UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ___________ to _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name on exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 11, 2022, there were shares of the registrant’s common stock, $0.001 par value, outstanding.
HARROW HEALTH, INC.
Table of Contents
| Page | |||
| Part I | FINANCIAL INFORMATION | 3 | |
| Item 1. | Financial Statements (unaudited) | 3 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32 | |
| Item 4. | Controls and Procedures | 32 | |
| Part II | OTHER INFORMATION | 33 | |
| Item 1. | Legal Proceedings | 33 | |
| Item 1A. | Risk Factors | 33 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | |
| Item 3. | Defaults Upon Senior Securities | 34 | |
| Item 4. | Mine Safety Disclosures | 34 | |
| Item 5. | Other Information | 34 | |
| Item 6. | Exhibits | 34 | |
| Signatures | 35 |
| 2 |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
HARROW HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment in Eton Pharmaceuticals | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Capitalized software costs, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Investment in Melt Pharmaceuticals | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Current portion of operating lease obligations | ||||||||
| Current portion of finance lease obligations | ||||||||
| Total current liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Loans payable, net of current portion and unamortized debt discount | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 3 |
HARROW HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity in losses of unconsolidated entities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment loss from Eton Pharmaceuticals | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on early extinguishment of debt | ( | ) | ||||||||||||||
| Gain on forgiveness of PPP loan | ||||||||||||||||
| Other expense, net | ( | ) | ||||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred dividends and accretion of preferred stock issuance costs | ( | ) | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net loss per share of common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares of common stock outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
HARROW HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2022 and 2021
| Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Harrow Health, Inc. | Total Noncontrolling | Total | |||||||||||||||||||||||||||||||
| Par | Par | Paid-in | Accumulated | Stockholders’ | Interest | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Equity | Equity | Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||||||||||
| Vesting of RSUs | ( | ) | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of preferred shares, net of discount and issuance costs | - | |||||||||||||||||||||||||||||||||||
| Redemption of preferred shares | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Payment of preferred dividends | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||||||||||
| Vesting of RSUs | ( | ) | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | | $ | | $ | | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Harrow Health, Inc. | Total Noncontrolling | Total | |||||||||||||||||||||||||||||||
| Par | Par | Paid-in | Accumulated | Stockholders’ | Interest | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Equity | Equity | Equity | ||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | | $ | | $ | | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
HARROW HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Provision for bad debt expense | ||||||||
| Amortization of debt issuance costs and discount | ||||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Investment loss from investment in Eton | ||||||||
| Equity in losses of unconsolidated entities | ||||||||
| Interest paid-in-kind from note receivable | ( | ) | ||||||
| Loss on early extinguishment of loan | ||||||||
| Stock-based compensation | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ( | ) | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net proceeds on sale of investments | ||||||||
| Investment in patent and trademark assets | ( | ) | ( | ) | ||||
| Issuance of note receivable, Melt Pharmaceuticals | ( | ) | ||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net proceeds from 8.625% notes payable, net of costs | ||||||||
| Principal and exit fee payments on SWK loan | ( | ) | ||||||
| Payment of taxes upon vesting of RSUs | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Sale of preferred stock, net of discount and issuance costs | ||||||||
| Redemption of preferred stock | ( | ) | ||||||
| Payment of preferred stock dividends | ( | ) | ||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | $ | ||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock upon vesting of RSUs | $ | $ | ||||||
| Purchase of intangible asset included in accounts payable and accrued expenses | $ | $ | ||||||
| Purchase of property, plant and equipment included in accounts payable and accrued expenses | $ | $ | ||||||
| Insurance premium financed | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | $ | ||||||
| Melt accounts receivable to note receivable | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
HARROW HEALTH, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine months ended September, 2022 and 2021
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company and Background
Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires, the “Company” or “Harrow”) is an eyecare pharmaceutical company exclusively focused on the discovery, development, and commercialization of innovative ophthalmic therapies that are accessible and affordable.
The Company owns non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow. Harrow also owns royalty rights in various drug candidates being developed by Surface and Melt.
Basis of Presentation
The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other period. For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries.
Harrow consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. The Company consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) entities that the Company deems to be a VIE. All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following represents an update for the three and nine months ended September 30, 2022 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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.
Segments
As a result of shifts in the Company’s strategic plans to further focus on growing the Company’s ImprimisRx business and suspension of activities related to starting up development-stage pharmaceutical companies, along with changes to the Company’s organizational and internal reporting structure, beginning in January 2022, management no longer evaluates the Company’s business in two segments and instead focuses on the performance of the business as a single operating business.
| 7 |
Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted stock units (“RSUs”) and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs and warrants were and at September 30, 2022 and 2021, respectively. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares underlying vested RSUs at September 30, 2022 and 2021 was and , respectively.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator – net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator – weighted average number of shares outstanding, basic and diluted | ||||||||||||||||
| Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Investment in Eton Pharmaceuticals, Inc.
As
of September 30, 2022, the Company owned shares of Eton common stock, which represents less than
Investment in Melt Pharmaceuticals, Inc. – Related Party
The
Company owns shares of common stock of Melt (representing approximately
| 8 |
The following table summarizes the Company’s investments in Melt as of September 30, 2022:
| In-substance | Net | |||||||||||||||||||
| Cost Basis | Share of Equity Method Losses | Paid-in-Kind Interest | Capital Contributions | Carrying value | ||||||||||||||||
| Common stock | $ | $ | ( | ) | $ | $ | $ | - | ||||||||||||
| Loan | ( | ) | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||
See Note 4 for more information and related party disclosure regarding Melt.
Investment in Surface Ophthalmics, Inc. – Related Party
The
Company owns common shares of Surface (representing approximately
The following table summarizes the Company’s investment in Surface as of September 30, 2022:
| Cost | Share of Equity | Net | ||||||||||
| Basis | Method Losses | Carrying value | ||||||||||
| Common stock | $ | $ | ( | ) | $ | |||||||
See Note 5 for more information and related party disclosure regarding Surface.
Impairment of Equity Method Investments and Note Receivable
On a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method investments and note receivable may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity method investments and note receivable. At September 30, 2022 and December 31, 2021, no indicators of impairment existed.
NOTE 3. REVENUES
The Company accounts for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers. The Company has three primary streams of revenue: (1) revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission agreement with a third party, and (3) revenue recognized from intellectual property licenses and asset purchase agreements.
Product Revenues
The Company sells prescription medications directly through its pharmacy, outsourcing facility and 3PL partner. Revenue from the Company’s pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other discounts paid back to the client, (ii) the price paid to the Company by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the following:
| 1. | Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled. |
| 9 |
| 2. | Identify the performance obligations in the contract: Obligations for fulfillment of the Company’s contracts consist of delivering the product to customers at their specified destination. ASU 2016-10 was issued in April 2016 and amended ASC 606 for shipping and handling activities as follows: If the customer takes control of the goods after shipment, shipping and handling activities would always be considered a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment, entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate performance obligation. The Company has elected to treat its shipping and handling activities as a fulfillment cost.
|
| 3. | Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which the Company expects to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales deductions) and an estimate for returns and replacements established at the time of sale. The Company utilizes the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of its branded products. The transfer of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration related to product sales.
|
| 4. | Allocate the transaction price to the performance obligations in the contract: Given that there is only one performance obligation for product sales, no allocation is necessary.
|
| 5. | Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery. |
Commission Revenues
The Company has entered into an agreement whereby it is paid a fee calculated based on sales the Company generates from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue.
Revenues From Transfer of Acquired Product Profit
The Company entered into an agreement whereby it purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, six month transition period, the Seller continued to manufacture and market these products and transfer the net profit from the sale of the products to the Company. The revenue recognized by the Company from the transfer of net profit was recognized at the time profit from the product sales were calculated by the Seller and confirmed by the Company, typically on a monthly basis, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue. On a quarterly basis, the Seller invoiced the Company for all credits and reimbursements (“Chargebacks”) made to customers related to the products. The Company used historical actual experience to estimate Chargebacks associated with the net profit transferred. The estimate is recorded as a reduction in revenues in the Company’s condensed consolidated statements of operations and accounts receivable in the condensed consolidated balance sheets at the time the revenue is recognized.
Intellectual Property License Revenues
The Company currently holds five intellectual property licenses and related agreements pursuant to which the Company has agreed to license or sell to a customer with the right to access the Company’s intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point in time that the performance obligation is met.
Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company’s continued involvement is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.
| 10 |
Revenue disaggregated by revenue source for the three and nine months ended September 30, 2022 and 2021 consists of the following:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Commission revenues | ||||||||||||||||
| Transfer of profits | ||||||||||||||||
| License revenues | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Deferred
revenue and customer deposits at September 30, 2022 and December 31, 2021 were $
NOTE 4. INVESTMENT IN, AND NOTE RECEIVABLE FROM MELT PHARMACEUTICALS, INC. - RELATED PARTY TRANSACTIONS
In December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt Asset Purchase Agreement”). Pursuant to the terms of the Melt Asset Purchase Agreement, Melt was assigned certain intellectual property and related rights from the Company to develop, formulate, make, sell, and sub-license certain Company conscious sedation and analgesia related formulations (collectively, the “Melt Products”). Under the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty payments to the Company on net sales of the Melt Products while any patent rights remain outstanding, as well as other conditions.
In
February 2019, the Company and Melt entered into a Management Service Agreement between the Company and Melt (the “Melt MSA”),
whereby the Company provides to Melt certain administrative services and support, including bookkeeping, web services and human resources
related activities, and Melt is required to pay the Company a monthly amount of $
The Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during the year ended December 31, 2021. Following Mr. Baum’s departure, the Company no longer has any representation on Melt’s board of directors.
The unaudited condensed results of operations information of Melt is summarized below:
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues, net | $ | $ | ||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| 11 |
The unaudited condensed balance sheet information of Melt is summarized below:
| At | At | |||||||
| September 30, 2022 | December 31, 2021 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Total preferred stock and stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
Melt Note Receivable
On
September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $
Melt
has granted the Company a security interest in substantially all of its personal property, rights and assets, including intellectual
property rights, to secure the payment of all amounts owed under the Melt Loan Agreement. The Melt Loan Agreement contains customary
representations, warranties and covenants, including covenants by Melt limiting additional indebtedness, liens, mergers and acquisitions,
dispositions, investments, distributions, subordinated debt, and transactions with affiliates. The Melt Loan Agreement includes customary
events of default, and upon the occurrence of an event of default (subject to cure periods for certain events of default), all amounts
owed by Melt thereunder may be declared immediately due and payable by the Company, and the interest rate on the loan may be increased
by
In connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug candidates for a period of five years following the effective date of the Melt Loan Agreement.
The
net funds received by Melt excluded $
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 September 30, 2022, the Company owned shares of Surface common stock. Company directors Richard L. Lindstrom, Perry J. Sternberg and Mark L. Baum, who is also the Company’s Chief Executive Officer, 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.
| 12 |
The unaudited condensed results of operations information of Surface is summarized below:
| For the Nine
Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues, net | $ | $ | ||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
The unaudited condensed balance sheet information of Surface is summarized below:
| At | At | |||||||
| September 30, 2022 | December 31, 2021 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Total preferred stock and stockholders’ deficit | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
NOTE 6. INVENTORIES
Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded commercial pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of September 30, 2022 and December 31, 2021 was as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid computer software licenses and related expenses | ||||||||
| Due from Melt Pharmaceuticals | ||||||||
| Other prepaid expenses | ||||||||
| Deposits and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Property, plant and equipment, net: | ||||||||
| Computer hardware | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Lab and pharmacy equipment | ||||||||
| Leasehold improvements | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| 13 |
For
the three and nine months ended September 30, 2022, depreciation related to the property, plant and equipment was $
NOTE 9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs at September 30, 2022 and December 31, 2021 consisted of the following:
| September
30, 2022 | December
31, 2021 | |||||||
| Capitalized internal-use software development costs | $ | $ | ||||||
| Acquired third-party software license for internal-use | ||||||||
| Total gross capitalized software for internal-use | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Capitalized internal-use software in process | ||||||||
| $ | $ | |||||||
The
Company recorded amortization expense of $
NOTE 10. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at September 30, 2022 consisted of the following:
Amortization Periods (in years) | Cost | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||
| Patents | $ | $ | ( | ) | $ | $ | ||||||||||||||
| Licenses | ( | ) | ||||||||||||||||||
| Trademarks | ||||||||||||||||||||
| Acquired NDAs | ( | ) | ||||||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||||||
| Trade name | ( | ) | ||||||||||||||||||
| Non-competition clause | ( | ) | ||||||||||||||||||
| State pharmacy licenses | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||||
Amortization expense for intangible assets for the three and nine months ended September 30, 2022 and 2021 was as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Patents | $ | $ | $ | $ | ||||||||||||
| Licenses | ||||||||||||||||
| Acquired NDAs | ||||||||||||||||
| Customer relationships | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Estimated future amortization expense for the Company’s intangible assets at September 30, 2022 is as follows:
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ |
| 14 |
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued insurance premium | ||||||||
| Accrued IHEEZO milestone payment | ||||||||
| Other accrued expenses | ||||||||
| Accrued interest | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
The
Company financed all insurance policies for the policy term of August 17, 2022 through August 16, 2023. The financing agreement has an
interest rate of
NOTE 12. DEBT
8.625% Senior Notes Due 2026
In
April 2021, the Company closed an offering of $
Prior
to February 1, 2026, the Company may, at its option, redeem the Notes, in whole at any time or in part from time to time, at a
Interest
expense related to the Notes totaled $
| 15 |
At September 30, 2022, future minimum payments under the Company’s debt were as follows:
| Amount | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total minimum payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Notes payable, gross | ||||
| Less: unamortized discount, net of premium | ( | ) | ||
| Notes payable, net of unamortized discount | $ | |||
NOTE 13. LEASES
The
Company leases office and laboratory space under the non-cancelable operating leases listed below. These lease agreements have
remaining terms between
to
| ● | An
operating lease for |
| ● | An
operating lease for |
| ● | An
operating lease for |
| ● | An
operating lease for |
At
September 30, 2022, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases
held by the Company were
During
the three and nine months ended September 30, 2022, cash paid for amounts included for the operating lease liabilities was $
Future lease payments under operating leases as of September 30, 2022 were as follows:
| Operating Leases | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Total operating lease liabilities | ||||
| Less: current portion, operating lease liabilities | ( | ) | ||
| Operating lease liabilities, net of current portion | $ | |||
During the nine months ended September 30, 2022, the Company repaid all remaining amounts owed under its finance lease and no future payments are due related to finance leases.
| 16 |
Preferred Stock
At September 30, 2022 and December 31, 2021, the Company had shares of preferred stock, $ par value, authorized and shares of preferred stock issued and outstanding.
Common Stock
During
the nine months ended September 30, 2022, the Company issued shares of common stock to Mark L. Baum, the Company’s Chief
Executive Officer, upon the cashless exercise of options to purchase shares at an exercise price of $ per share. The Company
withheld from Mr. Baum
During
the nine months ended September 30, 2022, the Company issued shares of common stock to consultants upon the cashless exercise
of options to purchase shares at an exercise price of $ per share. The Company withheld
During
the nine months ended September 30, 2022, the Company issued
During
the nine months ended September 30, 2022, RSUs granted in February 2019 to Andrew R. Boll, the Company’s Chief Financial
Officer, vested, and in February 2022, the Company issued shares of common stock to Mr. Boll, net of shares of common stock
withheld for payroll tax withholdings totaling $
During
the nine months ended September 30, 2022, RSUs granted in February 2019 to John P. Saharek, the President of ImprimisRx, vested,
and in February 2022, the Company issued shares of common stock to Mr. Saharek, net of shares of common stock withheld
for payroll tax withholdings totaling $
During
the nine months ended September 30, 2022, RSUs granted in February 2019 vested, and in February 2022, the Company issued
shares of common stock, net of shares of common stock withheld for payroll tax withholdings totaling $
During
the nine months ended September 30, 2022, RSUs granted in May 2019 vested, and in May 2022, the Company issued shares of
common stock, net of shares of common stock withheld for payroll tax withholdings totaling $
During the nine months ended September 30, 2022, shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the applicable director resigns.
Stock Option Plan
On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan; however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together with the 2007 Plan, the “Plans”). As of September 30, 2022, the 2017 Plan provides for the issuance of a maximum of shares of the Company’s common stock. The purposes of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had shares available for future issuances under the 2017 Plan at September 30, 2022.
| 17 |
Stock Options
| Number
of Shares | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding – January 1, 2022 | $ | |||||||||||||||
| Options granted | $ | |||||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options cancelled/forfeited | ( | ) | $ | |||||||||||||
| Options outstanding – September 30, 2022 | $ | $ | ||||||||||||||
| Options exercisable | $ | $ | ||||||||||||||
| Options vested and expected to vest | $ | $ | ||||||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on September 30, 2022, based on the closing price of the Company’s common stock of $ on that date.
During the nine months ended September 30, 2022, the Company granted stock options to certain employees. The stock options were granted with an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock was then listed, at the grant date and have contractual terms of . . Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of %. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant.
| 2022 | ||||
| Weighted-average fair value of options granted | $ | |||
| Expected terms (in years) | ||||
| Expected volatility | - | % | ||
| Risk-free interest rate | - | % | ||
| Dividend yield | ||||
| 18 |
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ - $ | $ | |||||||||||||||||||||