NOTE 9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Capitalized software development costs at March 31, 2022 and December 31, 2021 consisted of the following:

 SCHEDULE OF FINITE LIVED INTANGIBLE ASSETS

The Company recorded amortization expense of $43,000 and $28,000 related to capitalized software development costs during the three months ended March 31, 2022 and 2021, respectively.

NOTE 5. INVESTMENT IN SURFACE OPHTHALMICS, INC. - RELATED PARTY TRANSACTIONS

The Company entered into an asset purchase and license agreement with Surface in 2017 and amended it in April 2018 (the “Surface License Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface is required to make mid-single digit royalty payments to the Company on net sales of the Surface Products while any patent rights remain outstanding.

As of March 31, 2022, the Company owned 3,500,000 shares of Surface common stock (representing approximately 20% of Surface’s issued and outstanding equity interests). A Company director, Richard L. Lindstrom, and the Company’s Chief Executive Officer, Mark L. Baum, are directors of Surface. Dr. Lindstrom is a principal of Flying L Partners, an affiliate of an investor who purchased Surface Series A Preferred Stock.

The unaudited condensed results of operations information of Surface is summarized below:

 SUMMARY OF CONDENSED INCOME STATEMENT

The unaudited condensed balance sheet information of Surface is summarized below:

 SUMMARY OF CONDENSED BALANCE SHEET

Risks, Uncertainties and Liquidity

The Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results of operations.

For the three months ended March 31, 2021, the Company had net income. As a result, the Company computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. Diluted common equivalent shares for the three months ended March 31, 2021, consisted of the following:

 SCHEDULE OF DILUTED COMMON EQUIVALENT SHARES

Investment in Melt Pharmaceuticals, Inc. – Related Party

The Company owns 3,500,000 shares of common stock of Melt (representing approximately 46% of the equity interests as of March 31, 2022). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes earnings and losses in Melt in its condensed consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced the carrying value of its common stock investment in Melt to $0 as a result of the Company recording its share of equity losses in Melt since its deconsolidation in 2019. As of March 31, 2022 and at the time of entering into the Melt Loan Agreement (see Note 4), the Company owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s common stock investment in Melt to $0, the Company began recording 100% of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, the Company treats interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduces its investment in Melt accordingly, rather than recording interest income. The Company has no other requirements to advance funds to Melt.

The following table summarizes the Company’s investments in Melt as of March 31, 2022:

 SCHEDULE OF INVESTMENT

During the three months ended March 31, 2022 and 2021, the Company recorded $30,000 due from Melt for reimbursable expenses and amounts payable pursuant to a Management Services Agreement between the Company and Melt (the “Melt MSA”), which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.

See Note 4 for more information and related party disclosure regarding Melt.

Warrants outstanding and exercisable as of March 31, 2022 are as follows:

 SCHEDULE OF WARRANTS OUTSTANDING AND WARRANTS EXERCISABLE

NOTE 13. LEASES

The Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining terms between one to five years and contain various clauses for renewal at the Company’s option.

At March 31, 2022, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.34% and 13.45 years, respectively.

During the three months ended March 31, 2022 and 2021, cash paid for amounts included for the operating lease liabilities was $166,000 and $251,000, respectively, and the Company recorded operating lease expense of $238,000 and $261,000, included in selling, general and administrative expenses, respectively.

Future lease payments under operating leases as of March 31, 2022 were as follows:

 SCHEDULE OF FUTURE LEASE PAYMENT UNDER OPERATING LEASES

The Company also has a finance lease that is included in its lease accounting but is not considered significant.

Future lease payments under the non-cancelable finance lease as of March 31, 2022 were as follows:

 SCHEDULE OF FUTURE LEASE PAYMENT UNDER FINANCE LEASE

At March 31, 2022, the incremental borrowing rate and the remaining lease term for the finance lease held by the Company were 6.36% and 1.83 years, respectively.

For the three months ended March 31, 2022 and 2021, depreciation expense related to the equipment held under the finance lease obligation was $2,000 and $2,000, respectively.

For the three months ended March 31, 2022 and 2021, cash paid and expense recognized for interest expense related to the finance lease obligation was $0 and $1,000, respectively.

Capitalized software development costs at March 31, 2022 and December 31, 2021 consisted of the following:

 SCHEDULE OF FINITE LIVED INTANGIBLE ASSETS