAAP, and excluding (i) returns, (ii) coupon redemptions, (iii) contract rebates, (iv) Medicaid rebates, (v) Medicare rebates, (vi) chargebacks, (vii) cash discounts, and (vii) distribution service fees.

 

“Second Amendment” means that Second Amendment to Loan and Security Agreement dated the Second Amendment Date by and among Borrower, Lender and Agent.

 

“Second Amendment Date” means April 13, 2020.

 

(b)       The Loan Agreement shall be amended by amending and restating the following definitions in Section 1.1 thereof to read as follows:

 

“EBITDA” means with respect to Borrower and its consolidated Subsidiaries for any period, (a) the sum, without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) nonrecurring cash fees, costs and expenses incurred in connection with the closing of the Transactions (including fees and expenses paid pursuant to and in connection with the closing of the transactions contemplated by this Agreement), but only to the extent included in Net Income.

 

“Term Loan Cash Interest Rate” means for any day a per annum rate of interest equal to the greater of either (i) the prime rate as reported in the Wall Street Journal plus 11.50% minus 4.25% and (ii) 11.50%.

 

“Term Loan Maturity Date” means April 1, 2021, provided that, if Borrower shall have achieved Financial Milestone II, then the Term Loan Maturity Date shall be extended to December 1, 2021.

 

“Term Loan PIK Interest Rate” means (i) prior to the Second Amendment Date, 1.35%; and (ii) on and after the Second Amendment Date, 0.00%.

 

(c)       The Loan Agreement shall be amended by amending and restating the second sentence of Section 2.2(d) in its entirety, and inserting in lieu thereof the following:

 

“Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding the Amortization Date (excluding all accrued PIK Interest added to such principal balance prior to such date), in equal monthly installments of principal and interest (mortgage style) based on a 36-month amortization period (the “Monthly Installments”) beginning on the Amortization Date and continuing on the first Business Day of each month thereafter until the Second Amendment Date. Commencing on the Second Amendment Date, Borrower shall repay the remaining Term Loan principal balance (including all accrued PIK Interest added to such principal balance as of the Second Amendment Date) in equal monthly installments of principal and interest (mortgage style) based on a 20-month amortization period (the “Monthly Installments”) beginning on Amortization Date II and continuing on the first Business Day of each month thereafter until the Secured Obligations (other than inchoate indemnity obligations) are repaid (which for the avoidance of doubt, may include a bullet payment of the remaining outstanding principal balance (including all accrued PIK Interest added to the principal balance) on the Term Loan Maturity Date).”

 

(d)       The Loan Agreement shall be amended by amending and restating the first sentence of Section 2.5 thereof (Prepayment) in its entirety, and inserting in lieu thereof the following:

 

“2.5      Prepayment. From time to time, and at any time, Borrower may, at its option upon at least seven (7) Business Days prior notice to the Agent, prepay all or any portion of the outstanding Advances (including, for the avoidance of doubt, any PIK Interest added to principal pursuant to Section 2.2(c)(ii)) by paying the principal balance being prepaid, all accrued and unpaid interest thereon, together with a prepayment charge equal to the following percentage of the principal amount of the Term Loan Advance being prepaid: if such Advance amounts are prepaid in any of the first twelve (12) months following the Closing Date, 3.00%; after twelve (12) months but prior to twenty four (24) months, 2.00%; and after twenty-four (24) months but prior to the Term Loan Maturity Date, 0.00% (each, a “Prepayment Charge”).

 

 

(f)       The Loan Agreement shall be amended by amending and restating Section 2.6 thereof (End of Term Charge) in its entirety, and inserting in lieu thereof the following:

 

“2.6      End of Term Charge.

 

(a)       On the earliest to occur of (i) October 1, 2020, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge of $534,375.00 (the “End of Term Charge I”).

 

(b)       On the earliest to occur of (i) February 1, 2021, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge of $534,375.00 (the “End of Term Charge II” and, together with the End of Term Charge I, the “End of Term Charge”). Notwithstanding the required payment date of such charge, (i) $787,500.00 of the End of Term Charge shall be deemed earned by Lender as of the Closing Date and (ii) $281,250.00 of the End of Term Charge shall be deemed earned by Lender as of the First Amendment Date.”

 

(g)       The Loan Agreement shall be amended by adding the following new Section 2.9 after Section 2.8:

 

“2.9     Treatment of Prepayment Charge and End of Term Charge. Borrower agrees that any Prepayment Charge and any End of Term Charge payable shall be presumed to be the liquidated damages sustained by each Lender as the result of the early termination, and Borrower agrees that it is reasonable under the circumstances currently existing and existing as of the Second Amendment Date. The Prepayment Charge and the End of Term Charge shall also be payable in the event the Secured Obligations (and/or this Agreement) are satisfied or released by foreclosure (whether by power of judicial proceeding), deed in lieu of foreclosure, or by any other means. Borrower expressly waives (to the fullest extent it may lawfully do so) the provisions of any present or future statute or law that prohibits or may prohibit the collection of the foregoing Prepayment Charge and End of Term Charge in connection with any such acceleration. Borrower agrees (to the fullest extent that each may lawfully do so): (a) each of the Prepayment Charge and the End of Term Charge is reasonable and is the product of an arm’s length transaction between sophisticated business people, ably represented by counsel; (b) each of the Prepayment Charge and the End of Term Charge shall be payable notwithstanding the then prevailing market rates at the time payment is made; (c) there has been a course of conduct between the Lender and Borrower giving specific consideration in this transaction for such agreement to pay the Prepayment Charge and the End of Term Charge as a charge (and not interest) in the event of prepayment or acceleration; (d) Borrower shall be estopped from claiming differently than as agreed to in this paragraph. Borrower expressly acknowledges that their agreement to pay each of the Prepayment Charge and the End of Term Charge to the Lender as herein described was on the Second Amendment Date and continues to be a material inducement to the Lender to provide the Term Loan.”

 

(h)       The Loan Agreement shall be amended by amending and restating Section 8 to read as follows:

 

“SECTION 8. FINANCIAL COVENANTS.

 

8.1       Minimum Financing. Borrower shall have received, after March 31, 2020 and prior to April 30, 2020, unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) net cash proceeds in an aggregate amount of at least $3,000,000, which proceeds shall be immediately deposited in a Deposit Account of Borrower subject to an Account Control Agreement in favor of Agent, from the sale of equity interests of Metuchen and/or Subordinated Indebtedness (inclusive of amounts raised to satisfy the condition precedent set forth in Section 5(a) of the Second Amendment), subject to verification by Agent (including supporting documentation requested by Agent) (“Financing Milestone I”).

 

 

8.2       Minimum Cash. Borrower shall be required to maintain unrestricted Cash in a Deposit Account or Investment Account subject to an Account Control Agreement in favor of Agent, at all times during the applicable “Minimum Cash Covenant Period” set forth in the schedule below, subject to Borrower’s achievement of the “Minimum Net Revenue” and “Minimum EBITDA” for the applicable Test Period, in the following amounts: (i) if Borrower fails to achieve both the Minimum Net Revenue and Minimum EBITDA for a given Test Period, an amount greater than or equal to 100% of the Secured Obligations then outstanding during such Minimum Cash Covenant Period; (ii) if Borrower achieves either the Minimum Net Revenue or Minimum EBITDA for a given Test Period, an amount greater than or equal to 50% of the Secured Obligations then outstanding during such Minimum Cash Covenant Period; and (iii) if Borrower achieves both the Minimum Net Revenue and Minimum EBITDA for a given Test Period, $0.

 

Test Period		Minimum Net Revenue				Minimum EBITDA				Minimum Cash Covenant Period
Three-month period ended June 30, 2020		$	3,813,000			$	(1,343,000	)		August 1, 2020 through September 30, 2020
Six-month period ended September 30, 2020		$	8,572,000			$	(2,936,000	)		October 1, 2020 through December 31, 2020
Six-month period ended December 31, 2020		$	10,244,000			$	(2,563,000	)		January 1, 2021 through March 31, 2021
Six-month period ended March 31, 2021		$	10,098,000			$	(1,599,000	)		April 1, 2021 through June 30, 2021
Six-month period ended June 30, 2021		$	11,259,000			$	(867,000	)		July 1, 2021 through September 30, 2021
Six-month period ended September 30, 2021		$	12,125,000			$	(47,000	)		October 1, 2021 through December 31, 2021

 

Notwithstanding the foregoing, the effective date of the minimum cash covenant set forth in this Section 8.2 may be extended by Agent, in its sole discretion, from August 1, 2020 to September 1, 2020, subject to Borrower’s satisfactory progress toward achieving Financial Milestone II; and provided further, such date may be further extended to November 1, 2020 upon Borrower’s achievement of Financial Milestone II.

 

Borrower shall provide Agent evidence of compliance with the financial covenant under this Section 8.2 upon request in form and substance reasonably acceptable to Agent and supporting documentation requested by Agent.

 

 

4.       Waiver. Borrower has requested that Lender waive the following Events of Default that have occurred under the Loan Agreement through March 31, 2020: (a) Borrower’s failure to furnish Agent with unqualified audited financial statements as of the end of the 2018 fiscal year within 150 days after the end of such fiscal year pursuant to Section 7.1(c) of the Loan Agreement, (b) Borrower’s failure to comply with the applicable Fixed Charge Coverage Ratio for the fiscal quarters ending December 31, 2017, June 30, 2019, September 30, 2019 and December 31, 2019 pursuant to Section 8.2 of the Loan Agreement (prior to giving effect to the Second Amendment), (c) Borrower’s failure to comply with the trailing six months minimum EBITDA requirement for each of the quarters ending December 31, 2018, March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019 pursuant to Section 8.2 of the Loan Agreement (prior to giving effect to the Second Amendment) and (d) Borrower’s failure to have Control Agreements in favor of Agent for all of its Deposit Accounts, other than Excluded Accounts pursuant to Section 7.13 of the Loan Agreement (collectively, the “Existing Events of Default”). Subject to the terms and conditions of this Amendment, Lender hereby waives the Existing Events of Default. The foregoing waiver shall be limited precisely as written and shall not be deemed (a) to be a forbearance, waiver, or modification of any other term or condition of the Loan Agreement or of any Loan Documents or to prejudice any right or remedy which Lender may now have or may have in the future under or in connection with the Loan Documents; (b) to be a consent to any future consent or modification, forbearance, or waiver to the Loan Agreement or any other Loan Document, or to any waiver of any of the provisions thereof; or (c) to limit or impair Lender’s right to demand strict performance of all terms and covenants of the Loan Agreement as of any date.

 

5.       Conditions to Effectiveness. Borrower, Lender and the Agent agree that this Amendment shall become effective upon the satisfaction of the following conditions precedent, each in for m and substance satisfactory to the Agent:

 

(a)       Borrower shall have received after March 31, 2020 and prior to April 13, 2020, unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) net cash proceeds of at least $2,000,000 from the sale by Borrower of equity securities of Metuchen and/or Subordinated Indebtedness, which condition Agent confirms Borrower has satisfied as of April 1, 2020;

 

(b)       The Agent and Lender shall have received a fully-executed counterpart of this Amendment signed by Borrower;

 

(c)       Borrower shall have paid to the Agent, for the account of Lender, a fee (the “Second Amendment Facility Charge”) of Fifty Thousand Dollars ($50,000.00). The Second Amendment Facility Charge shall be deemed earned on the effective date of this Amendment; and

 

(d)       The Agent shall have received payment for all reasonable and documented fees and expenses incurred by Lender and the Agent in connection with this Amendment, including, but not limited to, all legal fees and expenses, payable pursuant to Section 11.11 of the Loan Agreement.

 

6.       Representations and Warranties. Borrower hereby represents and warrants to Lender and the Agent as follows:

 

(a)       Representations and Warranties in the Agreement. The representations and warranties of Borrower set forth in Section 5 of the Loan Agreement are true and correct in all material respects on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date in which case they shall be true and correct in all material respects on and as of such earlier date.

 

(b)       Authority, Etc. The execution and delivery by Borrower of this Amendment and the performance by Borrower of all of its agreements and obligations under the Loan Agreement and the other Loan Documents, as amended hereby, are within the limited liability company authority of Borrower and have been duly authorized by all necessary limited liability company action on the part of Borrower. With respect to Borrower, the execution and delivery by Borrower of this Amendment does not and will not require any registration with, consent or approval of, or notice to any Person (including any governmental authority).

 

(c)       Enforceability of Obligations. This Amendment, the Loan Agreement and the other Loan Documents, as amended hereby, constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium, general equitable principles or other laws relating to or affecting generally the enforcement of, creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.

 

 

(d)       No Default. Immediately after giving effect to this Amendment (i) no fact or condition exists that would (or would, with the passage of time, the giving of notice, or both) constitute an Event of Default, and (ii) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

 

(e)       Event of Default. By its signature below, Borrower hereby agrees that it shall constitute an Event of Default if any representation or warranty made herein should be false or misleading in any material respect when made.

 

7.       Reaffirmations. All of the terms and conditions of the Loan Agreement and the other Loan Documents as amended hereby remain in full force and effect. Nothing contained in this Amendment shall in any way prejudice, impair or effect any rights or remedies of Lender or the Agent under the Loan Agreement and the other Loan Documents. Except as specifically amended hereby, Borrower hereby ratifies, confirms, and reaffirms all covenants contained in the Loan Agreement and the other Loan Documents. The Loan Agreement, together with this Amendment, shall be read and construed as a single agreement. All references in the Loan Documents to the Loan Agreement or any other Loan Document shall hereafter refer to the Loan Agreement or such other Loan Document as amended hereby.

 

8.       Release. In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lenders and all such other persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

 

9.       Execution in Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one instrument.

 

10.     Miscellaneous.

 

(a)       THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE s STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).

 

(b)       The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof.

 

(c)       This Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.

 

 

(d)       Any determination that any provision of this Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Amendment.

 

[Signature Pages to Follow.]

 

 

IN WITNESS WHEREOF, Borrower, Lender and the Agent have duly executed and delivered this Amendment as of the day and year first above written.

 

	BORROWER:
	METUCHEN PHARMACEUTICALS LLC
	Signature:	/s/ J. Gregory Ford
	Print Name:	J. Gregory Ford
	Title:	President and CEO

 

	POS-T-VAC, LLC
	Signature:	/s/ J. Gregory Ford
	Print Name:	J. Gregory Ford
	Title:	President and CEO

 

	TIMM MEDICAL TECHNOLOGIES, INC.
	Signature:	/s/ J. Gregory Ford
	Print Name:	J. Gregory Ford
	Title:	President and CEO

 

 

Accepted in Palo Alto, California:
	AGENT:
	HERCULES CAPITAL, INC.
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Associate General Counsel
	LENDER:
	HERCULES FUNDING II, LLC
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Associate General Counsel

 

 

 

Exhibit 10.4

 

EXECUTION VERSION

 

THIRD AMENDMENT AND CONSENT TO LOAN AND SECURITY AGREEMENT

 

This THIRD AMENDMENT AND CONSENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of September 30, 2020 (the “Third Amendment Date”), is by and among METUCHEN PHARMACEUTICALS LLC, a Delaware limited liability company (“Metuchen”), Pos-T-Vac, LLC, a Delaware limited liability company (“PTV”), and Timm Medical Technologies, Inc., a Delaware corporation (“Timm”, and together with Metuchen and PTV, collectively, jointly and severally, the “Borrower”), the several banks and other financial institutions or entities party hereto as lenders (collectively, referred to as “Lender”) and HERCULES CAPITAL, INC., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, the “Agent”).

 

WHEREAS, Borrower, Lender and the Agent are parties to a certain Loan and Security Agreement, dated as of September 30, 2016, as amended by that certain First Amendment to Loan and Security Agreement dated November 22, 2017 and Second Amendment to Loan and Security Agreement dated April 13, 2020 (and as the same may from time to time be further amended, modified or supplemented in accordance with its terms, the “Loan Agreement”);

 

WHEREAS, in accordance with Section 11.3 of the Loan Agreement, Borrower, Lender and the Agent desire to amend the Loan Agreement as provided herein;

 

WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of May 17, 2020 (the “Merger Agreement”), among Borrower, Petros Pharmaceuticals, Inc. (“Parent”), PM Merger Sub 1, LLC (“Merger Sub 1”), PN Merger Sub 2, Inc. (“Merger Sub 2”) and Neurotrope, Inc. (“Neurotrope”), Neurotrope and Borrower have formed, directly or indirectly, (a) Parent, (b) Merger Sub 1 and (c) Merger Sub 2, and each of the parties to the Merger Agreement shall effect the following mergers upon the terms and conditions set forth therein: (i) Merger Sub 1 shall be merged with and into Borrower (the “Metuchen Merger”), with Borrower surviving as a direct wholly owned subsidiary of Parent and (ii) simultaneous with the Metuchen Merger, Merger Sub 2 shall be merged with and into Neurotrope (the “Neurotrope Merger” and, together with the Metuchen Merger, the “Mergers”), with Neurotrope surviving as a direct wholly owned subsidiary of Parent. For purposes of this Amendment, the Mergers and the transactions contemplated by the Merger Agreement shall be referred to as the “Merger Transactions”); and

 

WHEREAS, Borrower requests that the Agent and Lender consent to the Merger Transactions and the Agent and Lender hereby consent to the Merger Transactions, as set forth in Section 3 of this Amendment and on the terms and conditions set forth herein.

 

NOW THEREFORE, in consideration of the mutual agreements contained in the Loan Agreement and herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.       Defined Terms. Terms not otherwise defined herein which are defined in the Loan Agreement shall have the same respective meanings herein as therein.

 

2.       Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 4 of this Amendment, as of the Third Amendment Date, the Loan Agreement is hereby amended as follows:

 

(a)           The Loan Agreement shall be amended by inserting the following new definitions to appear alphabetically in Section 1.1 thereof:

 

   “Amortization Date III” means November 1, 2020; provided that, in the event that, as of as of said date (i) Borrower has not achieved Financing Milestone II and (ii) no Event of Default has occurred and is continuing, the Amortization Date III shall be extended to December 1, 2020; and provided further that in the event that, as of said date (x) Borrower has not achieved Financing Milestone II and (y) no Event of Default has occurred and is continuing, the Amortization Date III shall be extended to January 1, 2021.

 

 

“Catch Up Payment” means $509,935.78; provided that, in the event that Amortization Date III is extended to December 1, 2020, the Catch Up Payment shall be increased to $1,022,303.43; and provided further that, in the event that Amortization Date III is extended to January 1, 2021, the Catch Up Payment shall be increased to $1,542,036.28.

 

“Third Amendment” means that Third Amendment and Consent to Loan and Security Agreement dated the Third Amendment Date by and among Borrower, Lender and Agent.

 

“Third Amendment Date” means September 30, 2020.

 

(b)       The Loan Agreement shall be amended by amending and restating the following definitions in Section 1.1 thereof to read as follows:

 

“Escrow Agreement” means the Escrow Agreement dated September 30, 2020 by and among Agent, Juggernaut Capital Partners III, L.P., a Cayman Islands limited partnership (“Juggernaut”), and Wells Fargo, N.A., as the same may from time to time be amended, modified, supplemented or restated.

 

“Financing Milestone II” means (i) no default or Event of Default shall have occurred and be continuing and (ii) Borrower shall have received, after March 31, 2020 and on or prior to December 21, 2020, unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) net cash proceeds in an aggregate amount of at least $25,000,000, which proceeds shall be immediately deposited in a Deposit Account or Investment Account of Borrower subject to an Account Control Agreement in favor of Agent, from (A) the sale of equity interests of Metuchen and/or Subordinated Indebtedness (inclusive of amounts raised to satisfy Financing Milestone I) and (B) a merger, acquisition or similar transaction involving Borrower.

 

“Loan Documents” means this Agreement, the Notes (if any), the ACH Authorization, the Account Control Agreements, the Joinder Agreements, the Collateral Assignment of Contracts, the Collateral Assignment of Intellectual Property, all UCC Financing Statements, the Guaranty, the Escrow Agreement and any other documents executed in connection with the Secured Obligations or the transactions contemplated hereby, as the same may from time to time be amended, modified, supplemented or restated

 

“Term Loan Maturity Date” means April 1, 2021, provided that, if Borrower shall have achieved Financing Milestone II, then the Term Loan Maturity Date shall be extended to December 1, 2021.

 

(c)       The Loan Agreement shall be amended by amending and restating Section 2.2(d) in its entirety, and inserting in lieu thereof the following:

 

“(d)     Payment. Borrower will pay interest on the Term Loan Advance on the first Business Day of each month, beginning November 1, 2016. Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding the Amortization Date (excluding all accrued PIK Interest added to such principal balance prior to such date), in equal monthly installments of principal and interest (mortgage style) based on a 36-month amortization period beginning on the Amortization Date and continuing on the first Business Day of each month thereafter until the Second Amendment Date. Commencing on the Second Amendment Date, Borrower shall repay the remaining Term Loan principal balance (including all accrued PIK Interest added to such principal balance as of the Second Amendment Date) in equal monthly installments of principal and interest (mortgage style) based on a 20-month amortization period beginning on Amortization Date II and continuing on the first Business Day of each month thereafter until the Third Amendment Date. Commencing on the Third Amendment Date, Borrower will pay interest on the remaining Term Loan principal balance on the first Business Day of each month, beginning October 1, 2020. On or before the third Business Day after achieving Financing Milestone II, Borrower shall make a payment equal to the Catch Up Payment for application to the reduction of the outstanding Term Loan principal balance; provided that if Financing Milestone II is not achieved on or prior to December 21, 2020, Borrower or Juggernaut, on behalf of Borrower pursuant to the terms of the Escrow Agreement, shall make a payment equal to the Catch Up Payment on December 22, 2020. Borrower shall repay the remaining Term Loan principal balance in equal monthly installments of principal and interest (mortgage style) based on a 15-month amortization period (the “Monthly Installments”) beginning on Amortization Date III and continuing on the first Business Day of each month thereafter until the Secured Obligations (other than inchoate indemnity obligations) are repaid (which for the avoidance of doubt, may include a bullet payment of the remaining outstanding principal balance on the Term Loan Maturity Date. If, for any fiscal year of Borrower, there shall be Excess Cash Flow, Borrower shall, on the relevant Excess Cash Flow Application Date (as hereinafter defined), apply an amount equal to 75% of such Excess Cash Flow toward the prepayment of the Term Loan. Each such prepayment from Excess Cash Flow shall be made on a date (each an “Excess Cash Flow Application Date”) occurring no later than the date on which the financial statements of Borrower referred to in Section 7.1 for the fiscal year with respect to which such prepayment is made, are required to be delivered to Lender. Prepayments of the Term Loan from Excess Cash Flow shall be applied to reduce the remaining Monthly Installments on a pro rata basis. The entire Term Loan principal balance (including all accrued PIK Interest added to the principal balance) and all accrued but unpaid interest hereunder, shall be due and payable on the Term Loan Maturity Date. Borrower shall make all payments under this Agreement without setoff, recoupment or deduction and regardless of any counterclaim or defense. Lender will initiate debit entries to Borrower’s account as authorized on the ACH Authorization (i) on each payment date of all periodic obligations payable to Lender under the Term Advance and (ii) in connection with out-of-pocket legal fees and costs incurred by Agent or Lender in connection with Section 11.11 of this Agreement. Once repaid, the Term Loan Advance or any portion thereof may not be reborrowed.

 

(d)       The Loan Agreement shall be amended by amending and restating Section 8.2 to read as follows:

 

 

“SECTION 8.     FINANCIAL COVENANTS.

 

8.2       Minimum Cash.  Borrower shall be required to maintain unrestricted Cash in a Deposit Account or Investment Account subject to an Account Control Agreement in favor of Agent, at all times during the applicable “Minimum Cash Covenant Period” set forth in the schedule below, subject to Borrower’s achievement of the “Minimum Net Revenue” and “Minimum EBITDA” for the applicable Test Period, in the following amounts: (i) if Borrower fails to achieve both the Minimum Net Revenue and Minimum EBITDA for a given Test Period, an amount greater than or equal to 100% of the Secured Obligations then outstanding during such Minimum Cash Covenant Period; (ii) if Borrower achieves either the Minimum Net Revenue or Minimum EBITDA for a given Test Period, an amount greater than or equal to 50% of the Secured Obligations then outstanding during such Minimum Cash Covenant Period; and (iii) if Borrower achieves both the Minimum Net Revenue and Minimum EBITDA for a given Test Period, $0.

 

Test Period		Minimum Net Revenue				Minimum EBITDA				Minimum Cash Covenant Period
Six-month period ended September 30, 2020		$	6,000,000			$	(4,194,000	)		November 1, 2020 through January 31, 2020
Six-month period ended December 31, 2020		$	7,170,000			$	(3,661,000	)		February 1, 2021 through April 30, 2021
Six-month period ended March 31, 2021		$	10,098,000			$	(1,599,000	)		May 1,2021 through July 31, 2021
Six-month period ended June 30, 2021		$	11,259,000			$	(867,000	)		August 1, 2021 through December 1, 2021

 

Borrower shall provide Agent evidence of compliance with the financial covenant under this Section 8.2 upon request in form and substance reasonably acceptable to Agent and supporting documentation requested by Agent.

 

 

3.       Consent.  Subject to and upon the satisfaction of the conditions specified in Section 4 hereof and the following proviso, Agent and Lender hereby consent to the Merger Transactions so long as, on or prior to December 21, 2020, the Merger Transactions are consummated and each of the “Effective Times” (as defined in the Merger Agreement) shall have occurred. For the avoidance of doubt, if on or prior to December 21, 2020 the Merger Transactions are not consummated or any of the “Effective Times” (as defined in the Merger Agreement) have not occurred, the foregoing consent shall automatically terminate and shall be deemed to be null and void ab initio. In addition, the foregoing consent shall be limited precisely as written and except as so provided shall not be deemed (a) to be a consent with respect to any other matter, term, conditions or transaction or to prejudice any right or remedy which Lender may now have or may have in the future under or in connection with the Loan Documents; (b) to be a consent to any future consent or modification, forbearance, or waiver to the Loan Agreement or any other Loan Document, or to be any waiver of any of the provisions thereof; or (c) to limit or impair Lender’s right to demand strict performance of all terms and covenants of the Loan Agreement as of any date.

 

4.       Conditions to Effectiveness.   Borrower, Lender and the Agent agree that this Amendment shall become effective upon the satisfaction of the following conditions precedent, each in form and substance satisfactory to the Agent:

 

(a)       The Agent and Lender shall have received a fully-executed counterpart of this Amendment signed by Borrower;

 

(b)     The Borrower, Agent, Juggernaut and Wells Fargo, N.A. shall have entered into an Escrow Agreement in form and substance satisfactory to Agent on or prior to the Third Amendment Date;

 

(c)     Juggernaut or Wells Fargo, N.A. shall have provided to Agent written evidence in form and substance satisfactory to Agent that Juggernaut shall have delivered to Wells Fargo, N.A. in cash and in immediately available funds an amount not less than $1,542,036.28 pursuant to Section 1.1 of the Escrow Agreement on or prior to the Third Amendment Date and such amount shall have been deposited into the applicable escrow account established in connection therewith; and

 

(d)     The Agent shall have received payment for all reasonable and documented fees and expenses incurred by Lender and the Agent in connection with this Amendment, including, but not limited to, all legal fees and expenses, payable pursuant to Section 11.11 of the Loan Agreement.

 

5.       Representations and Warranties.   Borrower hereby represents and warrants to Lender and the Agent as follows:

 

(a)       Representations and Warranties in the Agreement.  The representations and warranties of Borrower set forth in Section 5 of the Loan Agreement are true and correct in all material respects on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date in which case they shall be true and correct in all material respects on and as of such earlier date.

 

(b)       Authority, Etc.  The execution and delivery by Borrower of this Amendment and the performance by Borrower of all of its agreements and obligations under the Loan Agreement and the other Loan Documents, as amended hereby, are within the limited liability company authority of Borrower and have been duly authorized by all necessary limited liability company action on the part of Borrower. With respect to Borrower, the execution and delivery by Borrower of this Amendment does not and will not require any registration with, consent or approval of, or notice to any Person (including any governmental authority).

 

(c)       Enforceability of Obligations.  This Amendment, the Loan Agreement and the other Loan Documents, as amended hereby, constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium, general equitable principles or other laws relating to or affecting generally the enforcement of, creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.

 

 

(d)       No Default.  Immediately after giving effect to this Amendment (i) no fact or condition exists that would (or would, with the passage of time, the giving of notice, or both) constitute an Event of Default, and (ii) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

 

(e)       Event of Default.  By its signature below, Borrower hereby agrees that it shall constitute an Event of Default if any representation or warranty made herein should be false or misleading in any material respect when made.

 

6.       Reaffirmations.  All of the terms and conditions of the Loan Agreement and the other Loan Documents as amended hereby remain in full force and effect. Nothing contained in this Amendment shall in any way prejudice, impair or effect any rights or remedies of Lender or the Agent under the Loan Agreement and the other Loan Documents. Except as specifically amended hereby, Borrower hereby ratifies, confirms, and reaffirms all covenants contained in the Loan Agreement and the other Loan Documents. The Loan Agreement, together with this Amendment, shall be read and construed as a single agreement. All references in the Loan Documents to the Loan Agreement or any other Loan Document shall hereafter refer to the Loan Agreement or such other Loan Document as amended hereby.

 

7.       Release.  In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lenders and all such other persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

 

8.       Execution in Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one instrument.

 

9.       Miscellaneous.

 

(a)       THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).

 

(b)       The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof.

 

(c)       This Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.

 

 

(d)       Any determination that any provision of this Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Amendment.

 

[Signature Pages to Follow]

 

 

IN WITNESS WHEREOF, Borrower, Lender and the Agent have duly executed and delivered this Amendment as of the day and year first above written.

 

	BORROWER:
	METUCHEN PHARMACEUTICALS LLC
	Signature:	/s/ Keith F. Lavan
	Print Name:	Keith F. Lavan
	Title:	CFO
	POS-T-VAC, LLC
	Signature:	/s/ Keith F. Lavan
	Print Name:	Keith F. Lavan
	Title:	CFO
	TIMM MEDICAL TECHNOLOGIES, INC.
	Signature:	/s/ Keith F. Lavan
	Print Name:	Keith F. Lavan
	Title:	CFO

 

[Signature Page to Third LSA Amendment]

 

 

Accepted in Palo Alto, California:
	AGENT:
	HERCULES CAPITAL, INC.
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Associate General Counsel
	LENDER:
	HERCULES FUNDING II, LLC
	Signature:	/s/ Jennifer Choe
	Print Name:	Jennifer Choe
	Title:	Associate General Counsel

 

[Signature Page to Third LSA Amendment]

 

 

Exhibit 10.9

 

CONFIDENTIAL

 

LICENSE AGREEMENT

 

Dated as of March 24, 2020

 

between

 

METUCHEN PHARMACEUTICALS LLC

 

and

 

HYBRID MEDICAL LLC

 

 

CONFIDENTIAL

 

TABLE OF CONTENTS

 

	1.	DEFINITIONS.	3

	2.	RIGHTS AND RESTRICTIONS.	9

3.

RESPONSIBILITIES OF PARTIES.

11

	4.	PAYMENT TERMS.	14

	5.	REPRESENTATIONS, WARRANTIES AND COVENANTS.	18

6.

TERM AND TERMINATION.

22

	7.	OWNERSHIP AND OTHER PROPRIETARY RIGHTS.	25

	8.	CONFIDENTIALITY.	31

	9.	INDEMNIFICATION AND INSURANCE.	33

	10.	LIMITATION ON LIABILITY.	35

	11.	DISPUTE RESOLUTION.	36

12.

MISCELLANEOUS.

37

 

METUCHEN/HYBRID DEVELOPMENT AND LICENSE AGREEMENT

 

 

CONFIDENTIAL

 

SCHEDULES

 

Schedule 1         HYBRID Patents

 

 

CONFIDENTIAL

 

LICENSE AGREEMENT

 

This License Agreement (this “Agreement”) is signed by HYBRID MEDICAL, LLC (including any affiliates) (“HYBRID”) and METUCHEN PHARMACEUTICALS LLC (“METUCHEN”) as of March 24th, 2020 (“Effective Date”) METUCHEN and HYBRID are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

 

RECITALS

 

WHEREAS, HYBRID is engaged in the development of, and is the owner of certain, technology and intellectual property rights in the area topical applications containing emu oil, nicardipine and superoxide dismutase as active pharmaceutical ingredients for treatment of Peyronie’s disease or any Product resulting from the Option herein (“Product”);

 

WHEREAS, METUCHEN develops, markets, distributes and sells pharmaceutical products; and

 

WHEREAS, METUCHEN and HYBRID desire to collaborate on the development and commercialization of such PRODUCT for the treatment of Peyronie’s disease and additional indications as described further herein;

 

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, METUCHEN and HYBRID agree to the foregoing and as follows:

 

1.             DEFINITIONS. Each of the capitalized terms used in this Agreement (other than the headings of the Sections), whether used in singular or plural form, shall have the meaning ascribed to each in this Agreement or as set forth below.

 

1.1              “Action” means, with respect to the applicable Party having such right pursuant to Section 7.11 (Enforcement), any action that such Party reasonably deems appropriate including notifying the infringer to cease and desist all such Infringing Activity, filing a complaint and instituting a lawsuit.

 

1.2              “Affiliate” means any individual, corporation or other legal entity which a Party directly or indirectly through one or more intermediaries controls or which is controlled by or under common control with such Party. For the purpose of this definition, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an individual, corporation or other legal entity, whether through the ownership of voting securities, by contract, or otherwise.

 

1.3             “Anti-Corruption Laws” means the U.S. Foreign Corrupt Practices Act (15 U.S.C. §§78dd-1, et. seq.), as amended, the Organization for Economic Co-operation and Development (OECD) Convention on combating bribery of foreign public officials in international business transactions, and any other applicable anti-corruption laws.

 

 

CONFIDENTIAL

 

1.4              “Change of Control” of METUCHEN means: (a) a merger, reorganization or consolidation of METUCHEN with a Third Party which results in the voting securities of METUCHEN outstanding immediately prior thereto ceasing to represent at least fifty percent (50%) of the combined voting power of the surviving entity immediately after such merger, reorganization or consolidation; (b) a Third Party becoming the beneficial owner of fifty percent (50%) or more of the combined voting power of the outstanding securities of METUCHEN; or (c) the sale or other transfer of all or substantially all of METUCHEN’s business or assets.

 

1.5              “Confidential Information” has the meaning as set forth herein.

 

1.6              “Control” or “Controlled” means, in the context of a license to or ownership of intellectual property, possession of the ability on the part of a Party to grant access to or a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party existing at the time such Party would be required hereunder to grant the other Party such access or license or sublicense.

 

1.7              “Current Good Clinical Practice” means the applicable current good clinical practices promulgated by the FDA or other applicable Regulatory Agency in any region or country other than the United States, including any applicable requirements of Title 21 of the Code of Federal Regulations.

 

1.8              “Current Good Laboratory Practice” means the applicable current good laboratory practices promulgated by the FDA or other applicable Regulatory Agency in any region or country other than the United States, including any applicable requirements of Title 21 of the Code of Federal Regulations.

 

1.9              “Current Good Manufacturing Practices” or “cGMP” means the applicable current good manufacturing practices promulgated by the FDA or other applicable Regulatory Agency in any region or country other than the United States, including any applicable requirements of Title 21 of the Code of Federal Regulations.

 

1.10              “Customer” means any Person that is not an Affiliate of METUCHEN and purchases Product(s) from METUCHEN or its Affiliates.

 

1.11             “Developed Data” means that portion of the Work Product that consists solely of data resulting from pre-clinical and clinical trials conducted in connection with the Product and which was funded by METUCHEN.

 

1.12             “Development Plan” means the development plan and budget mutually agreed in writing by the Parties for the development of a Product by HYBRID for METUCHEN under this Agreement.

 

1.13              “Excluded Person” means an Ineligible Person or a Person on an Exclusion List.

 

1.14              “Exclusion Lists” mean: (a) the HHS/OIG List of Excluded Individuals/Entities (available through the Internet at http://www.oig.hhs.gov); (b) the General Services Administration’s List of Parties Excluded from Federal Programs (available through the Internet at http://www.epls.gov); and (c) the FDA Debarment List (available through the Internet at http://www.fda.gov/ora/compliance ref/debar/).

 

 

CONFIDENTIAL

 

1.15              “Export Control Laws” means: (a) all applicable U.S. laws and regulations relating to sanctions and embargoes imposed by U.S. Department of Treasury’s Office of Foreign Assets Control (or its successor office or other body having substantially the same function); (b) all applicable U.S. export control laws, including the Arms Export Controls Act (22 U.S.C. Ch. 39), the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 et seq.), the Trading With the Enemy Act (50 U.S.C. app. §§ 1 et seq.), the Export Administration Act of 1979 (50 U.S.C. app. §§ 2401 et seq.), International Boycott Provisions of Section 999 of the U.S. Internal Revenue Code of 1986, and all rules, regulations and executive orders relating to any of the foregoing, including but not limited to the International Traffic in Arms Regulations (22 C.F.R. §§ 120 et seq.), the Export Administration Regulations (15 C.F.R. §§ 730 et. seq.), and the regulations administered by the Office of Foreign Assets Controls of the United States Department of the Treasury; and (c) all export controls imposed on any Product by any country or organization or nation within the jurisdiction in which Licensee operates or does business

 

1.16              “FDA” means the United States Food and Drug Administration or any successor entity.

 

1.17              “Field” means treatment of Peyronie’s disease and, any additional fields in which Metuchen actually pays for an Option to exercise a license for additional treatments covered by the Patent Rights.

 

1.18              “First Commercial Sale” of a Product means the first sale for use or consumption by the general public of such Product in a country after Marketing Approval and, if required for commercial sale, Price Approval, has been granted by the governing health authority of such country.

 

1.19              “First Product” means the first Product that METUCHEN sells under this Agreement for use or consumption by the general public after Marketing Approval has been granted by the FDA for such first Product.

 

1.20              “Force Majeure” means if the performance by either Party of any obligation under this Agreement is wholly or partially prevented, restricted, interfered with or delayed and the cause or causes are not due to, or caused by, any action or inaction of the Party claiming the benefit of force majeure or are not reasonably within the control of the Party claiming the benefit of force majeure, including acts of God, terrorism, acts by a Governmental Authority or Regulatory Agency, floods, fires, civil commotion, embargoes, quotas, or any delays or detention by customs, health or other Government Authorities.

 

1.21              “GAAP” means generally accepted accounting principles in effect in the United States at the applicable time. GAAP shall be applied by the Parties in a consistent manner.

 

1.22              “Governmental Authority” means any court, tribunal, arbitrator, agency, legislative body, commission, official or other instrumentality of: (a) any government of any country; or (b) a federal, state, province, county, city or other political subdivision thereof.

 

 

CONFIDENTIAL

 

1.23              “HYBRID New Patents” means any Patents from a HYBRID New Invention.

 

1.24              “HYBRID New Invention” means any invention conceived or reduced to practice solely by HYBRID which is in the category of the Field of Use and covered by a Valid Claim of the HYBRID Patents licensed herein.

 

1.25              “HYBRID Know-How” means any and all scientific, medical, technical, marketing, and regulatory information, know-how, trade secrets, inventions, discoveries, technology, modifications, improvements or the like (including clinical, safety, toxicity, analytical and technical data, assays, and analytical methods), that is or relates to (a) the HYBRID Technology, and (b) the formulations, tolerability, compatibility and stability of the Product(s), and is owned or Controlled by HYBRID or its Affiliates as of the Effective Date or at any time until the Launch Date of the First Product and is necessary for, or reasonably useful to, METUCHEN to exercise any of METUCHEN’s rights or perform any of METUCHEN’s obligations under this Agreement.

 

1.26              “HYBRID Patent Rights” means any and all rights under any Patents owned or Controlled by HYBRID or its Affiliates in any country of the Territory, as of the Effective Date or at any time until the Launch Date of the first Product that relate to or may be useful to the development, manufacture, use, sale, offer for sale, distribution, importation, exportation or other exploitation of the Product(s). HYBRID Patent Rights includes the patents and patent applications listed on Schedule 1.87 (HYBRID Patent Rights) and the HYBRID Developed Patents.

 

1.27              “HYBRID Technology” means: (a) the HYBRID Know-How, (b) the HYBRID Patent Rights; (d) HYBRID Work Product; (e) HYBRID New Inventions; and (f) HYBRID New Patents.

 

1.28              “HYBRID Work Product” means Work Product owned by HYBRID.

 

1.29              “IND” means an Investigational New Drug Application, or the equivalent submission in any country, submitted to a Regulatory Agency.

 

1.30              “Ineligible Person” means a Person who: (a) is currently excluded, debarred, suspended, or otherwise ineligible to participate in Federal health care programs or in Federal procurement or non-procurement programs; or (b) has been convicted of a criminal offense that falls within the ambit of 42 U.S.C. § 1320a-7(a), but has not yet been excluded, debarred, suspended, or otherwise declared ineligible.

 

1.31              “Launch Date” means the date of the First Commercial Sale of a Product by or on behalf of METUCHEN, its Affiliates or a sublicensee of METUCHEN to a Customer in the Territory.

 

1.32              “Legal Requirements” means: (a) all applicable laws, statutes, rules, regulations, or ordinances of a Governmental Authority; (b) Current Good Manufacturing Practices, Current Good Laboratory Practices, Current Good Clinical Practices, ICH guidelines and all applicable regulations of the FDA and any other applicable regulatory authority;

 

 

CONFIDENTIAL

 

1.33              “Licensed Work Product” means (i) the METUCHEN Work Product and (ii) the data described in Section 3.4 (Regulatory Submissions and Cooperation).

 

1.34              “Marketing Approval” means the receipt of the applicable approvals, licenses, registrations or authorizations of any federal, state or local Regulatory Agency, department, bureau or other governmental entity, necessary for the sale of a Product in a country or region, but shall not include Price Approval in any country.

 

1.35              “METUCHEN Royalty Period” means, on a country-by-country basis, the period commencing on the Launch Date for the applicable Product in the applicable country and terminating upon the expiration of the last to expire issued patent within the HYBRID Patent Rights or HYBRID New Patents having at least one Valid Claim covering Product Rights.

 

1.36              “METUCHEN Technology” means, collectively: (a) METUCHEN Work Product; (b) METUCHEN Inventions; and (c) METUCHEN Developed Patents.

 

1.37              “METUCHEN Trademark(s)” means any of the trademarks, service marks, logos, product configuration, trade dress or trade names used by METUCHEN and/or developed by METUCHEN in connection with the Product(s) during the Term of this Agreement including any trademarks, service marks, logos, product configuration, and/or trade dress for use with the Product(s).

 

1.38              “METUCHEN Work Product” means Work Product owned by METUCHEN.

 

1.39              “NDA” means a New Drug Application, or the equivalent submission, submitted to the applicable Regulatory Agency.

 

1.40              “Net Sales” means, for the applicable period, the gross amounts invoiced for sales of all applicable Products by METUCHEN, its Affiliates or their respective sublicensees to Third Parties, less the Net Sales Adjustments, all in accordance with standard allocation procedures, allowance methodologies and accounting methods consistently applied, which procedures and methodologies shall be in accordance with GAAP. For the avoidance of doubt, the transfer of any Product by METUCHEN or one of its Affiliates to another Affiliate of METUCHEN shall not be considered a sale; in such cases, Net Sales shall be determined based on the gross invoiced sales made by such Affiliate to a Third Party, less the Net Sales Adjustments. Net Sales shall not include distribution to a Third Party of Products for research, manufacturing or quality testing, clinical trials, compassionate or humanitarian purposes including expanded access programs (which provide access to therapies for no monetary consideration) or charitable donations.

 

1.41              “Net Sales Adjustments” means the following items as applicable to each such Product to the extent such items are customary under industry practices:

 

(a)               credits or allowances actually granted upon returns, rejections or recalls (due to spoilage, damage, expiration of useful life), retroactive price reductions, or billing corrections;

 

(b)               invoiced freight, postage, shipping, shipping insurance, handling and other transportation costs;

 

 

CONFIDENTIAL

 

(c)               credits or allowances actually granted including quantity, cash, bad debt and other trade discounts; and

 

(d)               taxes (including sales, value-added or excise taxes, but excluding withholding taxes and taxes paid by METUCHEN on the net income derived from sales of the Products), tariffs, customs duties, surcharges and other governmental charges incurred in connection with the sale, transportation, delivery, exportation or importation of Products that are actually incurred at time of sale or are directly related to the sale and not otherwise previously deducted.

 

1.42          “Patent(s)” means any and all rights under any patents, patent applications and patents issuing on such patent applications, together with any continuations, continuations-in-part, divisionals, reissues, renewals, reexamination certificates, substitutions, extensions, supplementary protection certificates or certificates of invention with respect to any of the foregoing.

 

1.43          “Person” means any natural person, corporation, partnership, trust, joint venture, Governmental Authority or other entity or organization.

 

1.44          “Price Approval” means, with respect to any country in which the price at which METUCHEN or its Affiliates or sublicensees sells Product must be approved by a Governmental Authority or Regulatory Agency for reimbursement or payment purposes, the receipt of approval by the applicable authority with respect to such price.

 

1.45          “Product(s)” has the meaning provided in the Recitals.

 

1.46          “Product Rights” means the applicable Product or its use, manufacture, offer for sale, sale or importation.

 

1.47          “Promotional Activities” means the detailing of Product by sales representatives or other marketing means to promote the applicable Product in accordance with the terms and conditions of this Agreement to a licensed health care professional.

 

1.48          “Regulatory Agency” means: (a) with respect to the United States, the FDA; and( b)   in the case of a country other than the United States, such other appropriate regulatory agency or authority with similar responsibilities.

 

1.49          “Territory” means: the entire world.

 

1.50          “Therapeutic Equivalent” has the meaning given to it by the FDA in the current edition of the “Approved Drug Products with Therapeutic Equivalence Evaluations” (the “Orange Book”) as may be amended from time to time.

 

1.51          “Valid Claim” means a claim in HYBRID Patent Rights that has not been: (a) canceled; (b) revoked or declared invalid and/or unenforceable by an unreversed and unappealable or unreversed and unappealed decision of a court or other appropriate body of competent jurisdiction; (c)  admitted to be invalid or unenforceable through disclaimer, or surrendered during a reissue or reexamination; or (d) abandoned.

 

 

CONFIDENTIAL

 

1.52          “Work Product” means any and all technical, scientific, regulatory, clinical and medical information and data, know-how, formulations, trade secrets, techniques, processes, ideas, concepts, designs, original works of authorship, enhancements, derivative works, adaptations and discoveries developed, conceived, reduced to practice, originated, prepared, learned, generated, obtained or made by or on behalf of a Party or its Affiliates and arising out of such Party’s performance (whether directly or through the use of a Party’s Affiliates or Third Parties performing for such Party or its Affiliates) under this Agreement after the Effective Date, including all formulations, manufacturing processes, preclinical and clinical data, analytical and quality control data, stability data, studies and procedures and marketing studies as well as drug applications and interactions with regulatory authorities.

 

2.             RIGHTS AND RESTRICTIONS.

 

2.1          Grant of Licenses to METUCHEN.

 

(a)               Subject to the terms and conditions of this Agreement (including payment of the royalties set forth in Section 4.3 (METUCHEN Royalty Payments) and Section 6 (Term and Termination)), HYBRID hereby grants to METUCHEN, and METUCHEN hereby accepts, the following rights (collectively referred to as the “METUCHEN Rights”): an exclusive (even as to HYBRID) right and license (with the right to transfer, sell, or grant sublicenses) in, to and under the HYBRID Technology to research, have researched, make or have made, use or have used, improve or have improved, develop or have developed, apply for regulatory approval, market or have marketed, distribute or have distributed, import or have imported, export or have exported, practice, have practiced, sell, offer for sale, have sold or otherwise exploit Product(s) in the Field in the Territory, including all intellectual property, future formulation development, clinical trial expenses and regulatory fees.

 

METUCHEN will have exclusive operational and budgetary oversight for all development, manufacturing, marketing, lifecycle strategy and commercialization efforts including all regulatory applications and approvals.

 

Subject to Section 6 (Term and Termination) and Section 4.3 (METUCHEN Royalty Payments), the licenses granted to METUCHEN under this Section 2 are irrevocable and perpetual, subject to Section 6 (Term and Termination). In addition, upon expiration of the METUCHEN Royalty Period for a Product in a country, no further royalties shall be payable in respect of sales of such Product in such country and thereafter the licenses granted to METUCHEN under this Section 2 with respect to such Product in such country shall be fully paid-up and royalty-free, and METUCHEN shall have the right to exploit, without any obligation of accounting or otherwise to HYBRID, the Products, in accordance with the licenses granted to METUCHEN in this Section 2.

 

(b)               Subject to Section 6 (Term and Termination) and Section 4.3 (METUCHEN Royalty Payments), HYBRID hereby grants to METUCHEN, and METUCHEN hereby accepts, an exclusive (even as to HYBRID), royalty-free, irrevocable, perpetual right and license (with the right to transfer, sell or otherwise grant sublicenses) to the HYBRID Technology, and all improvements thereof, or relating thereto.

 

 

CONFIDENTIAL

 

2.2          Sublicenses. In accordance with the license granted in Section 2.1 above, METUCHEN has the right to exercise some or all of the METUCHEN Rights through one or more Affiliates, sublicensees or subcontractors, and to provide sublicenses thereto.

 

2.3          Formulation Rights. HYBRID acknowledges the substantial investment in time, money and other resources that METUCHEN is making and will continue to make with respect to development of Product under this Agreement. Accordingly: (a) HYBRID agrees that the HYBRID Know-How includes any existing PRODUCT formulations (including improvements thereto) developed and owned by HYBRID as of the Effective Date, including any future improvements thereto; (b) HYBRID and HYBRID shall disclose to METUCHEN promptly any existing or future PRODUCT formulations (including improvements thereto) described in subsection (a) above; and (c) neither HYBRID nor any of its Affiliates shall, directly or indirectly, utilize or license the HYBRID Technology for the purposes of researching, making, using, improving, developing, marketing, commercializing, distributing, importing, selling, offering for sale, or otherwise exploiting in or for the Territory, nor shall HYBRID nor any of its Affiliates, either directly or indirectly, utilize or license the HYBRID Technology to assist any Third Party in researching, making, using, improving, developing, marketing, commercializing, distributing, importing, selling, offering for sale, or otherwise exploiting, in or for the Territory, any PRODUCT, or that otherwise is for the same indication or competitive therewith. HYBRID acknowledges and agrees that this Section 2.3 is binding upon HYBRID and any successor or assigns of HYBRID.

 

2.4           Option. METUCHEN shall have the option (hereinafter “Option”) to any new indications for the Product developed by HYBRID. METUCHEN will provide written notice to HYBRID of an Option at the HYBRID address specified in Section 12.5 (the “Option Notice”). Such Option shall be kept open, and exercisable by METUCHEN up to and including the time of patent application for the Product or indication, establishment or the development of data reasonably sufficient to provide a regulatory pathway for approval of indication of use whichever of the foregoing is latest (“Option Period”). Any such exercise will operate to include the Optioned product in the Product and in accordance with the terms of this Agreement. Exercise of such Option will be on the basis of payment by METUCHEN of a fee of $250,000 per indication within thirty (30) days of the sending of the Option Notice to HYBRID. If METUCHEN fails to make the required payment within the required time frame, METUCHEN is automatically and without further action required deemed to have forever waived such Option. To the extent METUCHEN exercises its Option to additional products and/or indications as contained herein, such Optioned product shall be subject to the License hereunder, and under the same Terms and Conditions of this Section 2, along with any other commercial terms which may be reasonably agreed between the Parties and such product shall be included as a Product and such indication shall be included within the Field.

 

2.5              No Other Rights. Except as otherwise expressly provided in this Agreement, under no circumstances does a Party hereto, as a result of this Agreement, obtain any ownership interest in or other right or license to any technology, regulatory submissions, or Patents rights of the other Party, including items owned, Controlled or developed by the other Party, or transferred by the other Party to said Party at any time pursuant to this Agreement.

 

 

CONFIDENTIAL

 

2.6              M&A Circumstance. If a third-party acquirer approaches METUCHEN for acquisition, H100 will be valued by the third party acquirer as a component of due diligence and asset valuation (valuation process to be neutral, fair and diligent in assessment process). In such event, HYBRID will receive 10% of Hl00 valuation accordingly as a transactional remuneration of the acquisition. Additionally, under the scenario of acquisition, third party acquirer will be contractually obligated to accept as binding on it the conditions and terms of this Agreement, rendering this Agreement durable through any further acquisition transaction, and abiding by the terms in this Agreement.

 

3.             RESPONSIBILITIES OF PARTIES.

 

3.1               HYBRID Responsibilities.

 

HYBRID will provide METUCHEN with any IND’s, or other regulatory information and/or clinical trial data previously conducted by it, or by any other institution or investigator or consultant on its behalf. For the avoidance of doubt, the foregoing includes all reports and analyses by HYBRID or its consultants with respect to the regulatory pathway or clinical trial or other investigation requirements which might be required by the FDA or any other regulatory body including IRB’s, reports and data from any research and development, or investigations conducted by HYBRID or any third party with regard to the Product or its active ingredients, including toxicological, animal and human studies, notes, minutes and correspondence with the FDA, any presentation or meeting materials prepared by or on behalf of HYBRID.

 

3.1.1

Technology Transfer.

 

(a)               Beginning promptly after execution of this Agreement and continuing thereafter, HYBRID shall provide to METUCHEN competent and knowledgeable assistance to facilitate the transfer of the HYBRID Technology to and for the use of, METUCHEN and its designees in accordance with the terms of this Agreement. As an example, HYBRID shall cooperate with and provide METUCHEN, its Affiliates and Third Party contract manufacturers with such reasonable assistance as HYBRID and METUCHEN jointly agree is reasonably necessary, with possible travel expense remittance as necessary and appropriate for such collaboration.

 

(b)               Unless otherwise stated herein, HYBRID shall deliver to METUCHEN, the documents and information comprising the complete technical transfer package it has as of the Effective Date including any and all incomplete or draft reports, data and other documents relating to any consultants, attorneys, physicians, scientists or governmental regulatory bodies including but not limited to the USFDA and USPTO.

 

3.1.2         Regulatory Proceedings. Upon METUCHEN’s reasonable request, HYBRID shall cooperate with and provide METUCHEN all such assistance, documentation and information as reasonably necessary or useful with respect to any of METUCHEN’s regulatory submissions or proceedings in connection with the Product, including providing access to HYBRID Technology, applicable personnel, records, materials, data, facilities or any other items reasonably requested by METUCHEN.

 

 

 

CONFIDENTIAL

 

3.1.3        Cooperation with Regulatory Agencies. HYBRID shall cooperate with METUCHEN and the applicable Governmental Authority or Regulatory Agency with respect to any inspections it may require of HYBRID’s or its respective subcontractors’ facilities and procedures relevant to and in connection with the Product(s). HYBRID shall promptly provide METUCHEN with written notice and, as applicable, copies of any communications between HYBRID and the applicable agencies with respect to the HYBRID Technology, laboratory facilities or the Product(s) to the extent such communications are relevant to the Product(s).

 

3.2           Non-Compete/Exclusivity. In no event shall HYBRID or any affiliate of HYBRID, including but not limited to an acquirer in whole or in part, or any joint venturer market any product in competition with the Product (including any Product covered by the Option provision before or after exercise as described hereinabove). Competition includes any product marketed for the treatment of Peyronie’s disease or any Product hereunder. This includes any license or permission to any other party to market, make or promote a Product, including but not limited to compounding pharmacies. For the avoidance of doubt, HYBRID shall, no later than the date on which METUCHEN pays to HYBRID the remaining Eight Hundred Thousand Dollars ($800,000.00) under Section 4.1.2 below or the remaining Nine Hundred Thousand Dollars ($900,000.00) under Section 4.1.3 below, as applicable, cease any sale, marketing or promotion directly or indirectly, or any license or permission to any other party or compounding pharmacy to make, market, sell or distribute any Product. The foregoing shall not be construed as limiting HYBRID from maintaining a corporate website which states only that a Product for its indication has been licensed to METUCHEN.

 

3.3

METUCHEN Responsibilities

 

3.3.1        METUCHEN, in good faith effort and procession of clinical development and commercialization, will expend sufficient and reasonable effort towards sequential process of clinical development, reasonably accommodative of ordinary process hurdles or delays.

 

3.3.2        Below is a proposed initial development roadmap intended to demonstrate the potential stepwise process correlated with reasonable estimated periods. Reasonable commercial efforts will be made compliantly, diligently and effectively to commercialize product in as promptly a timeline as process allows.

 

 

CONFIDENTIAL

 

 

 

3.4           Additional Responsibilities of METUCHEN. In addition to METUCHEN’s other responsibilities under this Agreement and subject to the other terms and conditions of this Agreement, METUCHEN shall use commercially reasonable efforts to undertake the following activities in the Territory with respect to the Product, which activities may in METUCHEN’s discretion be carried out by METUCHEN alone, or together with an Affiliate or subcontractors:

 

(a)              Conduct the appropriate clinical trials and toxicology studies and prepare and file the necessary regulatory submissions in order to obtain Marketing Approval from the FDA;

 

(b)              Work alone or together with its Affiliates and subcontractors to conduct formulation process development, scale-up and validation;

 

(c)              Undertake development and regulatory filing of the Product in accordance with the Development Strategies Program, and which efforts by METUCHEN shall be substantially similar to METUCHEN’s efforts for its own products of similar commercial potential taking into account scientific, business, marketing and return on investment considerations, and taking into account that each of such considerations may change over time; and

 

(d)              Provide HYBRID with monthly updates during the first year, and quarterly thereafter, regarding METUCHEN’s progress with respect to the Development Strategies Program, including providing summaries of scientific results, clinical trial results and material FDA meetings, notices and approvals, all of which will be memorialized in minutes of such reports unless otherwise agreed by the Parties.

 

 

CONFIDENTIAL

 

3.5

Regulatory Submissions and Cooperation.

 

Subject to the terms of this Agreement, including METUCHEN’s undertakings set forth in Section 3.3 above, METUCHEN, in its reasonable discretion, shall have the sole right to submit any and all regulatory submissions within the Territory with respect to Product(s) developed under this Agreement In addition, METUCHEN also shall have the right to list in the FDA’s Orange Book any HYBRID Patent Rights that cover the Product or are directed to a method of treating INDICATION by administration of the Product. All such submissions will be the exclusive property of METUCHEN.

 

3.6           Commercial Launch.

 

Subject to the other terms and conditions of this Agreement, METUCHEN shall undertake launch, sales and marketing of the Product in the Territory using efforts substantially similar to METUCHEN’s commercialization efforts for its own products of similar commercial potential taking into account scientific, business, marketing and return on investment considerations, and taking into account that each of such considerations may change over time.

 

4.             PAYMENT TERMS. Subject to the terms and conditions of this Agreement, the Parties shall make the applicable payments in accordance with the terms and conditions set forth below.

 

4.1

License Fees. METUCHEN shall pay HYBRID license fees as follows:

 

4.1.1        Upfront Payment. METUCHEN shall pay HYBRID the non-refundable, non-creditable amount of One Hundred Thousand Dollars ($100,000.00) in consideration of the license herein, to be paid on the Effective Date.

 

4.1.2        First Three Month Period. During the initial three (3) month period immediately following the Effective Date (the “Initial Period”), if Metuchen receives: (i) confirmation from the FDA of Orphan Drug status for the Product for Peyronie’s Disease, and (ii) written confirmation by HYBRID with acknowledgement by its counterpart contracting part(ies) of termination of any and all licenses, permission, or other agreements involving the Products (which may occur through execution of an Amendment providing for a full and final termination, without cause, on reasonable notice, of the agreement between Custom RX, LLC and HYBRID in a form mutually acceptable to HYBRID and Metuchen), then Metuchen will pay to HYBRID the non-refundable, non-creditable amount of Nine Hundred Thousand Dollars ($900,000.00) within seven (7) days after receipt of such confirmation. If Metuchen does not receive confirmation from the FDA of Orphan Drug status for the Product for Peyronie’s Disease during the Initial Period, then METUCHEN will have the option to pay an additional non-refundable, non-creditable amount of One Hundred Thousand Dollars ($100,000.00) within seven (7) days of the end of the Initial Period (the “Extension Option Period”) to extend this Agreement for an additional three (3) months from the end of the Initial Period (the “Second Period”). If Metuchen does not pay the additional One Hundred Thousand Dollars ($100,000.00) within the Extension Option Period, then this Agreement is automatically terminated immediately with no further obligations due by either party to the other.

 

4.1.3         Second Period. During the Second Period, if Metuchen receives: (i) confirmation from the FDA of Orphan Drug status for the Product for Peyronie’s Disease, and (ii) written confirmation by HYBRID with acknowledgement by its counterpart contracting part(ies) of termination of any and all licenses, permission, or other agreements involving the Products (which may occur through execution of an Amendment providing for a full and final termination, without cause, on reasonable notice, of the agreement between Custom RX, LLC and HYBRID in a form mutually acceptable to HYBRID and Metuchen), then Metuchen will pay to HYBRID the non-refundable, non-creditable amount of Eight Hundred Thousand Dollars ($800,000.00) within seven (7) days after receipt of such confirmation. If Metuchen does not receive confirmation from the FDA of Orphan Drug status for the Product for Peyronie’s Disease as of the end of the Second Period, then Metuchen will have the right, exercisable for a period of seven (7) days thereafter, (the “Termination Period”) to terminate this Agreement immediately with no further obligations by either party to the other. In the event that METUCHEN has not exercised its right of termination within the Termination Period, then METUCHEN will pay to HYBRID the non-refundable, non-creditable amount of Eight Hundred Thousand Dollars ($800,000.00) within three (3) days after the end of the Termination Period.

 

 

CONFIDENTIAL

 

4.2        Milestone Payments. In addition to the payments in Section 4.1, METUCHEN shall pay HYBRID the non-refundable, non-creditable against future royalty, milestone payments in accordance with the terms and conditions as follows:

 

4.2.1

First Anniversary of this agreement $125,000

 

4.2.2

Second Anniversary of this agreement $150,000

 

4.2.3

Third Anniversary of this agreement $200,000

 

4.2.4

Fourth Anniversary of this agreement $250,000

 

4.2.5

Fifth Anniversary and beyond of this agreement $250,000

 

4.2.6

First Commercial Sale $1,000,000

 

4.2.7

Cumulative Net Sales of $50M $2,500,000

 

4.2.8

Cumulative Net Sales of $100M $4,000,000

 

4.2.9

Cumulative Net Sales of $250M $7,500,000

 

	4.2.10	Cumulative Net Sales of $500M $10,000,000
	4.2.11	Once the first commercial sale is executed, Anniversary milestones shall no longer be paid; only Net Sales payments will be made, as incurred based on the foregoing.

 

 

4.3

METUCHEN Royalty Payments.

 

4.3.1        METUCHEN Periodic Royalties. During the METUCHEN Royalty Period, METUCHEN shall pay HYBRID royalties in accordance with this Section 4.3 (METUCHEN Royalty Payments).

 

(a)              METUCHEN shall pay HYBRID a royalty in the amount of six percent (6%) of cumulative Net Sales in countries in the Territory where a Product Right is covered by one or more Valid Claims of HYBRID Patent Rights or the HYBRID New Patents (“METUCHEN Royalty Payment”).

 

(b)               Royalty Payment shall be paid beginning with the First Commercial Sale of the Product and continuing for METUCHEN Royalty Period.

 

(c)             METUCHEN shall pay the METUCHEN Royalty Payment within forty-five (45) calendar days following the end of each calendar quarter.

 

(d)               In the event a significant change in market conditions (drop in sales by at least 50% over six months due to, by way of example and not limitation, regulatory changes or delays, Regulatory Agency action, recalls, interruption in supply, the introduction of a competing or generic product in the Territory, changes in federal or state reimbursement programs, changes in the pricing of competing products, etc.) has a material adverse effect on actual sales of the applicable Product, the parties will negotiate in good faith to revise the Royalty Payment to reflect such changes by up to a 50% reduction in the royalty rate, in which case the calculation of the Royalty Payment shall be adjusted to account for such changes. In the event a cumulative series of events occur, qualifying for a compounded reduction of royalty rate, described within this section (4.3.1 (d)), the final royalty rate shall not be reduced beyond 50% from original schedule stated within this agreement.

 

(1)              If the Parties are unable to agree to adjustment of the Royalty within thirty (30) calendar days following METUCHEN’s receipt of HYBRID’s written objections, the Parties shall refer the matter for resolution to an independent Third Party expert mutually agreed to by the Parties, which expert shall have at least five (5) years of relevant experience in the area of specialty pharmaceutical product sales (the “Arbiter”). The Arbiter shall review the applicable sales forecast (including the assumptions on which it is based) and HYBRID’s objections thereto and render a decision, which decision (a) shall take into consideration the assumptions made by METUCHEN with respect to the sales forecast, (b) shall be based on objective market criteria and conditions and (c) may include adjustments to the Sales Forecast based on the findings of the Arbiter. Each Party shall have an opportunity to present their position to the Arbiter and the Arbiter may determine the process for presenting each Party’s position. The decision of the Arbiter with respect to the Sales Forecast shall be final and binding on both Parties.

 

(2)               Each party shall be responsible for its costs and expenses of the Arbiter.

 

(e)               Notwithstanding anything in this Agreement to the contrary, the Royalty obligations with respect to a Product shall apply only if a Product Right is covered by one or more Valid Claims within the HYBRID Patent Rights for the applicable country and shall terminate on a country by country basis for the applicable Product in the applicable country upon the expiration of the last to expire issued Patent within the HYBRID Patent Rights having at least one Valid Claim covering one or more Product Rights.

 

 

CONFIDENTIAL

 

4.4         Reporting Obligations. The METUCHEN Royalty Payments shall be accompanied by a written report setting forth the Net Sales of the Product(s) sold by METUCHEN during the applicable quarterly period and the calculation of royalties payable for each such quarterly period.

 

4.5          Records Audit. HYBRID shall have the right, at its sole cost and expense, through a certified public accountant reasonably acceptable to the other METUCHEN (the “Accountant”), to examine the relevant records of METUCHEN during regular business hours during the Term of this Agreement and for one (1) year thereafter to verify the calculation of royalty payments pursuant to Section 4.3 (METUCHEN Royalty Payments) (the “Records”); provided, however that such examination shall not occur more often than once per year and shall not include any Records prior to the three (3) years preceding the accounting. HYBRID shall bear the expense of any such audit unless the audit reveals an underpayment of the applicable royalty payments to HYBRID which in the aggregate require payment to HYBRID in an amount equal to five percent (5%) or more of the total amount due for any calendar year, in which case METUCHEN shall bear the expense of such audit. In the event any errors in payment are discovered by the audit, the Party in error shall pay such amounts due within ten (10) business days following receipt of a demand for payment from the aggrieved Party. If payment will not be made, the Party in error, must, within the same time period as specified for payment, advise the aggrieved Party in written detail of its objections to the audit conclusion. If no agreement can be reached with respect to the amount in dispute, the dispute shall be handled in accordance with the dispute resolution procedures set forth in Section 11 (Dispute Resolution).

 

4.6

Taxes.

 

(a)               Each Party (the "Paying Party") shall pay all taxes and levies that by applicable Legal Requirements (including existing treaties for bilateral taxation) such Paying Party is required to pay on payments accruing under this Agreement and shall withhold from sums payable to the other Party all such taxes and levies and the Paying Party shall forward to the other Party documentation evidencing such payments whenever possible. To the extent that the Paying Party determines that it is required to withhold any taxes or levies on payments to the other Party, the Paying Party shall provide the other Party with reasonable prior written notice of the Paying Party's determination in order to provide the other Party an opportunity to provide comments regarding the Paying Party's decision to withhold, which comments the Paying Party shall consider in good faith. To the extent that the Paying Party withholds any taxes or levies on payments to the other Party, such other Party agrees that the Paying Party shall not be obligated to gross-up any such amounts and the other Party waives any right to payment from the Paying Party with respect to the withheld amounts which the Paying Party actually paid to the relevant Governmental Authority pursuant to such applicable Legal Requirements provided the Paying Party provides sufficient documentation from such relevant Governmental Authority evidencing payment. However, if the Paying Party receives a refund of any taxes or levies withheld from amounts paid to the other Party under this Agreement, the Paying Party shall pay to the other Party an amount equal to such refund, provided that the other Party upon request of the Paying Party, agrees to repay the amount paid over to other Party (plus any penalties, interest, or other charges imposed by the relevant Governmental Authority) by the Paying Party, if the Paying Party is required to repay such refund to such Governmental Authority. The Paying Party shall promptly notify the other Party of any notifications and discussions with any Governmental Authorities regarding any such refund.

 

 

CONFIDENTIAL

 

(b)               The Parties will cooperate with respect to tax matters relating to this Agreement including by providing an IRS Form W-9 or IRS Form W-8BEN (or other such form demonstrating an exemption from applicable taxes or levies as may be reasonably requested by the other Party), provided that such Party is legally entitled to do so. If any IRS Form expires or becomes obsolete or inaccurate in any respect, the Party that provided such form shall promptly (and in any event within thirty (30) days after such expiration, obsolescence, or inaccuracy) notify the other Party in writing of such expiration, obsolescence, or inaccuracy and update the IRS Form if it is legally eligible to do so.

 

(c)               In the event that any taxes or levies are assessed against one Party (the “Assessed Party”) with respect to payments made by the Assessed Party to the other Party (the “Non-Assessed Party”) under this Agreement, such taxes or levies (plus any penalties, interest, or other charges imposed by the relevant Governmental Authority not related to any delinquency of payment once the taxes have been assessed) shall be paid by the Non-Assessed Party. Should the Assessed Party have to pay such taxes or levies, the Non-Assessed Party shall promptly reimburse the Assessed Party in full for any taxes or levies (plus any penalties, interest, or other charges imposed by the relevant Governmental Authority not related to any delinquency in payment once the taxes have been assessed) so paid by the Assessed Party upon receipt of a copy of the assessment. Alternatively, the Assessed Party may reduce the amount of future payments to the Non-Assessed Party under this Agreement so as to recover in full any such taxes or levies (plus any penalties, interest, or other charges imposed by the relevant Governmental Authority not related to any delinquency in payment once the taxes have been assessed) so paid by the Assessed Party.

 

4.7           Currency. All payments to be paid to each Party hereunder shall be computed and made in United States Dollars.

 

5.

REPRESENTATIONS, WARRANTIES AND COVENANTS.

 

5.1           Representations, Warranties and Covenants of Each Party. Each of the Parties represents, warrants and covenants to the other that:

 

(a)               it is validly existing and in good standing under the Legal Requirements of the jurisdiction of its incorporation;

 

 

CONFIDENTIAL

 

(b)            the execution of this Agreement and full and timely performance of the covenants, duties and obligations described herein have been duly authorized by all necessary corporate action in accordance with all Legal Requirements;

 

(c)            it has obtained, and will maintain during the Term, all applicable regulatory approvals, applications, licenses, requests for exemption, permits or other regulatory authorizations with the applicable Regulatory Agency, or any state or local regulatory body necessary to conduct its business activities to date and to conduct its activities under the Agreement on and following the Effective Date;

 

(d)            it has the full power and authority to execute and deliver this Agreement and perform its covenants, duties and obligations described in this Agreement;

 

(e)            this Agreement is a valid, legal and binding obligation upon such Party, enforceable in accordance with its terms, except as enforceability may be limited by applicable insolvency and other Legal Requirements affecting creditors’ rights generally or by the availability of equitable remedies;

 

(f)             all work performed by or on behalf of a Party with respect to each Product will be conducted in material compliance with all applicable Legal Requirements;

 

(g)            neither it nor any of its personnel (including subcontractors) have been nor are disqualified or debarred under Section 306 of the Federal Food, Drug and Cosmetic Act (as amended by the Generic Drug Enforcement Act of 1992), 21 U.S.C.

§ 336;

 

(h)            it shall not use in any capacity the services of any Person who is debarred, disqualified or under investigation under the provisions of the Section 306 of the Federal Food, Drug and Cosmetic Act (as amended by the Generic Drug Enforcement Act of 1992), 21 U.S.C. § 336, and will notify the other Party immediately in the event the Party is made aware of any investigation or proceeding for debarment;

 

(i)             neither it nor any personnel within five (5) years preceding the Effective Date have been convicted of any offense required to be listed under FDA regulations; and

 

(j)            it shall not use any Ineligible Person or a Person on an Exclusion List in connection with the performance of any of its obligations or activities under the Agreement.

 

5.2           Representations, Warranties and Covenants of HYBRID. HYBRID represents, warrants and covenants to METUCHEN that:

 

(a)            HYBRID is the sole and exclusive owner of the HYBRID Technology in the Field in the Territory;

 

 

CONFIDENTIAL

 

(b)               HYBRID has the right, power and authority to grant to METUCHEN the licenses set forth in this Agreement, free and clear of any liens, security interests, restrictions on use or encumbrances of any nature whatsoever;

 

(c)              HYBRID has not specifically admitted and does not know of any verdict or decision holding that any claim of the HYBRID Technology is invalid or unenforceable;

 

(d)               HYBRID has maintained the HYBRID Patent Rights in full force and effect, including the payment of maintenance fees;

 

(e)                HYBRID has not granted, and shall not grant to any Third Party or any Affiliate, any rights or licenses with respect to, or has not otherwise taken any action that conflicts with, or adversely affects, the rights and licenses granted to METUCHEN under this Agreement;

 

(f)                HYBRID represents and warrants that is has not had any communications, directly or indirectly, with the FDA or any other regulatory agencies, or consultants or attorneys, with regard to the Product or the matters covered by this Agreement, including meetings, phone calls, correspondence.

 

(g)               the HYBRID Technology is not involved in nor, to the best of its knowledge, after due inquiry, has not been threatened by any third party to be brought into, any court proceeding, arbitration, mediation interference, reissue, re- examination or opposition; there are no allegations, claims, judgments or settlements, either actual or, to the best of its knowledge, after due inquiry, threatened, relating to any of the Product(s) or the HYBRID Technology;

 

(h)              there is no action, suit, claim, investigation or proceeding pending, or to the best of its knowledge, after due inquiry, threatened against, by or affecting HYBRID, which, if adversely decided, might adversely affect: (1) HYBRID’s ability to enter into this Agreement; (2) METUCHEN’s rights under this Agreement; or (3) HYBRID’s performance of its obligations under this Agreement;

 

(i)                to the best of HYBRID’s knowledge, after due inquiry, HYBRID has licensed and provided to METUCHEN all of the rights owned or Controlled by HYBRID as of the Effective Date reasonably necessary for METUCHEN to research, develop or have developed, make or have made, use or have used, improve or have improved, market or have marketed, distribute or have distributed, import or have imported, practice, have practiced, sell, offer for sale, have sold or otherwise dispose of the Product(s) in the Field in the Territory;

 

(j)                HYBRID has not applied for, nor received, any funds or other benefits from governmental, quasi-governmental or other non-profit sources that grant any such sources rights in or to the technology, intellectual property or know-how licensed hereunder or adversely affect or otherwise restrict the rights granted to METUCHEN under this Agreement.

 

 

CONFIDENTIAL

 

5.3

METUCHEN Covenants. METUCHEN covenants to HYBRID that:

 

(a)               neither METUCHEN nor any of its Affiliates will employ or knowingly use the services of any Person who is debarred or disqualified under United States law, including 21 U.S.C. §335a, or any foreign equivalent thereof, in connection with activities relating to any Products; and in the event that METUCHEN becomes aware of the debarment or disqualification or threatened debarment or threatened disqualification of any Person providing services to METUCHEN or any of its Affiliates with respect to any activities relating to any Products, METUCHEN will immediately notify METUCHEN in writing and METUCHEN will cease, or cause its Affiliate to cease (as applicable), employing, contracting with, or retaining any such Person to perform any services relating to any Products;

 

(b)             neither METUCHEN nor any of its Affiliates will, in connection with the exercise of METUCHEN’s rights or performance of its obligations under this Agreement, directly or indirectly through Third Parties, pay, promise or offer to pay, or authorize the payment of, any money or give any promise or offer to give, or authorize the giving of anything of value to a public official or entity or other Person for purpose of obtaining or retaining business for or with, or directing business to, any Person, including METUCHEN and its Affiliates, nor will METUCHEN or any of its Affiliates directly or indirectly promise, offer or provide any corrupt payment, gratuity, emolument, bribe, kickback, illicit gift or hospitality or other illegal or unethical benefit to a public official or entity or any other Person in connection with the exercise of METUCHEN’s rights or performance of METUCHEN’s obligations under this Agreement;

 

(c)               neither METUCHEN nor any of its Affiliates (or any of their respective employees and contractors), in connection with the exercise of METUCHEN’s rights or performance of METUCHEN’s obligations under this Agreement, shall knowingly cause HYBRID to be in violation of Anti-Corruption Laws or Export Control Laws; and

 

(d)              METUCHEN shall immediately notify HYBRID if METUCHEN has any information or suspicion that there may be a violation of Anti-Corruption Laws or Export Control Laws in connection with the exercise of METUCHEN’s rights or performance of METUCHEN’s obligations under this Agreement or any other Transaction Agreement.

 

5.4          The Parties will cooperate with respect to tax matters relating to this Agreement including by providing an IRS Form W-9 or IRS Form W-8BEN (or such other form demonstrating an exemption from applicable withholding tax as may be reasonably requested by the other Party), provided that such Party is legally entitled to do so.

 

 

CONFIDENTIAL

 

6.

TERM AND TERMINATION.

 

6.1           Term. The term of this Agreement shall commence on the Effective Date and unless earlier terminated pursuant to the terms and conditions of this Section 6 (Term and Termination), shall expire upon the expiry of the METUCHEN Royalty Period (the “Term”).

 

6.2           Termination for Default. Upon the occurrence and during the continuation of any Event of Default, the non-defaulting Party shall have the right to terminate the Term of this Agreement in whole and pursue any other remedies provided under this Agreement or available at law or in equity, by providing the defaulting Party with a prior written notice specifying the basis of the default (a “Notice of Default”). An event of default under this Agreement shall be deemed to exist upon the occurrence of any one or more of the following events (the “Event(s) of Default”):

 

(a)              the material breach or inaccuracy of any of the representations, warranties or covenants of HYBRID set forth in this Agreement, which breach or inaccuracy continues for a period ninety (90) calendar days after HYBRID’s receipt of METUCHEN’s Notice of Default;

 

(b)             the material breach or inaccuracy of any representations, warranties or covenants of METUCHEN set forth in this Agreement, which breach or inaccuracy continues for a period ninety (90) calendar days after METUCHEN’s receipt of HYBRID’s Notice of Default;

 

(c)               failure of METUCHEN to pay any undisputed amount due to HYBRID under this Agreement, which failure continues for a period of thirty (30) calendar days after METUCHEN’s receipt of HYBRID’s Notice of Default; or

 

(d)               failure of a Party to perform or comply with any other material obligation under this Agreement, including stagnation or cessation of commercial or development activities, provided that such failure is not cured within one hundred twenty (120) calendar days following the defaulting Party’s receipt of the Notice of Default from the non-defaulting Party (“Cure Period”), such Cure Period to be extendable for an additional thirty (30) days upon the payment of an extension fee of $25,000 by the curing party to the other party.

 

6.3         Termination for Convenience. In addition to the termination option my METUCHEN in Section 4 hereinabove, METUCHEN may terminate at any time after first anniversary without cause upon ninety (90) days' notice.

 

6.4          Termination for Reasons of Safety. METUCHEN may terminate at any time with notice following the withdrawal of Product from any market as a result of bona fide concerns based on specific and verifiable information that the Product is unsafe for administration to humans.

 

6.5

Effect of Termination or Expiration.

 

6.5.1        Effect of Expiration of METUCHEN Royalty Period or Term of Agreement. Upon expiration of the applicable METUCHEN Royalty Period of a Product or upon expiration of the Term of this Agreement, whichever occurs earlier METUCHEN shall have a fully paid-up, perpetual, exclusive license to use the HYBRID Technology (including, without limitation, sale, transfer or license to third parties) for the applicable Product(s) in the Field in the Territory including but not limited to all approved drug applications of any regulatory authority.

 

 

CONFIDENTIAL

 

6.5.2        Termination by HYBRID for Default. Upon termination of this Agreement by HYBRID pursuant to Section 6.2 (Termination for Default), the following shall occur:

 

(a)               except as necessary for METUCHEN to perform the activities set forth below), METUCHEN shall, at HYBRID's written request assign and transfer to HYBRID, all of METUCHEN'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. Licensor shall pay Licensee for such transfer a fee equal to 50% of Licensee's documented costs to procure, register and maintain such filings, approvals agreements and other data;

 

(b)             the rights and licenses of METUCHEN’s sublicensees shall survive, provided that that such sublicensee agrees in writing that (i) HYBRID is entitled to enforce all relevant provisions directly against such sublicense and (ii) HYBRID shall not assume, and shall not be responsible to such sublicensee for, any representations, warranties or obligations of METUCHEN to such sublicensee, other than to permit such sublicensee to exercise any rights to Products that are sublicensed under such sublicense agreement.

 

6.5.3

Termination By METUCHEN for Default, Convenience.

 

(a)               Upon termination of this Agreement by METUCHEN pursuant to Section 6.2 (Termination for Default), in addition to the other rights and obligations of the Parties pursuant to Section 6, to the following shall occur:

 

a)

the licenses granted to METUCHEN under Section

2.1 (Grant of Licenses to METUCHEN) shall become fully-paid up and shall continue until terminated for a subsequent Event of Default pursuant to Section 6.2 (Termination for Default) (provided that in no event will HYBRID be required to provide a refund for any prior amounts paid); and

 

b)            other than the METUCHEN Royalty Payments or other payments due to be paid to HYBRID below, METUCHEN shall have no other payment obligations upon its termination of this Agreement provided, however, the foregoing shall not be construed to limit the right of HYBRID to recover damages from METUCHEN subject to the terms and conditions of this Agreement.

 

(b)             Upon termination of this Agreement by METUCHEN pursuant to Section 6.3 “Termination for Convenience,” the following shall occur:

 

METUCHEN shall, at HYBRID's written request assign and transfer to HYBRID, all of METUCHEN'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. HYBRID shall pay METUCHEN for such transfer a fee equal to 50% of METUCHEN's documented costs to procure, register and maintain such filings, approvals agreements and other data.

 

 

 

CONFIDENTIAL

 

6.5.4        Additional Rights and Obligations of METUCHEN and HYBRID upon Termination or Expiration of the Agreement.

 

Upon termination or expiration of the Term of the Agreement for any reason, the following provisions shall apply:

 

(1)               Each Party shall return to the other Party or, as otherwise instructed, destroy the Confidential Information of the other Party in its possession except (a) for that Confidential Information necessary for a Party to exercise any of its rights under this Section 6.5 (Effect of Termination or Expiration), (b) that the legal department of the receiving Party and its outside counsel (if any) each may retain one copy of the Confidential Information received by the receiving Party, (c) for any Confidential Information contained on electronic media for archival or backup purposes, provided that such Confidential Information may not be used for any purpose other than a use permitted in this Agreement that extends beyond termination or expiration of the Agreement or for defending or enforcing any rights in connection with this Agreement, and (d) as otherwise provided herein. Each Party shall certify completion of the foregoing in writing within thirty (30) days of the expiration or termination of the Agreement. Notwithstanding the foregoing, return or destruction of Confidential Information does not abrogate the continuing obligations of the receiving Party under this Agreement.

 

(2)               Except as otherwise provided herein, each Party shall pay to the other any outstanding and undisputed amounts due and payable pursuant to this Agreement, including (a) any METUCHEN Royalty Payments that are due and payable from METUCHEN to HYBRID, and if a milestone payment has been earned in accordance with Schedule 4 (Payments) prior to the date that notice of termination has been sent to HYBRID, then METUCHEN shall be obligated to pay such milestone payment in accordance with Schedule 4 (Payments) unless the termination is due to a material breach of HYBRID. For clarity, unless the termination is due to a material breach of HYBRID if the milestone payment has been earned as described above and the notice is sent during the forty-five (45) day payment period, the milestone payment will continue to be due from METUCHEN to HYBRID.

 

 

CONFIDENTIAL

 

6.5.5        Survival. Notwithstanding anything contained herein to the contrary the following Sections of the Agreement shall survive the expiration or termination of the Term of this Agreement for any reason: Section 1 (Definitions) with respect to those defined terms in those provisions of the Agreement that survive; Section 4 (Payment Terms) with respect to any payment obligations that continue for any licenses that continue in accordance with the terms and conditions of this Agreement; Section 6.2 (Termination for Default) with respect to any licenses or other rights or obligations of the Parties that survive the Term of the Agreement, it being acknowledged by the Parties that any continuing licenses may be terminated in accordance with Section 6.2 (Termination for Default), in which case the Parties will have the applicable rights afforded to a Party upon termination for an Event of Default; Section 7 (Ownership and Other Proprietary Rights) only as the applicable terms and conditions apply to any licenses that continue; Section 8 (Confidentiality) subject to the scope of the licenses that may continue; Section 9.1 (Indemnification by HYBRID); Section 9.2 (Indemnification by METUCHEN); Section 9.3 (Procedures for Indemnification); Section 10 (Limitation on Liability); Section 11 (Dispute Resolution); Section 12 (Miscellaneous).

 

6.5.6        In the event of an alleged breach of this Agreement, the prevailing Party shall be entitled to reimbursement of all of its costs and expenses, including reasonable attorneys’ fees, incurred in connection with such dispute, claim or litigation, including any appeal therefrom. For purposes of this Section, the determination of which Party is to be considered the prevailing party shall be decided by the court of competent jurisdiction or independent party (i.e., mediator or arbitrator) that resolves such dispute, claim or litigation.

 

7.

OWNERSHIP AND OTHER PROPRIETARY RIGHTS.

 

7.1              HYBRID Technology. Subject to the license, ownership and other rights, provided to METUCHEN herein including METUCHEN Technology rights as defined in this Section 7, HYBRID retains all right, title and interest in the HYBRID Technology.

 

7.2              METUCHEN Technology. METUCHEN owns all right, title and interest in and to the METUCHEN Technology. .

 

7.3

Rights in Work Product.

 

7.3.1

METUCHEN Rights.

 

(a)               METUCHEN owns all right, title and interest in any and all information and intellectual property in the Metuchen Work Product.

 

(b)               HYBRID shall not have any rights to the METUCHEN Work Product. HYBRID agrees not to knowingly, and not to knowingly assist Third Parties to, apply to register or register title to any intellectual property rights in the METUCHEN Work Product including the METUCHEN Developed Patents, the Licensed Work Product and the Developed Data.

 

7.3.2

HYBRID Rights.

 

(a)               HYBRID shall own all right, title and interest to any and all Work Product, including any and all intellectual property rights arising therefrom, with the exception of the METUCHEN Work Product (collectively, “HYBRID Work Product”).

 

 

CONFIDENTIAL

 

(b)               Subject to the rights to METUCHEN under this Section 7, METUCHEN shall not have any rights to the HYBRID Work Product except pursuant to: (a) and to the extent of the licenses granted to METUCHEN hereunder, (b) the Option granted to METUCHEN hereunder or (c) a separate written agreement to be negotiated between the Parties, which agreement would include commercial terms for the use of such other HYBRID Work Product by METUCHEN. All other rights to HYBRID Work Product not expressly granted to METUCHEN under this Agreement are reserved solely and exclusively to HYBRID.

 

7.4

Inventions.

 

7.4.1        Any HYBRID New Inventions and HYBRID New Patents shall (a) be considered part of the License for purposes of this Agreement, (b) automatically become subject to the exclusive license grant under Section 2.1 (Grant of Licenses to METUCHEN) without further act of either Party, and (c) be subject to all of the other applicable restrictions, terms and conditions set forth in this Agreement.

 

7.4.2        METUCHEN Inventions. METUCHEN shall own all right, title and interest to (a) any inventions conceived or reduced to practice by METUCHEN arising out of or relating to the METUCHEN Work Product (collectively, “METUCHEN Inventions”) and

(b) any Patents arising therefrom (“METUCHEN Developed Patents”).

 

7.4.3

Disclosure and Cooperation.

 

(a)               Each Party covenants to promptly and fully disclose to the other Party in writing each invention owned by the other Party that such Party conceives or reduces to practice under this Agreement. Such disclosure shall be made promptly, but in no event no later than any of the following: thirty (30) days prior to the filing of a patent application, or ninety (90) days prior to a public disclosure, or within 45 days of identification of a new invention as contained in company records.

 

(b)               A Party that creates an invention subject to a license or assignment under this Agreement (an “Inventing Party”), on behalf of itself and all Affiliates or applicable Third Parties, shall: (1) promptly disclose to the other Party any invention conceived by the Inventing Party that the other Party owns pursuant to the terms and conditions of Section 7.4 (Inventions); and (2) cooperate with the other Party to provide all assistance to and execute all documents reasonably required by such other Party to establish, assign, perfect, protect enforce and affirm any and all of such other Party’s rights with respect to the applicable invention. If the other Party, at any time, is unable for any reason to secure the signature of the Inventing Party, its Affiliates or applicable Third Parties (as the case may be) to any document required to file, prosecute, register or memorialize the assignment of any rights as set forth in the Agreement, the Inventing Party hereby irrevocably designates and appoints such other Party and such other Party’s duly authorized officers and agents as the Inventing Party’s agents and attorneys-in-fact to act for and on the Inventing Party’s behalf and instead of the Inventing Party to take all lawfully permitted acts to further the filing, prosecution, registration, memorializing of assignment, issuance and enforcement of such rights, all with the same legal force and effect as if executed by the Inventing Party. The foregoing is deemed a power coupled with an interest and is irrevocable at all times.

 

 

CONFIDENTIAL

 

7.5              Government Applications and Other Information. Any IND, NDA, abbreviated NDA (“ANDA”) or Scale Up and Post Approval Changes (“SUPAC”) and any applications for Marketing Approval, Price Approval or any other approval from a Governmental Authority or Regulatory Agency, and any information directly related thereto including communications with the applicable Regulatory Agency together with the information and data contained therein shall be owned by METUCHEN or its Affiliates and shall be treated as METUCHEN Confidential Information in accordance with Section 8 (Confidentiality) of this Agreement.

 

7.6              Trademarks. All rights to and ownership of the METUCHEN Trademarks shall remain with METUCHEN, including any good will associated therewith. All rights to and ownership of the HYBRID Trademarks shall remain with HYBRID, including any good will associated therewith, METUCHEN shall have the sole right to market the Products under its own trade names and trademarks or those licensed by METUCHEN, subject to the terms and conditions contained in this Agreement, including the license provisions contained in Section 2.1 (Grant of Licenses to METUCHEN). METUCHEN also shall have the right to authorize one or more Third Parties to market Product(s) under the trade name, trademark or brands of one or more Third Parties, subject to the terms and conditions contained in this Agreement, including the license provisions contained in Section 2.1 (Grant of Licenses to METUCHEN). HYBRID shall have no rights to use METUCHEN Trademarks and shall restrict its sublicensees from using METUCHEN Trademarks.

 

7.7              Patent Marking. Both Parties shall mark any products, including the Products, sold or distributed pursuant to this Agreement in accordance with the applicable patent statutes or regulations in the country or countries of sale thereof.

 

7.8              Cooperation of Third Parties. Each Party represents and agrees that all of its employees and all of its Affiliates’ employees acting under its or its Affiliates’ authority under this Agreement shall be obligated under a binding written agreement, relevant law, or established corporate policy to assign to the other Party such other Party’s rights as set forth in this Agreement. In the case of all others acting in the performance of a Development Plan and Development Strategies Program on behalf of either Party, such as consultants, subcontractors, licensees, sublicensees, outside contractors, clinical investigators, agents, or non-employees working for non- profit academic institutions, such others also shall be obligated under an agreement that meets the criteria of the preceding sentence, unless otherwise approved in writing by the other Party. Each Party agrees to undertake to enforce the agreements referenced in this Section (including, where appropriate, by legal action).

 

7.9              No Encumbrances. Except as expressly provided in this Agreement, HYBRID shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in (e.g., as collateral for a loan or other financing) or otherwise encumber any HYBRID Technology necessary for the research, development, manufacture or commercialization of the Product in the Field in the Territory without the prior written consent of METUCHEN.

 

 

CONFIDENTIAL 

 

7.10

Registration and Maintenance of Intellectual Property.

 

7.10.1

Prosecution.

 

(a)               METUCHEN shall make commercially reasonable efforts to be responsible for any and all legal proceedings surrounding the development, commercialization and sale of the Product within the Territory, at METUCHEN's sole expense. The foregoing includes, without limitation, patent post-grant proceedings/oppositions, patent litigation (both enforcement and defense) including Paragraph IV litigation and product liability litigation with the exception of product already sold or marketed by HYBRID or by its representative or licensee. HYBRID shall reasonably cooperate with METUCHEN in such endeavors in circumstances where the participation of HYBRID as the patent holder of licensed patent rights is necessary or useful at no additional cost, except for reimbursed expense for travel and lodging.

 

(b)               Subject to the terms and conditions of this Agreement, METUCHEN undertakes to use commercially reasonable efforts in preparing, filing and prosecuting, and shall control and be responsible for preparing, filing, prosecuting and maintaining, all Patents relating to the Product, provided that METUCHEN shall cover expenses related thereto incurred with respect to such activities inside the Territory. HYBRID shall promptly cooperate with any reasonable request from METUCHEN to: (i) add PRODUCT-related disclosures to HYBRID Patent Rights in the Territory; and (ii) file any new patent application(s) related to PRODUCT or formulations or uses thereof that capture any previously undisclosed subject matter that may support any claim directed to the composition or formulation of the Product or a method of treating INDICATION by administration of the Product.

 

(c)               During the Term, without the prior written consent of METUCHEN, HYBRID shall not: (1) cancel, revoke or withdraw; (2) admit to be invalid or unenforceable through disclaimer, or surrender during a reissue or reexamination; (3) abandon, the HYBRID Patent Rights; or (4) (A) disclaim the term of any issued US patents licensed to METUCHEN hereunder that include at least one claim directed solely to the composition or formulation of the Product or a method of treating INDICATION by administration of the Product

 

7.10.2        METUCHEN March-In Rights. If HYBRID decides not to: (a) prosecute HYBRID Patent Rights; (b) pay a maintenance fee and/or annuities for any HYBRID Patents Rights in the Territory; or (c) take any other action necessary for the continued existence of the HYBRID Patents Rights in the Territory, HYBRID shall promptly notify METUCHEN in writing; provided, however, to the extent reasonably practicable under the circumstances, HYBRID shall use commercially reasonable efforts to provide such notice not less than thirty (30) calendar days prior to a non-extendable response or deadline is due before the United States Patent and Trademark Office or other analogous agency anywhere within the Territory. Within thirty (30) calendar days of receipt of such notice, METUCHEN shall have the right, in its sole discretion, to take an assignment of such HYBRID Patents Rights in the Territory (such HYBRID Technology thereafter becoming METUCHEN Technology) (collectively a “HYBRID Assignment”).

 

CONFIDENTAL 

 

7.10.3

Assignment.

 

(a)               In the event of a HYBRID Assignment pursuant to Section 7.10.2 (METUCHEN March In Rights), the Parties acknowledge and agree any Assigned Materials shall be removed from the HYBRID Patents as of the date of a HYBRID Assignment.

 

(b)               Any items identified in or covered by the HYBRID Assignment shall be referred to as the “Assigned Materials”) (as appropriate). Upon the request of the non-assigning Party, the assigning Party shall execute: (1) any appropriate documentation necessary to assign, cede and grant to the non-assigning Party all right, title, interest and possession in, to and under the Assigned Materials; and (2) any instruments to maintain, register, renew, defend, enforce and/or assign any and all Patents, service marks, trademarks, trade dress, product configuration, trade secrets, copyrights and/or any other intellectual property rights in relation to, associated with and/or arising from the Assigned Materials. Notwithstanding the foregoing, each Party represents and warrants that, as applicable, it shall not contest, deny or take any action inconsistent with the other Party’s ownership in or validity of the Assigned Materials pursuant to this Section 7.10 (Registration and Maintenance of Intellectual Property).

 

7.11

Enforcement.

 

7.11.1    Notification. Each Party acknowledges and agrees that it shall notify the other Party in writing of any known or suspected Third Party activity that may (a) infringe the HYBRID Patent Rights (the “Infringing Activity”), or (b) otherwise affect or interfere with the licenses granted to such HYBRID Patent Rights under this Agreement, which notice shall include a reasonably detailed and complete description of the Infringing Activity as is known by such Party. Notwithstanding the foregoing, the notifying Party shall not be obligated to provide to the other Party any of its attorney-client privileged material or any information that the notifying Party is prohibited to disclose pursuant to an agreement between the notifying Party and a Third Party.

 

7.11.2

Right to Institute Action Regarding Infringing Activity.

 

(a)               If the Infringing Activity infringes any of the following in the Territory: (1) a METUCHEN Developed Patent, or (2) a patent under which HYBRID has any HYBRID Patent Right or that is a HYBRID Developed Patent and which same patent includes a claim that is directed solely to the composition or formulation of the Product or a method of treating that falls within the Field by administration of the Product, then METUCHEN shall have the first right, at its sole cost and expense, to commence any Action against such Infringing Activity and only to the extent of the scope of the licenses granted to METUCHEN under subsection (a)(i) of Section 2.1 (Grant of Licenses to METUCHEN).

 

(b)               If the Infringing Activity infringes a HYBRID Patent Right other than as set forth in 7.11.2(a) above then only to the extent of the scope of such exclusive license, HYBRID shall have the first right, at its sole cost and expense, to commence any Action.

 

 

CONFIDENTIAL

 

(c)               The Party that has a first right to institute an Action pursuant to subsections (a) and (b) of this Section 7.11.2 shall be referred to as the “Instituting Party”. The Instituting Party shall have sole control of any such Action including any settlement negotiations in accordance with Section 7.11 and subject to the requirements of Section 7.11.7 (Settlement); provided, however, the other Party (the “Co-Party”) may, at its own expense, actively participate in the conduct of any such Action and, in any event, may provide ongoing comments and advice regarding its position in the dispute which comments the Instituting Party shall consider in good faith.

 

7.11.3    Co-Party Enforcement. If the Instituting Party does not commence an Action pursuant to Section 7.11.2 (Right to Institute Action Regarding Infringing Activity) within twenty (20) calendar days of notice pursuant to Section 7.11.1 (Notification), then the Co-Party shall have the right, at its sole cost and expense, to commence any Action that the Co-Party reasonably deems appropriate in accordance with the terms of this Section 7.11 (Enforcement). The Co-Party shall, at its sole cost and expense, commence any action that the Co-Party reasonably deems appropriate including notifying the infringer to cease and desist all such Infringing Activity, filing a complaint and instituting a lawsuit.

 

7.11.4

Paragraph IV Notices.

 

Each Party shall immediately give written notice to the other of any certification of which it becomes aware filed pursuant to 21 U.S.C. § 355(b)(2)(A)(iv) or § 355(j)(2)(A)(vii)(IV) (or any amendment or successor statute thereto) claiming that any HYBRID Patent Right or HYBRID New Patents covering any Product is invalid or that infringement will not arise from the development, manufacture, use or commercialization in the United States of such Product by a Third Party. Upon the giving or receipt of such notice (provided such notice challenges a patent under which HYBRID has any HYBRID Patent Right or that is a HYBRID New Patent and which same patent includes a claim that is directed solely to the composition or formulation of the Product or a method of treating INDICATION by administration of the Product), then METUCHEN shall have the first right, but not the obligation, to commence any applicable Action in the United States and only to the extent of the scope of the licenses granted to METUCHEN under subsection (a)(i) of Section 2.1 (Grant of Licenses to METUCHEN).

 

7.11.5

Joinder and Cooperation.

 

(a)               Joinder. For any Action instituted by one Party, the other Party acknowledges and agrees that upon request of instituting Party, such other Party shall join as necessary for standing to commence and maintain the Action.

 

(b)               Cooperation. For any Action, METUCHEN and HYBRID shall use commercially reasonable efforts to assist and cooperate with the Instituting Party.

 

 

CONFIDENTIAL

 

(c)                 Reimbursement. The Instituting Party shall reimburse the Co-Party for: (1) any reasonable and pre-approved costs related to joining the Action pursuant to subsection (a) above and (2) any costs related to assisting and cooperating with the Instituting Party pursuant to subsection (b) above. Notwithstanding the foregoing, the Instituting Party shall have sole control of any such Action including any settlement negotiations in accordance with Section 7.11.7 (Settlement).

 

7.11.6    Recovery. Any damages, monetary awards or other amounts recovered, whether by judgment or settlement, pursuant to any suit, proceeding or other legal action taken under this Section 7.11 (Enforcement) shall applied as follows:

 

(a)               First, to reimburse the Parties for their respective costs and expenses (including reasonable attorneys’ fees and costs) incurred in prosecuting such enforcement action; and

 

(b)                Second, any amounts remaining shall be retained by the Instituting

Party.

 

7.11.7    Settlement. In the event any settlement of such an Action would, in any manner as determined by the Co-Party in its reasonable discretion, reasonably affect any of the rights of the Co-Party under this Agreement, then prior to settling such Action with the infringing Third Party(ies), the Instituting Party must first obtain the prior approval of the Co-Party only, which approval shall not be unreasonably withheld or delayed as long as the rights of the Co-Party are not impaired, reduced, restricted or otherwise limited by such settlement in which case the Co-Party shall have the sole and absolute right to deny or withhold approval of such settlement.

 

8.

CONFIDENTIALITY.

 

8.1              METUCHEN Confidential Information. HYBRID acknowledges and agrees that “METUCHEN Confidential Information” means any materials, data, and information of any type whatsoever, in whatever form or media, whether or not marked as “confidential” and/or “proprietary,” that is disclosed to or becomes known by HYBRID, and which is not generally known to the public or throughout the trade, or which could reasonably be expected to be valuable to any of METUCHEN and its Affiliates or a competitor of any of METUCHEN and its Affiliates including all the records of METUCHEN and any other secret, sensitive or confidential material related to the business generally, including any information, work in progress, trade secrets, data or other secret, sensitive or confidential material, and any business technology, business strategies, accounting, marketing, products, systems, formulae, practices, processes, customers or projects of METUCHEN or its Affiliates that are created, accessed, viewed, learned, obtained, disclosed to or become known by HYBRID pursuant to this Agreement including METUCHEN Work Product, and any information or matter subject to the terms of, or otherwise transmitted to METUCHEN by HYBRID pursuant to, this Agreement. HYBRID shall: (a) hold such METUCHEN Confidential Information in strict confidence; (b) not disclose such METUCHEN Confidential Information to any Third Party except as expressly permitted by this Agreement; and (c) use such METUCHEN Confidential Information only as necessary for HYBRID’s performance of its obligations under this Agreement.

 

 

CONFIDENTIAL

 

8.2              HYBRID Confidential Information. METUCHEN acknowledges and agrees “HYBRID Confidential Information” means any materials, data, and information of any type whatsoever, in whatever form or media, whether or not marked as “confidential” and/or “proprietary,” that is disclosed to or become known by METUCHEN and which is not generally known to the public or throughout the trade, or which could reasonably be expected to be valuable to HYBRID and/or its Affiliates and/or a competitor of HYBRID and/or its Affiliates including all the records of HYBRID and any other secret, sensitive or confidential material related to the business generally, including any information, work in progress, trade secrets, data or other secret, sensitive or confidential material, and any business technology, business strategies, accounting, marketing, products, systems, formulas, practices, processes, customers or projects of HYBRID or its Affiliates that are created, accessed, viewed, learned, obtained disclosed to or become known by METUCHEN or its Affiliates during the Term, but excluding any METUCHEN Confidential Information. METUCHEN shall: (a) hold such HYBRID Confidential Information in strict confidence; (b) not disclose such HYBRID Confidential Information to any Third Party except as expressly permitted by this Agreement, including to Third Parties that are performing services for METUCHEN or its Affiliates in connection with the activities of METUCHEN and its Affiliates under the Agreement, provided that any such Third Party is subject to written obligations of confidentiality and nondisclosure similar to those set forth in this Agreement protecting the HYBRID Confidential Information; and (c) use such HYBRID Confidential Information only as necessary to perform the obligations of METUCHEN under this Agreement or otherwise develop and commercialize one or more Products under this Agreement. METUCHEN may use and disclose the HYBRID Technology to its Affiliates and as necessary to sublicensees of METUCHEN solely in accordance with the scope of the applicable licenses granted under Section 2.1 (Grant of Licenses to METUCHEN), provided that any sublicensee is subject to written obligations of confidentiality and nondisclosure similar to those set forth in this Agreement protecting the HYBRID Confidential Information and METUCHEN otherwise complies with its obligations under subsection (a)(1) of Section 2.3 (Sublicenses) (the METUCHEN Confidential Information and the HYBRID Confidential Information collectively shall be referred to as the “Confidential Information”).

 

8.3              Exceptions to Confidential Information. As used herein, the term Confidential Information shall not include information:

 

(a)               that is publicly available or later becomes available other than through a breach of this Agreement;

 

(b)               subsequently lawfully obtained by the recipient from a Third Party without obligations of confidentiality with respect to such Confidential Information; or

 

(c)               already in the lawful possession of the recipient, as evidenced by written records, provided that such information was not acquired directly or indirectly from the disclosure.

 

 

CONFIDENTIAL

 

8.4              Disclosure Rights. Notwithstanding Sections 8.1 (METUCHEN Confidential Information) and 8.2 (HYBRID Confidential Information), subject to the terms of this Section 8.4 (Disclosure Rights), either Party may disclose the other Party’s Confidential Information in response to: (a) an order from a Governmental Authority; (b) in response to a Party in litigation, provided that an appropriate protective order has been entered; or (c) if such disclosure is necessary to comply with any other Legal Requirements applicable to the disclosing Party. If the receiving Party or any of its employees or agents are requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the Confidential Information of the disclosing Party, the receiving Party shall use commercially reasonable efforts not to disclose the Confidential Information without providing the disclosing Party at least twenty-four (24) hours prior written notice of any such request or requirement so that the disclosing Party may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement; provided, however, to the extent a disclosure of Confidential Information is requested or required by a Third Party (including Governmental Authority) during the pendency of a proceeding (e.g., hearing, deposition, etc.) without advance notice of such request to the receiving Party but such Confidential Information is subject to a protective or other order or agreement protecting the confidentiality of such Confidential Information, then the receiving Party shall have the right to disclose such Confidential Information only to the extent requested or required and within the protection of the applicable order or agreement; provided further, that the receiving Party shall so advise the disclosing Party of such disclosure as soon as reasonably practicable under the circumstances to the extent permitted taking into consideration the nature of the proceedings. Notwithstanding the foregoing, the receiving Party shall exercise its best efforts to preserve the confidentiality of the Confidential Information including by cooperating with the disclosing Party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information by such tribunal. If the receiving Party becomes aware of any unauthorized use or disclosure of the Confidential Information of the disclosing Party, the receiving Party shall promptly and fully notify the disclosing Party of all facts known to it concerning such unauthorized use or disclosure.

 

8.5              Ownership of Confidential Information. Except as provided in this Agreement, Confidential Information furnished by either Party under the Agreement shall remain the disclosing Party’s property.

 

8.6              No Licenses or Other Rights. The Parties hereby agree that no right or license under any patent, copyright, trademark or other intellectual property right is granted, or is construed to be granted, to either Party except as provided by the terms and conditions of this Agreement.

 

9.

INDEMNIFICATION AND INSURANCE.

 

9.1              Indemnification by HYBRID. Subject to the terms of Section 9.3 (Procedures for Indemnification), HYBRID shall indemnify, defend and hold METUCHEN, its Affiliates and their respective directors, officers, shareholders, employees, representatives, agents, successors and permitted assigns (“METUCHEN Indemnified Parties”) harmless from and against any and all any and all Third Party liabilities, losses, claims, demands, obligations, judgments, causes of action, assessments, fines, damages, costs and expenses (including reasonable attorneys’ fees) (collectively, “Third Party Claims”), that arise out of or in connection with: (a) a breach or inaccuracy of any representation, warranty or covenant made by HYBRID in Section 5 (Representations, Warranties and Covenants) of this Agreement; (b) a material breach of this Agreement by HYBRID; (c) any negligence, willful or reckless actions or misconduct of HYBRID, its Affiliates or any of their respective employees, agents or subcontractors; (d) any personal injury, including death, or damage to tangible property caused by the negligent or intentional acts of HYBRID, its Affiliates or any of their respective employees, agents or subcontractors; and (e) any breach of HYBRID’s confidentiality obligations under Section 8 (Confidentiality) (f) any claims by any third parties, including but not limited to private parties and governmental agencies relating to products sold or distributed by HYBRID, or to marketing or promotional efforts by HYBRID, including by any agents, licensees or contracting parties of HYBRID. Notwithstanding the foregoing, HYBRID shall not be liable for any Third Party Claims to the extent caused by negligent or willful acts or omissions of the METUCHEN Indemnified Parties.

 

 

CONFIDENTIAL

 

9.2              Indemnification by METUCHEN. Subject to the terms of Section 9.3 (Procedures for Indemnification), METUCHEN shall indemnify, defend and hold HYBRID, its Affiliates and their respective directors, officers, shareholders, employees, representatives, agents, successors and permitted assigns (“HYBRID Indemnified Parties”) harmless from and against any and all Third Party Claims, that arise out of or in connection with: (a) a breach or inaccuracy of any representation, warranty or covenant made by METUCHEN in Section 5 (Representations, Warranties and Covenants) of this Agreement; (b) a material breach of this Agreement by METUCHEN; (c) any negligence, willful or reckless actions or misconduct of METUCHEN, its Affiliates or any of their respective employees, agents or subcontractors; (d) any personal injury, including death, or damage to tangible property caused by the negligent or intentional acts of METUCHEN, its Affiliates or any of their respective employees, agents or subcontractors; (e) any breach of METUCHEN’s confidentiality obligations under Section 8 (Confidentiality); and (f) any claim by a Third Party that the use, manufacture, sale, offer for sale or import of the Product in the Territory with respect to the METUCHEN Technology infringes upon, misappropriates or results from the misappropriation of, or violates the intellectual property or proprietary rights of a Third Party. Notwithstanding the foregoing, METUCHEN shall not be liable for any Third Party Claims to the extent caused by negligent or willful acts or omissions of the HYBRID Indemnified Parties.

 

9.3

Procedures for Indemnification.

 

9.3.1        General. In connection with any Third Party Claims or action for which a Party seeks indemnification (“Indemnified Party”) from the other Party (“Indemnifying Party”) in accordance with this Section, the Indemnified Party: (a) shall give the Indemnifying Party prompt written notice of the claim or action; provided, however, that failure to provide such notice shall not relieve the Indemnifying Party from its liability or obligation hereunder, except to the extent of any material prejudice as a direct result of such failure; (b) shall cooperate with the Indemnifying Party, at the Indemnifying Party’s expense, in connection with the defense and settlement of the Third Party Claim; and (c) shall permit the Indemnifying Party to control the defense and settlement of the Third Party Claim; provided, however, that the Indemnifying Party may not settle the Third Party Claim without the Indemnified Party’s prior written consent, which shall not be unreasonably withheld or delayed, in the event such settlement: (y) materially adversely impacts the Indemnified Party’s rights; or (z) arises out of or is a part of any criminal action, suit or proceeding or contains a stipulation or admission or acknowledgement of any liability or wrongdoing (whether in contract, tort or otherwise) on the part of the Indemnified Party. Further, the Indemnified Party, at its cost, may participate in the defense of the Third Party Claim through counsel of its own choosing.

 

 

 

CONFIDENTIAL

 

9.3.2        Contributory Negligence; Right of Contribution. Nothing contained herein shall bar a claim for contributory negligence or a Party’s right of contribution.

 

9.3.3        Right to Withhold Payments. During the time in which a Third Party Claim is pending, the Indemnified Party shall have the right to withhold any payments due to the Indemnifying Party until such time as the Third Party Claim has been settled or a final, non- appealable order of a court of competent jurisdiction has been entered with respect to such Third Party Claim, in which case the Indemnified Party shall pay the Indemnifying Party any withheld amounts less any amounts that the Indemnified Party may be required to pay, on behalf of the Indemnifying Party, with respect to any such settlement or judgment.

 

9.4              Insurance. Each Party shall maintain in effect at all times during the Term of this Agreement insurance with (a) a carrier with an A.M. Best rating of A-X or better with respect to HYBRID and (b) with a carrier with an A.M. Best rating of A-X or better with respect to METUCHEN. Such insurance shall include worker’s compensation in statutory amounts with respect to METUCHEN) and/or Employers Liability Insurance Policy as customary, product liability, errors and omissions, and general liability insurance in amounts not less than $2 million per occurrence and $4 million annual aggregate for all claims against all losses, claims, demands, proceedings, damages, costs, charges and expenses for injuries or damage to any person or property arising out of or in connection with each Party’s activities under this Agreement. Both Parties shall designate the other Party and its Affiliates as “additional insureds” in respect of its liability (i.e., the additional insureds’ liability) for any act and/or omission of the primary insured on products/completed operations liability and general liability policies. Each Party shall, on or before the Effective Date and thereafter upon the other Party’s reasonable request, provide the other Party with certified copies of all applicable endorsements and certificates of insurance, both evidencing such coverage, which shall also state that such other Party shall be provided a minimum of thirty (30) calendar days prior written notice of any cancellation and of any change in material terms of coverage. Upon a Party’s request, the other Party also shall provide the requesting Party with certified copies of the involved insurance policy or policies within fifteen (15) calendar days of such request. Each Party shall obtain or otherwise arrange for appropriate levels of insurance coverage for all subcontractors performing work under this Agreement. Each Party shall maintain, in its files, evidence of all subcontractors’ insurance coverage and shall provide proof of such coverage to the other Party upon such Party’s request. In the event coverage is denied or reimbursement of a properly presented claim is disputed by the carrier for insurance provided as described above, upon written request from a Party, the other Party shall provide the requesting Party with a certified copy of the involved insurance policy or policies within ten (10) business days of receipt of such request. All notices and copies of policies, endorsements, certificates and other proof of coverage obtained by a Party as required under this Section shall be sent to the other Party at the addresses set forth in Section 12.5 (Notices). The terms of this Section shall not be deemed to limit the liability of a Party hereunder, or to limit any rights a Party may have including rights of indemnity or contribution.

 

10.

LIMITATION ON LIABILITY.

 

10.1       General. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST PROFITS, PUNITIVE, INDIRECT, INCIDENTAL, EXEMPLARY, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST PROFITS0 ARISING OUT OF, OR IN CONNECTION WITH, THIS AGREEMENT.

 

 

CONFIDENTIAL

 

10.2       Exclusions from Limitations of Liability. Notwithstanding anything contained herein to the contrary, the limitations of liability contained in this Section 10 (Limitation on Liability) shall not apply to obligations to indemnify for third party claims under Section 9.

 

11.

DISPUTE RESOLUTION.

 

11.1          Executive-Level; Arbitration. In the event of any dispute, controversy or claim arising out of or relating to this Agreement, or the breach thereof, upon written notice of such dispute by either Party, the senior executive officers of METUCHEN and HYBRID shall meet to conduct face-to-face negotiations in an effort to resolve the dispute within ten (10) days of receipt of written notice. If these representatives are unable to resolve the dispute within ten (10) calendar days after the Parties have been notified in writing of the dispute, any unresolved dispute, controversy or claim shall be determined exclusively (subject to Section 11.3 (Equitable Relief) below) by an arbitration administered by the American Arbitration Association (“AAA”). The number of arbitrators shall be one (1) The arbitrator shall be selected in accordance with the AAA Arbitration Rules. The place of arbitration shall be New York City, New York.

 

11.2          Continued Performance. Except where clearly prevented by the issue in dispute, both Parties shall continue performing their obligations under this Agreement while the dispute is being resolved under this Section 11 (Dispute Resolutions) unless and until the dispute is resolved or until this Agreement is terminated as provided herein.

 

11.3          Equitable Relief. Notwithstanding anything contained in this Agreement to the contrary, either Party shall have the right to apply to any court of competent jurisdiction for provisional relief, including pre-arbitral attachments, a temporary restraining order, temporary injunction, permanent injunction and/or order of specific performance, as may appear reasonably necessary to preserve the rights of either Party. The application of either Party to a judicial authority for such measures shall not be deemed to be an infringement or a waiver of the arbitration agreement and shall not affect the relevant powers reserved to the arbitrators.

 

11.4          Governing Law; Venue. This Agreement, and all the rights and duties of the Parties arising from or relating in any way to the subject matter of this Agreement or the transaction(s) contemplated by it, shall be governed by, construed and enforced in accordance with the laws of the State of New York (excluding any conflict of laws provisions that would refer to and apply the substantive laws of another jurisdiction), except that issues relating to this arbitration clause and any arbitration hereunder shall be governed by the Federal Arbitration Act, Chapter 1 and 2.

 

11.5          Confidentiality. Except as may be required by law, neither Party nor its representatives nor a witness nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of both Parties.

 

11.6          Fees and Expenses. The arbitrators shall award to the prevailing Party, if any, as determined by the arbitrators, all of its Costs and Fees. “Costs and Fees” means all reasonable pre- award expenses of the arbitration, including the arbitrators’ fees, administrative fees, travel expenses, out of pocket expenses such as copying and telephone, court costs, witness fees and attorneys’ fees, as well as interest as permitted by New York law.

 

 

CONFIDENTIAL

 

11.7          Punitive Damages. Consistent with AAA International Arbitration Rules, the arbitrator shall not award punitive or exemplary damages.

 

11.8         Discovery/Document Exchange. Any discovery or document exchange shall be conducted in accordance with the AAA Guidelines for Arbitrators Concerning Exchanges of Information. Consistent with Guideline 6(b), the arbitrator shall not permit depositions, interrogatories, or requests for admission.

 

11.9          Executive Level Negotiation. At any time prior to or after the demand for arbitration is filed, either Party may request of the other Party executive level Negotiation. The Parties shall arrange a meeting of executive-level employee(s) within ten (10) days of such request; the ICDR and the arbitrator are empowered to stay proceedings pending the outcome of such negotiations; provided, however, that such a stay shall not exceed thirty (30) calendar days.

 

12.

MISCELLANEOUS.

 

12.1

Assignment.

 

(a)           Neither Party may assign nor delegate (except as permitted by Section 2.2 (Sublicenses)) this Agreement, or any part thereof, to a Third Party by operation of law or otherwise without the prior written consent of the other Party, which consent will not be unreasonably withheld, delayed or conditioned; provided, however, that without the consent of the other Party: (1) HYBRID shall have the right to assign this Agreement to a successor to all or substantially all of the business to which this Agreement relates; and (2) METUCHEN shall have the right to assign this Agreement to any Affiliate of equal or greater financial viability to METUCHEN or to a successor to all or substantially all of the business to which this Agreement relates.

 

(b)           To the extent that HYBRID requests that the Agreement be assigned to an Affiliate of HYBRID, HYBRID acknowledges that METUCHEN’s consent may be conditioned on HYBRID guaranteeing in a written agreement with METUCHEN the performance of the HYBRID Affiliate and, to the extent HYBRID remains the owner of any of the HYBRID Technology, ensuring that such assignment does not adversely impact the rights of METUCHEN under the Agreement with respect to the licenses and ownership rights granted to METUCHEN under the Agreement.

 

(c)           The assigning Party shall notify the other Party of any permitted assignment under this Section promptly after the assignment has been completed. Any assignment or delegation in circumvention of the foregoing provisions of this Section shall be void. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective permitted successors and assigns.

 

 

CONFIDENTIAL

 

(d)           Notwithstanding the foregoing, any Third Party to which this Agreement and the obligations hereunder may be assigned pursuant to this Section must agree, as a condition to such assignment, to be bound by the terms and conditions of this Agreement.

 

12.2          Benefits of Agreement. The licenses and other rights granted to METUCHEN or HYBRID under this Agreement extend to present and future Affiliates of METUCHEN or HYBRID (as appropriate) subject to the terms and conditions of this Agreement; provided, however, that a Party to this Agreement shall have the right to revoke, terminate or otherwise limit such licenses or rights as relates to one of its own Affiliates.

 

12.3

Media Releases and Public Disclosures of Agreement.

 

12.3.1    No Release. Subject to Section 12.3.2 (Security Laws Compliance), neither Party shall issue or make any media release or public announcement (including any announcements made via any posting on the Internet), or disclosure subject to Regulation FD promulgated under the Securities Exchange Act of 1934, as amended, or other similar publicity announcing the existence of this Agreement or relating to any term or condition of this Agreement or the relationships created by this Agreement without three (3) Business Days’ prior written notice to the other Party and the prior written agreement of the other Party. Notwithstanding the foregoing, each Party shall be permitted to disclose the terms of this Agreement to a potential or actual investor or purchaser of such Party, or to an investment bank retained for the purpose of identifying and facilitating a transaction with a potential investor or purchaser of such Party, provided that (a) in the case of disclosures by HYBRID, such disclosures shall not be to competitors of METUCHEN and its Affiliates and (b) any disclosure must be subject to a written agreement with the applicable Third Party protecting the confidentiality of such information.

 

12.3.2    Security Laws Compliance. Each Party acknowledges that the other Party may, upon advice of its legal advisors, be required by applicable securities laws and/or stock exchange rules to issue a public statement regarding the existence of this Agreement and/or file a copy of this Agreement with its applicable securities regulators. The Party required to make any such filing or disclosure shall, upon the request of the other Party, furnish to such other Party a legal opinion from its legal advisors indicating that such Party is subject to such filing and/or disclosure requirement. If a Party is required to so file a copy of the Agreement or disclose the existence or content or information regarding this Agreement, it shall: (a) use all commercially reasonable efforts to ensure that only such information is disclosed as is absolutely necessary to meet the applicable filing and/or disclosure requirements; and (b) provide a copy of such proposed public statement or disclosure to the other Party along with a copy of any application for confidential treatment to be submitted therewith, for review in as far in advance of the required filing date as is reasonably practicable. Upon any reasonable objection to such public statement or disclosure by the other Party, the Parties shall work in good faith to resolve the issues giving rise to such objection, including redacting portions of such public statement or disclosure as mutually agreed by the Parties. Each Party shall act in a timely and responsive manner in order to meet the other Party’s filing requirements to timely meet its filing and disclosure obligations. The Parties acknowledge and mutually agree that this Section is not intended to, and shall not be used by either Party as a means to, circumvent the general restrictions set forth in subsection (a) above.

 

 

CONFIDENTIAL

 

12.3.3    Approvals, Consents or Notices. Any approvals, consents or notices required by this Section shall be made or sent as follows: (a) with respect to METUCHEN, METUCHEN’s Chief Executive Officer; and (b) with respect to HYBRID, HYBRID’s Chief Executive Officer.

 

12.4          Force Majeure. In the event a Party’s performance of its obligations under this Agreement is delayed or prevented by Force Majeure, the non-performing Party shall, upon giving written notice to the other Party, be excused from such performance to the extent of such prevention, restriction, interference or delay, provided that the non-performing Party shall use its reasonable best efforts to avoid or remove such causes of non-performance and shall continue performance with the utmost dispatch whenever such causes are removed. When such circumstances arise, the Parties shall discuss what, if any, modifications of the terms of this Agreement may be required in order to arrive at an equitable solution. Notwithstanding the foregoing, if the period of any previous actual non-performance of a Party because of Force Majeure conditions plus the anticipated future period of non-performance because of such conditions will exceed an aggregate of one hundred twenty (120) days, then the Party unaffected by such event may terminate this Agreement for an Event of Default by not less than sixty (60) days written notice of termination to the other Party; provided that, if the Force Majeure event ceases within such sixty (60) day period, this Agreement shall remain in full force and effect.

 

12.5          Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the Party to be notified; (b) when sent by confirmed facsimile if sent during regular business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the addresses set forth below or at such other address as HYBRID or METUCHEN, respectively, may designate by ten (10) days advance written notice to the other Party.

 

If to HYBRID, to: Harold Hoium, 5200 Wilson Road, Suite 150, Edina, MN 55424

 

If to METUCHEN, to:¹ Greg Ford, 200 US Hwy 9, Suite 500, Manalapan, NJ 07726

 

12.6          Execution of Additional Documents. Each Party hereto agrees to execute such further papers or agreements as may be reasonably necessary or desirable to effect the purpose of this Agreement and the schedules attached hereto and carry out their respective provisions and terms.

 

12.7          No Waiver of Rights. No failure or delay on the part of either Party in the exercise of any power or right under the Agreement shall operate as a waiver thereof. No single or partial exercise of any right or power under the Agreement shall operate as a waiver of such right or of any other right or power. The waiver by either Party of a breach of any provision of the Agreement shall not operate or be construed as a waiver of any other or subsequent breach under the Agreement.

 

¹ NTD: to be completed by the parties

 

 

CONFIDENTIAL

 

12.8          Severability. In case any one or more of the provisions contained in the Agreement shall, for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability, shall not affect any other provision of the Agreement, but the Agreement shall be construed as if such invalid, illegal, or unenforceable provision or provisions had never been contained in the Agreement, unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated in the Agreement to be impossible and provided that the performance required by the Agreement with such clause deleted remains substantially consistent with the intent of the Parties.

 

12.9

Construction.

 

(a)            The Section captions in this Agreement have been inserted as a matter of convenience and are not part of this Agreement.

 

(b)             Wherever any provision of the Agreement uses the terms “include,” “includes,” or “including”, such term shall be deemed to mean “include, without limitation,” “includes, without limitation” and “including, without limitation” or “include, but not limited to,” “includes, but not limited to,” or “including, but not limited to.”

 

(c)               Any reference to “days” means calendar days unless otherwise specified in the Agreement.

 

(d)               The recitals set forth at the start of the Agreement, along with the Schedules, Exhibits, Attachments and Addenda to the Agreement, and the terms and conditions incorporated in such recitals, Schedules, Exhibits, Attachments and Addenda shall be deemed integral parts of the Agreement, are hereby incorporated by reference and all references in the Agreement to the “Agreement” shall encompass such recitals, Schedules, Exhibits, Attachments and Addenda and the terms and conditions incorporated in such recitals, Schedules, Exhibits, Attachments and Addenda.

 

(e)               Unless otherwise explicitly stated, in the event of any conflict between the terms and conditions of the main body of the Agreement and the terms and conditions of any of the Schedules, Exhibits, Attachments or Addenda to the Agreement, the terms and conditions of the main body of the Agreement shall prevail.

 

(f)                Any terms and conditions that may be set forth in any invoice or order form (other than quantities and prices consistent with the Agreement) are void and of no force and effect.

 

(g)               This Agreement has been prepared jointly and shall not be strictly construed against either Party. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party shall not be applied in the construction or interpretation of the Agreement.

 

 

(h)               The masculine, feminine or neuter gender and the singular or plural number shall each be deemed to include the others whenever the context so indicates.

 

(i)                 Except as otherwise expressly set forth in the Agreement, under no circumstances does a Party to the Agreement, as a result of the Agreement, or due to the financing by it of any activity performed by the other Party under this Agreement, obtain any ownership interest in or other right or license to any technology, regulatory submissions or intellectual property of the other Party, including items owned, acquired, licensed or developed by the other Party, or transferred by the other Party to such Party at any time pursuant to the Agreement.

 

(j)                 Unless otherwise set forth in the Agreement, all references to Sections, Exhibits, Attachments, Addenda and Schedules in the Agreement are to Sections, Exhibits, Attachments, Addenda and Schedules of and to the Agreement.

 

12.10      Counterparts. The Agreement, or any part thereof requiring signing by the Parties, may be executed in two or more counterparts, each of which shall be an original as against any Party whose signature appears thereon but both of which together shall constitute one and the same instrument. A facsimile transmission of the signed Agreement, and those parts thereof requiring signing by the Parties, shall be legal and binding on both Parties.

 

12.11      Amendments. No amendment or modification of or supplement to the terms of this Agreement or the schedules attached hereto shall be binding on either Party unless reduced to writing and signed by both Parties.

 

12.12      Entire Agreement. This Agreement, together with all of the Schedules, Exhibits, Attachments and Addenda hereto, sets forth the entire, final and exclusive agreement between the parties as to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, between the parties. For the avoidance of doubt, this Agreement supersedes the Confidential Disclosure Agreement, dated June 15, 2011, it being acknowledged and agreed by the Parties that any Confidential Information of a Party disclosed thereunder shall be subject to the confidentiality and non-disclosure terms and conditions set forth in this Agreement. The Recitals are hereby incorporated into this Agreement by this reference. This Agreement may be modified only pursuant to a writing executed by authorized representatives of the Parties.

 

[Remainder of Page Left Intentionally Blank]

 

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

 

	HYBRID.			METUCHEN
	By:	/s/ Harold Hoium		By:	/s/ Greg Ford
	Name:	Harold Hoium		Name:	J. Gregory Ford
	March 24, 2020			March 24, 2020

 

 

Exhibit 10.10

 

metuchen

Pharmaceuticals

 

200 U.S. 9, Suite 500, Manalapan Township, NJ 07726

 

 

September 24, 2020

Harold Hoium

Chief Executive Officer
Hybrid Medica l LLC

5200 Wilson Road, Suite 150 

Edina, Minnesota 55424

 

Dear Harold:

 

This Letter Agreement is being entered into as of September 24, 2020 (the " Effective Date") by and between Metuchen Pharmaceuticals LLC ("MET UCHEN") and Hybrid Medical LLC ("HYBRID") (referred to herein collectively as the " Parties") to amend the License Agreement entered into between the Parties on March 24, 2020 pursuant to Section 12.11 thereof (the "License Agreement"). Except as specifically provided herein, nothing in this Letter Agreement is intended to, nor shall it, modify the License Agreement in any manner, including, but not limited to, the Milestone Payments as set forth in Section 4.2 of the License Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement.

 

The Parties hereby acknowledge that METUCHEN has previously paid to HYBRID the Upfront Payment in the sum of $100,000 pursuant to Section 4.1.l of the License Agreement and an additional payment of $100,000 pursuant to Section 4.1.2 of the License Agreement to extend the term of the Agreement for a Second Period to September 24, 2020. The Parties further hereby acknowledge their mutual desire to enter into this Letter Agreement to extend the Second Period referred to in section 4.1.3 of the License Agreement for an additional six months to March 24, 2021. Accordingly, in consideration of the payments outlined below the Parties mutually agree to extend the Second Period until March 24, 2021 with all other rights and obligations remaining.

 

In consideration of the foregoing, METUCHEN shall pay to HYBRID a one-time, non-creditable and non-refundable payment of fifty thousand U.S. Dollars ($50,000), which shall be payable within fifteen (15) days of the Effective Date. In addition, as of December 24, 2020, METUCHEN shall be required to pay HYBRID an additional one hundred thousand U.S. Dollars ($100,000), which shall be payable within fifteen (15) days of December 24, 2020 and of which fifty thousand U.S. Dollars ($50,000) shall be creditable toward any payment required pursuant to Section 4.1.3 of the License Agreement (for the avoidance of doubt, the other $50,000 of this $100,000 payment shall be a non-credible and non-refundable payment). METUCHEN further acknowledges that this Letter Agreement shall not impact the agreements made between HYBRID and Custom RX, LLC ("Custom RX"), including, but not limited to, Amendment No. 3 to the Distributor Agreement dated July 17, 2020.

 

If the foregoing is acceptable to you, please sign and date this Letter Agreement in the space provided below and return it to me.

 

 

metuchen

Pharmaceuticals

 

200 U.S. 9, Suite 500, Manalapan Township, NJ 07726

 

 

 

  

	Sincerely,
	/s/ Keith Lavan
	Keith Lavan, Chief Financial Officer
	Metuchen Pharmaceuticals LLC

 

 

Agreed and Accepted on September 24, 2020

 

 

/s/ Harold Hoium

Harold Hoium

Chief Executive Officer Hybrid Medica l LLC

 

 

 

Exhibit 21

 

SUBSIDIARIES OF PETROS PHARMACEUTICALS, INC.

(as of December 31, 2020)

 

 

Company	Jurisdiction
Metuchen Pharmaceuticals, LLC	Delaware
TIMM Medical, Inc.	Delaware
Pos-T-Vac, LLC	Delaware

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

We consent to the incorporation by reference in the Registration Statements of Petros Pharmaceuticals, Inc. and Subsidiaries on Form S-3 (No. 333-252573) and Form S-8 (No. 333-252339) of our report dated March 31, 2021, on our audits of the consolidated financial statements as of December 31, 2020 and 2019 and for each of the years then ended, which report is included in this Annual Report on Form 10-K to be filed on or about March 31, 2021.

 

 

 

/s/ EisnerAmper LLP

 

EISNERAMPER LLP

Iselin, New Jersey

March 31, 2021

 

 

Exhibit 31.1

 

CERTIFICATION

I, Fady Boctor, certify that:

 

1.             I have reviewed this annual report on Form 10-K 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 U.S. 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.

 

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: March 31, 2021

 

/s/ Fady Boctor
Fady Boctor
Chief Commercial Officer and Principal Executive Officer

 

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Mitchell Arnold, certify that:

 

1.             I have reviewed this annual report on Form 10-K 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 U.S. 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.

 

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: March 31, 2021

 

/s/ Mitchell Arnold
Mitchell Arnold
Vice President of Finance and Principal Financial Officer

 

 

 

Exhibit 32

 

CERTIFICATION

 

In connection with the periodic report of Petros Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), we, Fady Boctor, Chief Commercial Officer and Principal Executive Officer of the Company, and Mitchell Arnold, Vice President of Finance and Principal Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to our knowledge:

 

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, 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 at the dates and for the periods indicated.

 

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

 

Date: March 31, 2021

 

 

/s/ Fady Boctor
Fady Boctor
Chief Commercial Officer and Principal Executive Officer
/s/ Mitchell Arnold
Mitchell Arnold
Vice President of Finance and Principal Financial Officer