PETROS PHARMACEUTICALS, INC. MANAGEMENT'S …

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.OverviewPetros is a pharmaceutical company focused on men’s health therapeutics, consisting of wholly owned subsidiaries, Metuchen Pharmaceuticals, LLC (“Metuchen”), Timm Medical Technologies, Inc. (“Timm Medical”), and Pos-T-Vac, LLC (“PTV”). On September 30, 2016, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Vivus, Inc (“Vivus”) to purchase and receive the license for the commercialization and development of Stendra(R) for a one-time fee of £70 million.

The License Agreement gives the Company the right to sell Stendra(R) in the U.S and its territories, Canada, South America, and India. Stendra(R) 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 in the US.

Stendra(R) offers the ED therapeutic landscape a valuable addition as an oral ED therapy that may be taken as early as approximately 15 minutes prior to sexual engagement, with or without food when using the 100mg or 200mg dosing (does not apply to 50mg dosing). Petros is also currently conducting non-clinical consumer studies in connection with the contemplated pursuit of FDA approval for Stendra(R) for Non-Prescription / Over-The-Counter (“OTC”) use in treating ED. 42 Table of ContentsIn addition to Stendra(R), Petros’ ED portfolio also includes external penile rigidity devices, namely VEDs, which are sold domestically and internationally. In addition to ED products, Petros is committed to identifying and developing other pharmaceuticals to advance men’s health.

In March 2020, Petros acquired an exclusive global license (the “Hybrid License”) for the development and commercialization of H100(TM) from Hybrid Medical LLC (“Hybrid”). H100(TM) 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.

Petros is also currently conducting non-clinical consumer studies in connection with the contemplated pursuit of FDA approval for Stendra(R) for over-the-counter (“OTC”) use in treating ED. On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid £50,000 in October 2020 and an additional £100,000 in December 2020.

On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of £200,000, which was paid within seven calendar days of entering into the agreement. On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA.

Along with this election, the Company paid Hybrid £150,000 on October 1, 2021, £200,000 on October 31, 2021, £200,000 on December 1, 2021, £200,000 on December 23, 2021 and £150,000 on March 24, 2022.Going ConcernPetros has experienced net losses and negative cash flows from operations since our inception. As of December 31, 2022, the Company had cash of approximately £9.4 million, positive working capital of £7.6 million, an accumulated deficit of approximately £90.7 million and used cash in operations during the twelve months ended December 31, 2022 of approximately £12.8 million. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months.

These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Annual Report. The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well as by exploring additional ways to raise capital in addition to increasing cash flows from operations.

There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra(R) and continuing to invest in research and development pursuant to our Non-Prescription / Over-The-Counter (“OTC”) strategies related to Stendra(R), which we believe has the potential to dramatically increase product sales in the future; further developing and commercializing H100; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of H100 and possibly Stendra(R) OTC in order to extend its cash resources.

The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.Impact of COVID-19The World Health Organization (“WHO”) declared the coronavirus COVID-19 (“COVID-19”) a global pandemic on March 11, 2020, and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic, and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.

The Company cannot reasonably estimate the length of the impact that the COVID-19 pandemic, including the emergence of any new variants 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 2022 and beyond. 43Table of ContentsDuring 2020, government regulations and the voluntary business practices of the Company and prescribing physicians had prevented in-person visits by sales representatives to physicians’ offices. The Company had taken steps to mitigate the negative impact on its businesses of such restrictions. In March 2020, the Company reduced our sales representative head count to reflect the lack of in-person visits.

The Company has maintained a core sales team which continued to contact physicians via telephone and videoconference as well as continuing to have webinars provided by the Company’s key opinion leaders to other physicians and pharmacists. In response to the spread of COVID-19, in March 2020, the Company closed its administrative offices. In January 2022, the Company sub-leased its Manalapan office and all administrative employees are working remotely for the foreseeable future.

The Company has fully 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. Since the beginning of the COVID-19 pandemic, we have experienced a shift from in-person sales to online, telehealth-based sales.

These online sales generally have lower gross margins than in-person sales, which has impacted our net revenues.Nature of Operations and Basis of PresentationPetros 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 (as amended, the “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”). 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 prior to the spin-off) 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(R), which is sold generally in the United States. Expenses related to the development of H100(TM), 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. 44 Table of ContentsLicensing and DistributionThe Company acquired the rights to Stendra(R) 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(R) 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(R). Stendra(R) 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(R) 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(R) 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(R) in such territory. After the royalty period, no further royalties shall be owed with respect to net sales of Stendra(R) 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(R) during any calendar year.In connection with the License Agreement, the Company and Vivus also entered into a Supply Agreement on September 30, 2016, which has since been terminated, effective as of September 30, 2021. Following the termination of the Vivus Supply Agreement, Petros, through its subsidiary Metuchen, entered into a Technology Transfer Service Agreement on January 20, 2022 with Patheon Pharmaceuticals Inc., part of Thermo Fisher Scientific (“Patheon”), pursuant to which the Company and Patheon agreed to collaborate as strategic partners for commercial production of Stendra(R) tablets at Patheon’s facilities in Cincinnati, Ohio. Under the Agreement, Patheon or one of its affiliates will provide pharmaceutical development and technology transfer services in order to establish and validate its ability to manufacture supply of the Company’s Stendra(R) product.

Any commercial sale of product manufactured during the performance of the Agreement must be subject to a subsequent commercial manufacturing services agreement (with associated quality agreement) between the parties before it can be offered for commercial sale.The license agreement between MTPC and Vivus contains certain termination rights that will allow MTPC to terminate the agreement if Vivus were to breach any of the terms of the MTPC License or become insolvent or bankrupt. In the event that MTPC terminates the MTPC License with Vivus because of any contractual breach the Company has step-in rights with MTPC, which would allow the Company to continue to sell Stendra(R).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(R) avanafil for a one-time fee of £100,000. The Company was entitled to receive an additional fee of £400,000 if Stendra(R) is approved by Canadian regulators, as well as commercial milestone payments and royalty fees of 12% of net sales.

However, in April 2020 Health Canada issued a Notice of Deficiency (“NOD”) against the New Drug Submission. Metuchen and Acerus are currently renegotiating modified terms to the sub-license agreement and the viability of a pathway required to address the deficiency noted by Health Canada. The outcome of these negotiations is uncertain and depends on a variety of factors, including the result of Acerus’ ongoing dissolution proceedings. 45 Table of ContentsIn March 2020, we entered into the Hybrid License for the development and commercialization of H100(TM) from Hybrid.

H100(TM) is a topical candidate with at least one active ingredient and potentially a combination of ingredients responsible for the improvement of penile curvature during the acute phase of Peyronie’s disease. We paid an initial license fee of £100,000 and additional payments of £250,000, with additional annual milestone payments of £125,000, £150,000, and £200,000 on each of the first, second and third anniversaries of the entry into the Hybrid License and £250,000 annual payments due thereafter. On September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the license agreement was extended for an additional six months to March 24, 2021.

In consideration for the extension, the Company paid Hybrid £50,000 in October 2020 and an additional £100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the License Agreement) for an additional six (6) months to September 24, 2021. Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of £200,000, which was paid within seven calendar days of entering into the agreement.

On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA. Along with this election, the Company paid Hybrid £150,000 on October 1, 2021, £200,000 on October 31, 2021, £200,000 on December 1, 2021, £200,000 on December 23, 2021 and £150,000 on March 24, 2022.Vivus Settlement Agreement, Promissory Note and the Security AgreementOn January 18, 2022, Petros (through its wholly-owned subsidiary) and Vivus entered into a Settlement Agreement (the “Vivus Settlement Agreement”) related to the minimum purchase requirements under the Vivus Supply Agreement in 2018, 2019 and 2020 and certain reimbursement rights asserted by a third-party retailer in connection with quantities of the Company’s Stendra(R) product that were delivered to the third-party retailer and later returned. In connection with the Vivus Settlement Agreement, Petros retained approximately £7.3 million of API inventory (representing the 2018 and 2019 minimum purchase requirements) out of approximately £12.4 million due under the Vivus Supply Agreement, in conjunction with forgiveness of approximately £4.25 million of current liabilities relating to returned goods and minimum purchase commitments.

In exchange for the API and reduction of current liabilities, Petros executed an interest-bearing promissory note (the “Note”) in favor of Vivus in the principal amount of £10,201,758. The parties also entered into a Security Agreement to secure Petros’ obligations under the Note. The Company recorded the impact of this transaction, including the gain in the first quarter of 2022.In addition to the payments to be made in accordance with the Note, the Company further agreed in the Vivus Settlement Agreement to (i) grant to Vivus a right of first refusal to provide certain types of debt and convertible equity (but not preferred equity) financing issued by or to Metuchen (including any subsidiaries and intermediaries) until the Note is paid in full, and (ii) undertake to make certain regulatory submissions to effectuate Vivus’ ability to exercise its rights under the License Agreement.

On January 18, 2022, the Company made a prepayment of the obligations under the Note in the amount of £900,000, and a payment of £1,542,904 with respect to a purchase order made in 2021 to Vivus. In consideration of these payments and upon the Company’s satisfaction of certain regulatory submissions. Vivus released 50% of the quantity of bulk Stendra(R) tablets under the Company’s existing open purchase order (the “Open Purchase Order”) being held by Vivus, which represents approximately a six-month supply of inventory.

Pursuant to the Vivus Settlement Agreement, Vivus released the remaining 50% of the quantity of bulk Stendra(R) tablets under the Open Purchase Order, later during the first quarter of 2022, upon the Company’s satisfaction of the remaining regulatory submission requirements. The Vivus Settlement Agreement stipulated that Vivus is the sole owner of all API unless or until such time as certain quantities of API are shipped to the Company upon the fulfillment of the aforementioned payment conditions.Under the terms of the Note, the principal amount of £10,201,758 is payable in consecutive quarterly installments beginning on April 1, 2022 through January 1, 2027. Interest on the principal amount will accrue at a rate of 6% per year until the principal is repaid in full and is due and payable, in arrears, on the first day of each January, April, July, and October of each calendar year, commencing on April 1, 2022.

The Company may prepay the Note, in whole or in part, at any time, with no premium or penalty. In the event that the Company defaults under the Security Agreement, all principal outstanding under the Note at the time of the default will bear interest at a rate of 9% per year until the full and final payment of all principal and interest under the Note (regardless of whether any default is waived or cured). If the Note is placed in the hands of any attorney for collection, or if it is collected through any legal proceeding at law or in equity or in bankruptcy, receivership, or other court proceedings, the Company will also be required to pay all costs of collection including, but not limited to, court costs and attorneys’ fees.

Pursuant to the Security Agreement, dated January 18, 2022, the Company granted to Vivus a continuing security interest in all of its Stendra(R) API and products and its rights under the License Agreement. The Security Agreement contains customary events of default. For the year ended December 31, 2022, the Company has paid Vivus £1.6 million.

As of December 31, 2022, the principal balance on the Note is £9.5 million. 46 Table of ContentsReverse Stock SplitOn November 30, 2022 we effected a 1-for-10 reverse stock split of the issued and outstanding shares of our Common Stock. All share and per share information herein has been adjusted to retrospectively reflect this reverse stock split.Critical Accounting Policies and EstimatesThe 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 RecognitionThe Company recognizes revenue when its performance obligations with its customers have been satisfied. In the contracts with its customers, the Company has identified a single performance obligation to provide either its prescription medication or medical devices upon receipt of a customer order. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of the prescription medication or medical device, which is typically upon delivery.In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers either the prescription medication or medical device to when the customers pay for the product is typically less than one year.

The Company records sales net of any variable consideration, including but not limited to discounts, rebates, returns, chargebacks, and distribution fees. The Company uses the expected value method when estimating its variable consideration, unless terms are specified within contracts. The identified variable consideration is recorded as a reduction of revenue at the time revenues from sales are recognized.

The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates each reporting period to reflect known changes.The most significant sales deductions relate to contract returns, contract rebates and coupon redemptions, and distribution service fees (“DSA fees”).

Our estimates are based on factors such as our direct and indirect customers’ buying patterns and the estimated resulting contractual deduction rates, historical experience, specific known market events and estimated future trends, current contractual and statutory requirements, industry data, estimated customer inventory levels, current contract sales terms with our direct and indirect customers, and other competitive factors. Significant judgment and estimation are required in developing the foregoing and other relevant assumptions.Consistent with industry practice, the Company maintains a return policy that generally allows its customers to return Stendra(R) 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(R) 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, 2022 and 2021, the reserves for product returns were £2.3 million and £3.8 million, respectively, and are included as a component of accrued expenses. During the years ended December 31, 2022 and December 2021, respectively, the Company recorded £9.4 million and £8.3 million of returns as a reduction of gross revenue. 47 Table of ContentsAccounts ReceivableThe 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.InventoryInventories 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 MeasurementsCertain 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 markets.Level 3 – Unobservable inputs which are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.In connection with the Mergers in December 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros’ Common Stock. The Company estimated their fair value using the Monte Carlo Simulation approach as of December 31, 2022 and December 31, 2021.

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.IntangiblesThe 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 reviews the carrying value and useful lives of its intangible assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable or the period over which they should be amortized has changed. When indicators of impairment exist, the Company determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values.

The Company evaluates the remaining useful life of each intangible asset that is being amortized during each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. During the three months ended September 30, 2022, the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis, which indicated for the Stendra(R) product an impairment.

The Company then prepared a discounted cash flow analysis through December 2029, representing the remaining economic useful life for the Stendra(R) product resulting in an impairment of approximately £7.5 million. As indicators of impairment exist as of December 31, 2022, the Company prepared an undiscounted cash flow analysis. This analysis includes projections of future revenue and expenses, which if not achieved could result in future impairment charges.

These projections include continued sales of prescription Stendra(R). Additionally, the Company is investing in research and development pursuant to our OTC Strategies related to Stendra(R), which we anticipate will dramatically increase product sales in the future, such that if our Stendra(R) OTC strategy is not successful, we 48 Table of Contentsmay have to partially or fully impair the remaining intangible balance. Based on the impairment assessment as of December 31, 2022, the Company determined that no additional intangible asset impairment occurred as the undiscounted cash flows exceeded the respective carrying values of the assets by £59.7 million.The Company has prepared projections including the undiscounted cash flows of the remaining estimated useful lives through December 2031 for the medical device products.

Based on the impairment assessment as of December 31, 2022, and 2021, the Company determined that no intangible asset impairment occurred as the undiscounted cash flows exceeded the respective carrying values of the assets by approximately £0.8 million.Recent Accounting PronouncementsFor 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 OperationsThe impact on our results of operations of the COVID-19 pandemic and related changes in economic conditions, are highly uncertain and, in many instances, outside of our control. The duration and severity of the direct and indirect effects of the COVID-19 pandemic continue to evolve and in ways that are difficult to anticipate. There are numerous uncertainties related to the COVID-19 pandemic that have impacted our ability to forecast our future operations as a company.

The extent to which the COVID-19 pandemic, and the emergence of new variants, will affect our business, financial position and operating results in the future cannot be predicted with certainty; however, any such impact could be material. The COVID-19 pandemic could also increase the degree to which our results, including the results of our business segments, fluctuate in the future.Years ended December 31, 2022 and December 31, 2021The following table sets forth a summary of our statements of operations for the years ended December 31, 2022 and 2021: For the Year Ended December 31, 2022 2021Net sales £ 5,992,054 £ 7,811,264Cost of sales 2,289,418 1,599,566Gross profit 3,702,636 6,211,698Operating expenses:Selling, general and administrative 12,209,162 15,593,233Gain on settlement with Vivus (3,389,941) -Research and development 1,740,280 1,788,491Depreciation and amortization expense 5,598,884 6,877,990Intangible asset impairment 7,460,000 -Total operating expenses 23,618,385 24,259,714Loss from operations (19,915,749) (18,048,016)Change in fair value of derivative liability 460,000 9,430,000Interest income 14,194 -Interest expense, senior debt – (368,660)Interest expense, promissory note (596,018) -Net loss £ (20,037,573) £ (8,986,676) 49 Table of ContentsNet SalesNet sales for the year ended December 31, 2022 were £5,992,054, composed of £2,734,639 of net sales from Prescription Medicines and net sales of £3,257,415 from Medical Devices.Net sales for the year ended December 31, 2021 were £7,811,264, composed of £4,605,043 of net sales from Prescription Medicines and net sales of £3,206,221 from Medical Devices.For the year ended December 31, 2022, gross billings to customers representing 10% or more of the Company’s total gross billings included four customers that represented approximately 26%, 21%, 17%, and 16% of total gross billings. Gross billings is a non-GAAP financial measure.

For a reconciliation of net sales to gross billings, see the section titled “Reconciliation of Non-GAAP Financial Measures” below.For the year ended December 31, 2021, gross billings to customers representing 10% or more of the Company’s total gross billings included five customers that represented approximately 27%, 22%, 16%, 13% and 11% of total gross billings. Gross billings is a non-GAAP financial measure. For a reconciliation of net sales to gross billings, see the section titled “Reconciliation of Non-GAAP Financial Measures” below.Prescription Medicines sales consist of sales of Stendra(R) in the U.S. for the treatment of male ED.

Stendra(R) is primarily sold directly to four main customers, as described above, which collectively accounted for approximately 92% of Stendra(R) net sales for the year ended December 31, 2022. Individually, sales to the four main customers, accounted for 30%, 25%, 19%, and 18% of Stendra(R) gross billings for the year ended December 31, 2022.Medical Device sales consist of domestic and international sales of men’s health products for the treatment of ED. The men’s health products do not require a prescription and include Vacuum Erection Devices (“VEDs and related accessories”).Net sales were £1,819,210, or 23% lower during year ended December 31, 2022 than in the same period in 2021 consisting of a £1,870,404 decrease in the net sales of Stendra(R) and a £51,194 increase in Medical Device Sales.

The decrease in net sales of Stendra(R) was substantially due to increased wholesaler returns related to the sale of short-dated product and decreased wholesaler sales due to decreased demand. The increase in net sales for Medical Devices included an increase in domestic sales of VED systems and a decrease in international sales of VED systems.Cost of SalesCost of sales for the year ended December 31, 2022 were £2,289,418, composed of £949,197 of cost of sales for our Prescription Medicines segment and £1,340,221 for our Medical Devices segment.Cost of sales for the year ended December 31, 2021 were £1,599,566 composed of a benefit of £577,795 of cost of sales for our Prescription Medicines segment and £1,021,771 for our Medical Devices segment.Cost of sales for the Prescription Medicine segment for the year ended December 31, 2022 consisted of 37% inventory obsolescence reserves, 34% third-party product cost of sales, 15% 3PL order fulfillment, shipping expenses and other cost of sales and 14% royalty expenses.Cost of sales for the Medical Device segment for the year ended December 31, 2022 consisted of 85% raw materials and 15% production labor.Cost of sales increased by £689,852 or 43% during the year ended December 31, 2022 compared to the same period in 2021. For the years ended December 31, 2022 and 2021, cost of sales as a percentage of net sales was 38% and 20%, respectively.

The increase in cost of sales as a percentage of net sales was primarily the result of an increase in excess and obsolete inventory. 50 Table of ContentsGross ProfitGross profit for the year ended December 31, 2022 was £3,702,636 or 62%, composed of £1,785,442 of gross profit from Prescription Medicines and £1,917,194 from Medical Devices. Gross profit for the year ended December 31, 2021 was £6,211,698 or 80%, composed of £4,027,248 of gross profit from Prescription Medicines and £2,184,450 from Medical Devices. The decrease in gross profit was driven by the factors noted above.Operating ExpensesSelling, General and AdministrativeSelling, general and administrative expenses for the year ended December 31, 2022 were £12,209,162, composed of £4,947,466 of selling, general and administrative expenses of our Prescription Medicines segment, £1,685,678 of selling, general and administrative expenses of our Medical Devices segment and £5,576,018 of general corporate expenses.Selling, general and administrative expenses for the year ended December 31, 2021 were £15,593,233, composed of £6,473,482 of selling, general and administrative expenses of our Prescription Medicines segment, £2,620,403 of selling, general and administrative expenses of our Medical Devices segment and £6,499,348 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 £3,384,071 or 22% during the year ended December 31, 2022, compared to the same period in 2021. Decreased selling general and administrative expenses were primarily driven by a waiver of FY 22 and FY 23 PDUFA fees by the FDA resulting in a £1,311,092 decrease in PDUFA expenses, decreased professional service fees of £1,074,359 as management sought to reduce expenses to improve operational efficiencies, lower payroll expenses of £542,128 resulting from decreased headcount, decreased direct selling and marketing expenses of £262,821, decreased bad debt expenses of £128,951 due to improved customer collections, and decreased other operating expenses of £125,402 partially offset by increased stock compensation expense of £60,682.Gain on Settlement with VivusAs a result of the Vivus Promissory Note, as discussed in Note 8 and Note 13 of the Notes to Consolidated Financial Statements, the Company’s total liabilities were decreased by £3,389,941 in the form of concession of customer returns, which were recognized as a gain on settlement during the year ended December 31, 2022. There was no such activity in the year ended December 31, 2021.Research and DevelopmentResearch and development expenses for the year ended December 31, 2022 were £1,740,280, composed of £1,541,714 for our Prescription Medicines segment and £198,566 for our Medical Devices segment.Research and development expenses for the year ended December 31, 2021 were £1,788,491, composed of £1,788,491 for our Prescription Medicines segment and £0 for our Medical Devices segment.

Research and development expenses for the Prescription Medicines segment for the year ended December 31, 2022 are composed of £900,864 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter (“OTC”) Strategies related to Stendra(R); £150,000 for upfront licensing fees, £239,339 for clinical development expenses, and £73,407 for consulting fees related to the H100 license acquired in March 2020; and £178,104 related to the Company’s technology transfer of its manufacturing process. Research and development expenses for the Prescription Medicines segment for the year ended December 31, 2021 are composed of £777,998 for consulting fees related to the Company’s Non-Prescription / Over-The-Counter (“OTC”) Strategies related to Stendra(R), £950,000 for upfront licensing fees, and £60,493 for legal fees related to the H100 license acquired in March 2020. 51Table of ContentsResearch and development expenses for the Medical Devices segment for the year ended December 31, 2022 were composed of £198,566 for license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies. Research and development expenses for the Medical Devices segment for the year ended December 31, 2021 were £0.Research and development expenses decreased by £48,211 or 3% during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Decreased research and development expenses were primarily driven by decreased upfront licensing fees related to the Hybrid License partially offset by increased clinical development expenses related to the Hybrid License, increased license fees related to the Company’s Tissue-Specific Oxygenation Sensor Technology Strategies, increased consulting fees related to the Company’s OTC strategies related to Stendra(R) and increased development expenses related to the Company’s technology transfer of its Stendra(R) manufacturing process.Depreciation and amortizationDepreciation and amortization expenses for the year ended December 31, 2022 were £5,598,884, composed of £4,442,922 of depreciation and amortization expenses of our Prescription Medicines segment and £1,155,962 of depreciation and amortization expenses of our Medical Devices segment.Depreciation and amortization expenses for the year ended December 31, 2021 were £6,877,990, composed of £5,564,499 of depreciation and amortization expenses of our Prescription Medicines segment and £1,313,491 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(R) over its estimated useful life of 10 years. Medical Devices depreciation and amortization primarily consists of the amortization of the intangible assets related to Timm Medical and PTV over their estimated useful life of 12 years.Intangible Asset ImpairmentDuring the year ended December 31, 2022, the Company noted that indicators of impairment existed and prepared an undiscounted cash flow analysis, which indicated that the Stendra(R) product intangible asset was impaired. The Company then prepared a discounted cash flow analysis resulting in an impairment of approximately £7.5 million.

There was no impairment for the year ended December 31, 2021.Change in Fair Value of Derivative LiabilityIn connection with the Mergers consummated on December 1, 2020, each security holder of Metuchen received a liability classified earnout consideration to be paid in the form of Petros Common Stock if either Petros’ Market Capitalization (as defined in the Merger Agreement) or Petros receives aggregate gross proceeds from securities offerings that equals or exceeds certain milestones set forth in the Merger Agreement. The earnout contingent consideration met the criteria to be classified as a derivative with fair value remeasurements recorded in earnings each reporting period. As a result, the £460,000 represents the change in fair value of the derivative during the year ended December 31, 2022, primarily driven by the decline in the Company’s stock price as well as the passage of time, as it became less likely that the earnout would be met.

During the year ended December 31, 2021, the fair value of the derivative liability decreased by £9,430,000.Interest IncomeInterest income for the year ended December 31, 2022 was £14,194. There was no interest income for the year ended December 31, 2021.Interest Expense, Senior DebtInterest expense, senior debt for the year ended December 31, 2021 was £368,660 consisting of interest payments on our senior debt, with a weighted average balance of £3,066,505. The senior debt was repaid in 2021.

There was no interest expense, senior debt, for the year ended December 31, 2022. 52Table of ContentsInterest Expense, Promissory NoteIn January 2022, the Company executed a promissory note in favor of Vivus with a principal amount of £10,201,758 in connection with the Vivus Settlement Agreement. Interest expense, promissory note for the year ended December 31, 2022, was £596,018. There was no interest expense, promissory note for the year ended December 31, 2021.Income Tax Expense (Benefit)Income tax expense for the year ended December 31, 2022 was £0 compared to income tax of £0 for the year ended December 31, 2021.Liquidity and Capital ResourcesGeneralCash totaled £9,426,264 at December 31, 2022, compared to £23,847,572 at December 31, 2021.We have experienced net losses and negative cash flows from operations since our inception.

As of December 31, 2022, we had cash of £9.4 million, working capital of £7.6 million, and an accumulated deficit of £90.7 million. Our plans include, or may include, utilizing our cash on hand, as well as exploring additional ways to raise capital in addition to increasing cash flows from operations. In January 2022, the Company executed a promissory note in favor of Vivus in connection with the Vivus Settlement Agreement in the principal amount of £10,201,758, net of a prepayment of £900,000.

The terms of this promissory note are discussed in the section titled “Vivus Settlement Agreement, Promissory Note and the Security Agreement” above.To date, our principal sources of capital used to fund our operations have been the revenues from product sales, private sales, registered offerings and private placements of equity securities. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these audited annual consolidated financial statements are issued.In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Annual Report.

The potential sources of financing that the Company is evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. The Company also plans to finance near-term operations with its cash on hand, as well by as exploring additional ways to raise capital in addition to increasing cash flows from operations. There is no assurance the Company will manage to raise additional capital or otherwise increase cash flows, if required.

The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depend, in part, on expanding the use of Stendra(R) and continuing to invest in research and development pursuant to our Non-Prescription / Over-The-Counter (“OTC”) strategies related to Stendra(R), which we believe has the potential to dramatically increase product sales in the future; further developing and commercializing H100; and future capital market conditions. If the Company’s current assumptions regarding timing of these events are incorrect or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of H100 and possibly Stendra(R) OTC in order to extend its cash resources. Thus far the Company has taken steps to reduce discretionary expenditures and explored new sources of funding for our research initiatives, such as sponsored research agreements and co-development initiatives.

While we are optimistic that we will be successful in our efforts to finance our operations, there can be no assurances that we will be successful in doing so. The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.In March 2020, the Company acquired the Hybrid License, providing an exclusive license to H100(TM). H100(TM) 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. 53Table of ContentsOn September 24, 2020, the Company and Hybrid entered into a letter agreement, pursuant to which the term of the Hybrid License was extended for an additional six months to March 24, 2021. In consideration for the extension, the Company paid Hybrid £50,000 in October 2020 and an additional £100,000 in December 2020. On March 31, 2021, the Company and Hybrid, entered into a second letter agreement, pursuant to which the parties agreed to extend the Second Period (as defined in the Hybrid License) for an additional six (6) months to September 24, 2021.

Additionally, the Company agreed to pay Hybrid a one-time, non-creditable and non-refundable payment of two hundred thousand U.S. Dollars (£200,000), which was paid within seven calendar days of entering into the second letter agreement. On September 24, 2021, the Company entered into an amendment to the license agreement in which the Company exercised its right not to terminate the Hybrid License even though orphan drug status had not yet been granted by the FDA.

Along with this election, the Company paid Hybrid £150,000 on October 1, 2021, £200,000 on October 31, 2021, £200,000 on December 1, 2021, £200,000 on December 23, 2021 and £150,000 on March 24, 2022.While the Company’s primary priority remains the Stendra(R) Rx-to-OTC switch, we expect to incur approximately £14 million of research and development expenses relating to H100(TM) 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. The Company anticipates funding these future expenses through additional capital raises or issuance of debt, until revenues become sufficient to cover these ongoing expenses.October 2021 FinancingOn October 13, 2021, we entered into a Securities Purchase Agreement (the “October SPA”) with certain accredited and institutional investors, pursuant to which we sold 332,362 shares of our common stock in a registered direct offering (the “October RD”) at an offering price of £17.15 per share and associated October Warrant (as defined below). Also pursuant to the October SPA, in a concurrent private placement (together with the October RD, the “October Offering”), the Company sold to the purchasers warrants to purchase up to an aggregate of 332,362 shares of common stock at an exercise price of £17.15 per share (the “October Warrants”).

The October Warrants became exercisable immediately upon the closing of the October Offering on October 18, 2021 and will expire five years following that date. In connection with the October Offering, the Company issued warrants to purchase 13,000 shares of common stock to Katalyst as compensation for financial advisory services. The Company received net proceeds from the October Offering, after deducting fees and other offering expenses payable by the Company, of approximately £5.5 million.The October Warrants and the warrants issued to Katalyst in connection with the October Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.

Each purchaser represented that it was an “accredited investor” (as defined by Rule 501 under the Securities Act).November 2021 FinancingOn November 29, 2021, we entered into a Securities Purchase Agreement (the “November SPA”) with certain accredited and institutional investors, pursuant to which we sold 215,334 shares of our common stock in a registered direct offering (the “November RD) at an offering price of £30.00 per share and associated November Warrant (as defined herein). Also pursuant to the November SPA, in a concurrent private placement (together with the November RD, the “November Offering”), the Company sold to the purchasers (i) 118,000 unregistered shares of the Company’s common stock (the “November PIPE Shares) at an offering price of £30.00 per share and associated November Warrant and (ii) the warrants to purchase up to an aggregate of 250,000 shares of common stock at an exercise price of £35.00 per share (the “November Warrants”). The November Warrants became exercisable immediately upon the closing of the November Offering on December 2, 2021 and will expire five years following that date.

In connection with the November Offering, the Company issued warrants to purchase 15,000 shares of common stock to Katalyst as compensation for financial advisory services. The Company received net proceeds from the November Offering, after deducting fees and other offering expenses payable by the Company, of approximately £9.3 million.The November PIPE Shares, the November Warrants, and the warrants issued to Katalyst in connection with the November Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. Each purchaser represented that it was an “accredited investor” (as defined by Rule 501 under the Securities Act). 54 Table of ContentsDecember 2021 FinancingOn December 22, 2021, we entered into a Securities Purchase Agreement (the “December SPA”) with certain accredited and institutional investors, pursuant to which we sold 154,519 shares of our common stock in a registered direct offering (the “December RD) at an offering price of £34.30 per share and associated December Warrant (as defined herein).

Also pursuant to the December SPA, in a concurrent private placement (together with the December RD, the “December Offering”), the Company sold to the purchasers (i) 64,141 unregistered shares of the Company’s common stock (the “December PIPE Shares) at an offering price of £34.30 per share and associated December Warrant and (ii) the warrants to purchase up to an aggregate of 163,995 shares of common stock at an exercise price of £35.00 per share (the “December Warrants”). The December Warrants became exercisable immediately upon the closing of the December Offering on December 27, 2021 and will expire five years following that date. In connection with the December Offering, the Company issued warrants to purchase 11,000 shares of common stock to Katalyst as compensation for financial advisory services.

The Company received net proceeds from the December Offering, after deducting fees and other offering expenses payable by the Company, of approximately £6.9 million.The December PIPE Shares, the December Warrants, and the warrants issued to Katalyst in connection with the December Offering were issued in reliance upon the exemption from the registration requirements in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. Each purchaser represented that it was an “accredited investor” (as defined by Rule 501 under the Securities Act).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.DebtVivus NoteAs noted above, in January 2022, the Company executed a promissory note in favor of Vivus with a principal amount of £10,201,758 as part of the settlement. For more information, see the section above titled “Vivus Settlement Agreement, Promissory Note and the Security Agreement.”Senior DebtOn September 30, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules”), for a £35 million term loan. The Loan Agreement included an additional Payable-In-Kind (“PIK”) interest that increases the outstanding principal on a monthly basis at an annual rate of 1.35% and a £787,500 end of term charge.

The end of term charge was being recognized as interest expense and accreted over the term of the Loan Agreement, as amended, using the effective interest method. We refer to the amounts available under the credit facility with Hercules as Senior Debt.On November 22, 2017, the Company entered into Amendment No.

1 to the Loan Agreement (the “First Amendment”). A covenant was added, in which the Company must achieve a certain minimum EBITDA, as defined in the First Amendment, target for the trailing twelve-month period, ending June 30, 2018.

The end of term charge was increased from £787,500 to £1,068,750. The minimum EBITDA for each of the trailing six months and the fixed charge coverage ratio were reduced from 1:1 to 0.9:1. The Company was also required to prepay £10,000,000 in principal. 55Table of ContentsOn 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 entered into Amendment No.

2 to the Loan Agreement, (the “Second Amendment”), to extend the maturity date to December 1, 2021, if the Company should raise at least £20 million through an equity or debt financing or other transaction. All previously accrued PIK interest was added to principal, and no further PIK interest would accrue. The cash interest accrued 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 end of term charge of £1,068,750 was partially extended with £534,375 due on October 1, 2020, and £534,375 due on February 1, 2021. The Company incurred a £50,000 amendment fee upon closing of the Second Amendment.Effective September 30, 2020, the Company and Hercules entered into Amendment No.

3 to the Loan Agreement (the “Third Amendment”) to provide for interest only payments commencing on October 1, 2020 and continuing through December 22, 2020. The Third Amendment also amended the minimum cash, minimum net revenue and minimum EBITDA financial covenants.

On that same date, Juggernaut Capital Partners III, L.P., an affiliate of JCP Investor, Hercules, and Wells Fargo Bank, N.A. entered into an escrow agreement (the “Escrow Agreement”) to escrow certain funds in an aggregate amount equal to certain principal payments owed under the Loan Agreement, as amended. In connection with the consummation of the Mergers, the funds held in escrow were disbursed back to Juggernaut Capital Partners III, L.P. and the Escrow Agreement was terminated.The Company satisfied the maturity date extension requirement pursuant to funds retained upon the closing of the Mergers in December 2020. As a result, the Senior Debt had a maturity date of December 1, 2021.On November 3, 2021, the Company repaid the remaining balance due on the Senior Debt.Cash FlowsThe following table summarizes our cash flows for the years ended December 31,2022 and 2021: For the Years Ended December 31, 2022 2021Net cash used in operating activities £ (12,797,325) £ (11,862,031) Net cash used in financing activities (1,623,983) -Net cash provided by financing activities – 18,569,909Net increase in cash £ (14,421,308) £ 6,707,878Cash Flows from Operating ActivitiesNet cash used in operating activities for the year ended December 31, 2022 was £12,797,325, which primarily reflected our net loss of £20,037,573.

Adjustments to reconcile net loss to net cash provided by operating activities of £10,542,319 consisting primarily of depreciation and amortization, intangible asset impairment, gain on Vivus settlement, stock compensation and changes in operating assets and liabilities of £3,302,071.Net cash used in operating activities for the year ended December 31, 2021 was £11,862,031, which primarily reflected our net loss of £8,986,676, in addition to noncash adjustments to reconcile net loss to net cash used in operating activities of £1,111,405 consisting primarily of depreciation and amortization, changes in the fair value of derivative liability and stock compensation, and changes in operating assets and liabilities of £1,736,950.Cash Flows from Investing ActivitiesNet cash used in investing activities was £0 for both the years ended December 31, 2022 and 2021. 56 Table of ContentsCash Flows from Financing ActivitiesNet cash used in financing activities was £1,623,983 for the year ended December 31, 2022, consisting of payments of the promissory note, including a prepayment of £900,000.Net cash provided by financing activities was £18,569,909 for the year ended December 31, 2021, consisting of net proceeds from the issuance of common stock of £21,745,003 and proceeds from the exercise of warrants of £4,012,435 offset by payments of senior debt of £6,653,292 and a payment for the senior debt end-of-term fee of £534,237.Off-Balance Sheet Commitments and ArrangementsWe 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.ContingenciesCertain 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 MeasuresAdjusted EBITDAAdjusted 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. 57Table of ContentsThe 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 forcapital expenditures or contractual commitments;? does not reflect changes in, or cash requirements for, the Company’s workingcapital needs;? does not reflect the significant interest expense, or the cash requirementsnecessary 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, 2022 and 2021. For the Year Ended December 31, 2022 2021Net Loss £ (20,037,573) £ (8,986,676)Interest income (14,194) -Interest expense, senior debt – 368,660Interest expense, promissory note 596,018 -Income tax expense – -Depreciation and amortization expense 5,598,884 6,877,990EBITDA (13,856,865) (1,740,026)Stock based compensation 1,195,076 1,305,150Gain on settlement with Vivus (3,389,941) -Intangible asset impairment 7,460,000 –Change in fair value of derivative liability (460,000) (9,430,000) Adjusted EBITDA £ (9,051,730) £ (9,864,876)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 BillingsGross billings is a non-GAAP financial measure utilized as a key performance metric by management and the Company’s Board of Directors in their financial and operational decision-making as well as for the preparation of the annual budget.

The Company believes that Gross billings is useful to investors as a supplemental way to provide an alternative measure of the total demand for the products sold by the Company. Gross billings is a non-GAAP financial measure commonly used in the Company’s industry and should not be construed as an alternative to net sales as an indicator of operating performance (as determined in accordance with GAAP). The Company’s presentation of gross billings may not be comparable to similarly titled measures reported by other companies.Gross billings is adjusted to exclude certain items that affect comparability.

The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below.

The presentation of these adjustments should not be construed as an inference that future results will be unaffected by unusual or recurring items.The Company defines gross billings as the amount of its aggregate sales billed to customers at standard prices before the application of certain adjustments that reduce the net amount received from customers, including product returns, certain rebates and coupon redemptions, discounts and fees. 58Table of ContentsThe following table presents a reconciliation of net sales to gross billings for the years ended December 31, 2022 and 2021. For the Year Ended December 31, 2022 2021Net Sales £ 5,992,054 £ 7,811,264Product Returns 9,355,121 8,342,505Contract Rebates 1,685,080 3,386,406Chargebacks 164,577 304,301Cash Discounts 319,630 438,515Distribution Service Fees 1,721,238 2,023,768Coupon Redemptions 5,324,829 7,910,032Gross Billings £ 24,562,529 £ 30,216,791Gross billings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP.(C) Edgar Online, source Glimpses