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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2023

 

or

 

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

 

For the transition period from ___________ to _____________

 

Commission File Number: 001-35814

 

Harrow Health, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   45-0567010
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

102 Woodmont Blvd., Suite 610

Nashville, Tennessee

  37205
(Address of principal executive offices)   (Zip code)

 

(615) 733-4730

(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
Common Stock, $0.001 par value per share   HROW   The Nasdaq Stock Market LLC
8.625% Senior Notes due 2026   HROWL   The Nasdaq Stock Market LLC
11.875% Senior Notes due 2027   HROWM   The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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
Non-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 ☐ No

 

As of May 10, 2023, there were 30,121,997 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   28
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   34
         
Item 4.   Controls and Procedures   34
         
Part II   OTHER INFORMATION   35
         
Item 1.   Legal Proceedings   35
         
Item 1A.   Risk Factors   35
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   35
         
Item 3.   Defaults Upon Senior Securities   35
         
Item 4.   Mine Safety Disclosures   35
         
Item 5.   Other Information   35
         
Item 6.   Exhibits   35
         
    Signatures   36

 

2

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HARROW HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2023   2022 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $19,248,000   $96,270,000 
Investment in Eton Pharmaceuticals   7,631,000    5,589,000 
Accounts receivable, net   12,111,000    6,249,000 
Inventories   9,093,000    6,541,000 
Prepaid expenses and other current assets   3,604,000    3,611,000 
Total current assets   51,687,000    118,260,000 
Property, plant and equipment, net   3,586,000    3,486,000 
Capitalized software costs, net   2,277,000    2,112,000 
Deferred financing costs   -    1,950,000 
Deferred tax asset   288,000    - 
Operating lease right-of-use assets, net   7,336,000    7,513,000 
Intangible assets, net   151,992,000    23,725,000 
Goodwill   332,000    332,000 
TOTAL ASSETS  $217,498,000   $157,378,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $13,794,000   $13,771,000 
Accrued payroll and related liabilities   3,103,000    4,025,000 
Deferred revenue and customer deposits   67,000    113,000 
Current portion of operating lease obligations   744,000    723,000 
Total current liabilities   17,708,000    18,632,000 
Operating lease obligations, net of current portion   7,137,000    7,332,000 
Accrued expenses, net of current portion   2,275,000    - 
Notes payable, net of unamortized debt discount   168,850,000    104,174,000 
TOTAL LIABILITIES   195,970,000    130,138,000 
Commitments and contingencies   -    - 
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 50,000,000 shares authorized, 30,056,370 and 29,901,530 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively   30,000    30,000 
Additional paid-in capital   137,989,000    137,058,000 
Accumulated deficit   (116,136,000)   (109,493,000)
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY   21,883,000    27,595,000 
Noncontrolling interests   (355,000)   (355,000)
TOTAL STOCKHOLDERS’ EQUITY   21,528,000    27,240,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $217,498,000   $157,378,000 

 

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   For the 
   Three Months Ended   Three Months Ended 
   March 31,   March 31, 
   2023   2022 
Revenues:          
Product sales, net  $20,453,000   $20,340,000 
Other revenues   5,650,000    1,780,000 
Total revenues   26,103,000    22,120,000 
Cost of sales   (8,271,000)   (5,963,000)
Gross profit   17,832,000    16,157,000 
Operating expenses:          
Selling, general and administrative   15,888,000    13,398,000 
Research and development   734,000    658,000 
Total operating expenses   16,622,000    14,056,000 
Income from operations   1,210,000    2,101,000 
Other (expense) income:          
Interest expense, net   (4,747,000)   (1,792,000)
Equity in losses of unconsolidated entities   -    (2,886,000)
Investment gain from Eton Pharmaceuticals   2,042,000    139,000 
Loss on extinguishment of debt   (5,465,000)   - 
Other income, net   29,000    - 
Total other expense, net   (8,141,000)   (4,539,000)
Loss before income taxes   (6,931,000)   (2,438,000)
Income tax benefit   288,000    - 
Net loss   (6,643,000)   (2,438,000)
Basic and diluted net loss per share of common stock  $(0.22)  $(0.09)
Weighted average number of shares of common stock outstanding, basic and diluted   30,289,730    27,226,819 

 

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 Months Ended March 31, 2023 and 2022

 

                   Total   Total     
   Common Stock   Additional       Harrow Health, Inc.   Noncontrolling   Total 
       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2021   26,902,763   $27,000   $106,666,000   $(95,407,000)  $11,286,000   $(355,000)  $10,931,000 
                                    
Issuance of common stock in connection with:                                   
Exercise of employee stock-based options   89,986    -    4,000    -    4,000    -    4,000 
Vesting of RSUs   135,000    1,000    (1,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   (96,622)   (1,000)   (776,000)   -    (777,000)   -    (777,000)
Stock-based compensation expense   -    -    2,016,000    -    2,016,000    -    2,016,000 
Net loss   -    -    -    (2,438,000)   (2,438,000)   -    (2,438,000)
Balance at March 31, 2022   27,031,127   $27,000   $107,909,000   $(97,845,000)  $10,091,000   $(355,000)  $9,736,000 
                                    
Balance at December 31, 2022   29,901,530   $30,000   $137,058,000   $(109,493,000)  $27,595,000   $(355,000)  $27,240,000 
                                    
Issuance of common stock in connection with:                                   
Exercise of employee stock-based options   97,542    -    148,000    -    148,000    -    148,000 
Vesting of RSUs   111,000    -    -    -    -    -    - 
Shares withheld related to net share settlement of equity awards   (53,702)   -    (850,000)   -    (850,000)   -    (850,000)
Stock-based compensation expense   -    -    1,633,000    -    1,633,000    -    1,633,000 
Net loss   -    -    -    (6,643,000)   (6,643,000)   -    (6,643,000)
Balance at March 31, 2023   30,056,370   $30,000   $137,989,000   $(116,136,000)  $21,883,000   $(355,000)  $21,528,000 

 

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

 

   2023   2022 
   For the Three Months Ended 
   March 31, 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(6,643,000)  $(2,438,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and amortization of property, plant and equipment   292,000    419,000 
Amortization of intangible assets   2,207,000    404,000 
Amortization of operating lease right-of-use assets   177,000    124,000 
Provision for bad debt expense   20,000    10,000 
Amortization of debt issuance costs and debt discount   761,000    193,000 
Investment gain from investment in Eton   (2,042,000)   (139,000)
Equity in losses of unconsolidated entities   -    2,886,000 
Loss on extinguishment of debt   5,465,000    - 
Stock-based compensation   1,633,000    2,016,000 
Deferred taxes   (288,000)   - 
Changes in assets and liabilities:          
Accounts receivable   (5,882,000)   (1,535,000)
Inventories   (2,552,000)   (179,000)
Prepaid expenses and other current assets   7,000    (29,000)
Accounts payable and accrued expenses   (212,000)   369,000 
Accrued payroll and related liabilities   (1,111,000)   (1,141,000)
Deferred revenue and customer deposits   (46,000)   7,000 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES   (8,214,000)   967,000 
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in patent and trademark assets   -    (6,000)
Purchase of product NDAs and patents   (130,474,000)   - 
Purchases of property, plant and equipment   (496,000)   (404,000)
NET CASH USED IN INVESTING ACTIVITIES   (130,970,000)   (410,000)
CASH FLOWS FROM FINANCING ACTIVITIES          
Payments on finance lease obligations   -    (3,000)
Net proceeds from 11.875% notes payable, net of costs   4,961,000    - 
Net proceeds from Oaktree loan, net of costs   61,585,000    - 
Payment of taxes upon vesting of RSUs and exercise of stock options   (661,000)   (777,000)
Proceeds from exercise of stock options   148,000    4,000 
Net proceeds from B Riley senior secured note, net of costs   55,879,000    - 
Repayment of B. Riley senior secured note   (59,750,000)   - 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   62,162,000    (776,000)
NET CHANGE IN CASH AND CASH EQUIVALENTS    (77,022,000)   (219,000)
CASH AND CASH EQUIVALENTS, beginning of period   96,270,000    42,167,000 
CASH AND CASH EQUIVALENTS, end of period  $19,248,000   $41,948,000 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for interest  $3,371,000   $1,617,000 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Purchase of property, plant and equipment included in accounts payable and accrued expenses  $61,000   $- 
Right-of-use assets obtained in exchange for new operating lease obligations  $-   $1,036,000 
Accrual of exit fee related to Oaktree Loan  $2,275,000    - 
Reclassification of derferred financing costs  $1,950,000    - 
Income taxes owed for exercise of stock options  $189,000   $- 

 

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 Months Ended March 31, 2023 and 2022

 

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 months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 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, 2022.

 

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 months ended March 31, 2023 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

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.

 

Credit Losses

 

The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables. The Company considers historical collection rates, the current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable, the Company believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments, including its trade receivables.

 

7

 

 

To determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of customer at the business component level, as the Company determined that the risk profile of its customers is consistent based on the type and industry in which they operate, mainly in the life sciences industry. Each business component is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the life sciences industry to estimate if there are current expected credit losses within its trade receivables based on the trends of the Company’s expectation of the future status of such economic and industry-specific factors. Also, specific allowance amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability of default.

 

The accounts receivable balance on the Company’s condensed consolidated balance sheet as of March 31, 2023 was $12,111,000, net of $82,000 of allowances. The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected at March 31, 2023:

 

Balance at January 1, 2023  $73,000 
Change in expected credit losses   20,000 
Write-offs, net of recoveries   (11,000)
Balance at March 31, 2023  $82,000 

 

Business Combinations and Asset Acquisitions

 

The Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether the Company has acquired inputs, process, and output, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in Financial Account Standards Board (“FASB”). Accounting Standards Codification (“ASC”) 805, Business Combinations, requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including any contingent assets and liabilities, and any non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. In accordance with ASC 805 – Business Combinations, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

 

The consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events. The obligation for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, would be recognized as a gain or loss and recorded in the condensed consolidated statement of operations.

 

If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50 Business Combinations – Related Issues, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on the cost of the acquired assets on a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s financial statements. Consideration transferred that is non-cash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets acquired, and liabilities assumed, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values.

 

Fair Value Measurements

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1: Applies to assets or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.
Level 2: Applies to assets or liabilities for which there are significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Applies to assets or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

At March 31, 2023 and December 31, 2022, the Company measured its investment in Eton on a recurring basis. The Company’s investment in Eton is classified as Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of March 31, 2023 and December 31, 2022, the fair market value of the Company’s investment in Eton was $7,631,000 and $5,589,000, respectively.

 

The Company carries the 2026 Notes at face value, including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes are carried at face value less unamortized debt issuance costs, and the Oaktree Loan is carried at face value less the original issue discount and unamortized debt issuance costs on the condensed consolidated balance sheets and presents fair value for disclosure purposes only. The 2026 Notes and 2027 Notes are classified as Level 1 instruments as the fair value is determined using quoted market prices in active markets for the same securities.

 

The following table presents the estimated fair values and the carrying values:

 

    March 31, 2023   December 31, 2022 
    Carrying Value   Fair Value   Carrying Value   Fair Value 
2026 Notes   $72,628,000   $73,590,000   $72,436,000   $71,550,000 
2027 Notes   $36,900,000   $40,250,000   $31,738,000   $35,112,000 
Oaktree Loan   $

59,322,000

   $65,000,000   $-   $- 

 

The Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred revenue and customer deposits and operating and finance lease liabilities. The carrying amount of these financial instruments, except for operating and finance lease liabilities, approximates fair value due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying values of the operating and finance lease liabilities approximate their respective fair values.

 

8

 

 

Basic and Diluted Net Loss per Common Share

 

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 common 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 was 4,750,340 and 5,546,200 at March 31, 2023 and 2022, respectively, and are excluded in the calculation of diluted net loss per common share for the periods presented, because the effect is anti-dilutive. 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 unissued shares underlying vested RSUs at March 31, 2023 and 2022 was 336,264 and 277,405, respectively.

 

The following table shows the computation of basic and diluted net loss per share of common stock for the three months ended March 31, 2023 and 2022:

 

   2023   2022 
   For the Three Months Ended 
   March 31, 
   2023   2022 
         
Numerator – net loss  $(6,643,000)  $(2,438,000)
Denominator – weighted average          
number of shares outstanding, basic and diluted   30,289,730    27,226,819 
Net loss per share, basic and diluted  $(0.22)  $(0.09)

 

Income Taxes

 

The Company calculates its quarterly tax provision pursuant to the guidelines in ASC 740-270, Income Taxes. Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the period.

 

The Company’s effective tax rate was 4.16% and 0% for the three months ended March 31, 2023 and 2022, respectively. The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 differed from the U.S. federal statutory tax rate of 21% due to state taxes, permanent book-tax differences related to Internal Revenue Code Section 162(m) excess officer compensation limitation and share-based compensation and the change in valuation allowance.

 

As of March 31, 2023 and December 31, 2022, there were no unrecognized tax benefits included in the condensed consolidated balance sheets that would, if recognized, affect the effective tax rate.

 

Investment in Eton Pharmaceuticals, Inc.

 

As of March 31, 2023, the Company owned 1,982,000 shares of Eton common stock, which represented less than 10% of the equity and voting interests of Eton. At March 31, 2023, the fair market value of Eton’s common stock was $3.85 per share. In accordance with the ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the Company recorded an unrealized investment gain from its Eton common stock position of $2,042,000 and $139,000 during the three months ended March 31, 2023 and 2022, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of March 31, 2023 and December 31, 2022, the fair market value of the Company’s investment in Eton was $7,631,000 and $5,589,000, respectively.

 

Investment in Melt Pharmaceuticals, Inc. – Related Party

 

The Company owns 3,500,000 shares of common stock of Melt which represented approximately 46% of the equity and voting interests of Melt as of March 31, 2023. 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, 2023, and at the time of entering into the Melt Loan Agreement (see Note 5), 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.

 

9

 

 

The following table summarizes the Company’s investments in Melt as of March 31, 2023:

 

   Cost   Share of Equity   Paid-in-Kind   In-substance   Net 
   Basis   Method Losses   Interest   Capital Contributions   Carrying value 
Common stock  $5,810,000   $(5,810,000)  $-   $    $- 
Loan   13,500,000    (13,500,000)   3,001,000    (3,001,000)   - 
   $19,310,000   $(19,310,000)  $3,001,000   $(3,001,000)  $- 

 

See Note 5 for more information and related party disclosure regarding Melt.

 

Investment in Surface Ophthalmics, Inc. – Related Party

 

The Company owns 3,500,000 common shares of Surface, which represented approximately 20% of Surface’s equity and voting interests as of March 31, 2023, and uses the equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced its common stock investment in Surface to $0 as a result of the Company recording its share of equity losses of Surface. The Company has no other investments in Surface.

 

The following table summarizes the Company’s investment in Surface as of March 31, 2023:

 

   Cost   Share of Equity   Net 
   Basis   Method Losses   Carrying value 
Common stock  $5,320,000   $(5,320,000)  $- 

 

See Note 6 for more information and related party disclosure regarding Surface.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the Company for the fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s accounts receivable, and other financial assets, including current market conditions and historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of March 31, 2023, using its expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of the standard.

 

NOTE 3. REVENUES

 

The Company accounts for contracts with customers in accordance with 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.

 

10

 

 

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.
   
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: Because 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 had entered into an agreement whereby it was 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 was recognized, at which point there was 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 agreements whereby it purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, transition period, the Seller continues 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 invoices the Company for all credits and reimbursements (“Chargebacks”) made to customers related to the products. The Company uses 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.

 

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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.

 

Revenue disaggregated by revenue source for the three months ended March 31, 2023 and 2022 consists of the following:

 SCHEDULE OF DISAGGREGATED REVENUE

   2023   2022 
   For the Three Months Ended 
   March 31, 
   2023   2022 
Product sales, net  $20,453,000   $20,340,000 
Commission revenues   -    1,320,000 
Transfer of profits   5,650,000    460,000 
Total revenues  $26,103,000   $22,120,000 

 

Deferred revenue and customer deposits at March 31, 2023 and December 31, 2022 were $67,000 and $113,000, respectively. All deferred revenue and customer deposit amounts at December 31, 2022 were recognized as revenue during the three months ended March 31, 2023.

 

NOTE 4. RECENT PRODUCT ACQUISITIONS, LICENSES AND DIVESTITURES

 

Acquisition of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE

 

In December 2022, the Company entered into an Asset Purchase Agreement (the “Fab 5 APA”) with Novartis Technology, LLC and Novartis Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the U.S. (the “Fab 5 Acquisition”): ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE.

 

Under the terms of the Fab 5 APA, the Company made a one-time payment of $130,000,000 at closing in January 2023, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE. Pursuant to the Fab 5 APA and various ancillary agreements, immediately following the closing and subject to certain conditions and prior to the transfer of the Fab 5 Products new drug applications (the “NDAs”) to the Company, Novartis will continue to sell the Fab 5 Products on the Company’s behalf and transfer the net profit from the sale of the Fab 5 Products to the Company. Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs are transferred and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers, if needed.

 

The assets acquired in the Fab 5 Acquisition are identifiable intangible asset groups in similar asset classes and all directly related to the five product NDAs acquired. The developed technology is within one major intangible asset class. No workforce/employees were included in the Fab 5 Acquisition and the Company is required to utilize its own business inputs/processes to transfer and commercialize the Fab 5 Products and NDAs. As a result, the Company recognized this transaction as an asset acquisition.

 

The Company incurred $558,000 in costs associated with the Fab 5 Acquisition, including the acquisition costs and the payment of $130,000,000 at closing, the total purchase price of the Fab 5 Acquisition was $130,558,000. At the time of the Fab 5 Acquisition and as of March 31, 2023, the contingent consideration due related to the commercial availability of TRIESENCE was not considered probable and reasonably estimable, therefore no amount was included in the purchase price of the Fab 5 Acquisition. At the time the contingent consideration due related to the commercial availability of TRIESENCE becomes probable and reasonably estimable, the additional consideration, if any, paid will be allocated to all of the assets on a pro rata basis based on their initial estimated fair values as a percent of the total purchase price. The Company does not consider any amounts related to TRIESENCE to be in-process research and development (IPR&D) as considered within the scope of ASC 730, Research and Development.

 

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Divestiture of Non-Ophthalmic Assets

 

In October 2022, wholly owned subsidiaries of the Company (“Imprimis”) entered into an Asset Purchase Agreement (the “RPC Agreement”) with Innovation Compounding Pharmacy, LLC (the “Buyer”). Under the terms of the RPC Agreement, Imprimis agreed to sell substantially all of its assets associated with its non-ophthalmology related compounding product line, including but not limited to, certain intellectual property rights, customer lists, databases, and formulations (the “RPC Assets”). The Buyer agreed to make offers of employment to six of the Company’s employees that were responsible for the sales activities associated with the RPC Assets. Under the terms of the RPC Agreement, the Buyer paid Imprimis an aggregate cash amount of $6,000,000 in October 2022. In addition, the Buyer is obligated to pay up to $4,500,000 to Imprimis based on mutually agreed upon revenue milestones during the calendar year 2023 (the “Contingent Amount”). During the year ended December 31, 2022, no amount related to the Contingent Amount was recognized by the Company. The Company will recognize a gain related to the Contingent Amount if/when the contingency (in this case, revenue thresholds for 2023) become likely and reasonably estimated.

 

In connection with the RPC Agreement, Imprimis entered into a separate transition services agreement with the Buyer related to providing on going services associated with the RPC Assets, such as procuring and dispensing prescription orders, providing accounting and billing services and collecting accounts receivable. The Company expects Imprimis to provide transition services to the Buyer for up to six to nine months following the effective date of the RPC Agreement. The Company collected and will continue to collect cash on behalf of the Buyer for revenue generated by sales of RPC Assets from October 2022 through the transition period and the Company is obligated to transfer cash generated by such sales to the Buyer. The Company’s condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 reflected $226,000 and $579,000, respectively, of cash collected on behalf of the Buyer and a receivable within accounts receivable of $116,000 and $128,000, respectively, for cash to be collected on behalf of the Buyer for sales of RPC Assets sold through March 31, 2023 and December 31, 2022, respectively.

 

The amounts due from the Buyer for reimbursement of services performed under the transition services agreement was $162,000 and $254,000 as of March 31, 2023 and December 31, 2022, respectively. Such amounts were netted against the amounts collected on behalf of the Buyer and was unpaid within accrued expenses on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022. The combined total of $307,000 and $453,000 was recorded within accrued expenses on the condensed consolidated balances sheets as of March 31, 2023 and December 31, 2022, respectively, and represents a payable to the Buyer. The Company recorded income from the transition services agreement of $124,000 which is presented in other income on the consolidated statement of operations for the three months ended March 31, 2023. During the three months ended March 31, 2023, the Company recorded a loss on the sale of assets of $94,800 related to remaining unusable inventory.

 

NOTE 5. 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 $10,000. During the three months ended March 31, 2023, the Company recorded $59,000 due from Melt for reimbursable expenses and amounts payable pursuant to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. As of March 31, 2023, and December 31, 2022, the Company was due $198,000 and $139,000, respectively, from Melt for reimbursable expenses and amounts due under the Melt MSA. Melt did not make any payments to the Company during the three months ended March 31, 2023.

 

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. Mr. Baum re-joined the Melt board of directors in January 2023. At the time Mr. Baum re-joined, the Melt board of directors consists of five total board members, including Mr. Baum, who is the only representative of the Company on Melt’s board of directors.

 

13

 

 

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

 

   2023   2022 
   For the Three Months Ended March 31, 
   2023   2022 
Revenues, net  $-   $- 
Loss from operations  $(1,858,000)  $(3,337,000)
Net loss  $(1,858,000)  $(3,337,000)

 

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

 

   At March 31,   At December 31, 
   2023   2022 
Current assets  $133,000   $655,000 
Non-current assets   133,000    107,000 
Total assets  $266,000   $762,000 
           
Total liabilities  $20,273,000   $19,056,000 
Total preferred stock and stockholders’ deficit   (20,007,000)   (18,294,000)
Total liabilities and stockholders’ equity  $266,000   $762,000 

 

Melt Note Receivable

 

On September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $13,500,000 (the “Melt Loan Agreement”), as lender, with Melt, as borrower. Amounts borrowed under the Melt Loan Agreement bear interest at 12.50% per annum, which interest can be paid in-kind at the option of Melt until the maturity date. The Melt Loan Agreement permits Melt to pay interest only on the principal amount loaned thereunder through the term and all amounts owed were previously due and payable on September 1, 2022. In April 2022, the Company entered into a First Amendment and in September 2022, a Second Amendment (together, the “Amendments”) to the Melt Loan Agreement. The Amendments (i) extended the maturity date of the Melt Loan Agreement to June 1, 2023, which can be extended further to September 1, 2026 upon Melt completing a qualifying financing of a minimum amount of $10,000,000 from third-party investors, (ii) added conditions related to minimum cash amounts following a qualifying financing, and (iii) clarified the definition of material adverse effects. Melt may elect to prepay all, but not less than all, of the amounts owed prior to the maturity date at any time without penalty.

 

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 3% per annum.

 

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 $908,000 owed to the Company for reimbursable expenses and amounts due under the Melt MSA prior to the effective date of the note receivable. As of March 31, 2023 and December 31, 2022, aggregate principal and accrued interest payable to the Company pursuant to the Melt Loan Agreement amounted to $16,501,000 and $15,984,000, respectively. In accordance with ASC 328, Investments – Equity Method and Joint Ventures, the carrying amount of the notes receivable has been reduced by the Company’s allocated share of Melt’s losses based on its ownership of total debt owed by Melt (see Note 2).

 

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NOTE 6. 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, 2023, the Company owned 3,500,000 shares of Surface common stock. Certain Company directors, Richard L. Lindstrom and Perry J. Sternberg 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. Mark L. Baum, who is the Company’s Chief Executive Officer, was previously a member of the Surface board of directors and resigned from his position as a director of Surface during the three months ended March 31, 2023

 

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

 

   2023   2022 
   For the Three Months Ended March 31, 
   2023   2022 
Revenues, net  $-   $- 
Loss from operations  $(1,587,000)  $(1,996,000)
Net loss  $(1,524,000)  $1,996,000 

 

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

 

   At March 31,   At December 31, 
   2023   2022 
Current assets  $13,350,000   $15,350,000 
Non-current assets   902,000    652,000 
Total assets  $14,252,000   $16,002,000 
           
Total liabilities  $995,000   $1,586,000 
Total preferred stock and stockholders’ deficit   13,257,000    14,416,000 
Total liabilities and stockholders’ equity  $14,252,000   $16,002,000 

 

NOTE 7. INVENTORIES

 

Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded commercial pharmaceutical products, including those held at a 3PL, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of March 31, 2023 and December 31, 2022 was as follows:

   March 31, 2023   December 31, 2022 
Raw materials  $5,023,000   $3,707,000 
Work in progress   36,000    38,000 
Finished goods   4,034,000    2,796,000 
Total inventories  $9,093,000   $6,541,000 

 

NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at March 31, 2023 and December 31, 2022 consisted of the following:

 

   March 31, 2023   December 31, 2022 
Prepaid insurance  $527,000   $858,000 
Prepaid computer software licenses and related expenses   1,072,000    1,165,000 
Due from Melt Pharmaceuticals   198,000    139,000 
Other prepaid expenses   1,689,000    1,331,000 
Deposits and other current assets   118,000    118,000 
Total prepaid expenses and other current assets  $3,604,000   $3,611,000 

 

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NOTE 9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at March 31, 2023 and December 31, 2022 consisted of the following:

 

   March 31, 2023   December 31, 2021 
Property, plant and equipment, net:          
Computer hardware  $1,060,000   $979,000 
Furniture and equipment   922,000    860,000 
Lab and pharmacy equipment   4,335,000    4,259,000 
Leasehold improvements   6,555,000    6,449,000 
Property, plant and equipment, gross   12,872,000    12,547,000 
Accumulated depreciation   (9,286,000)   (9,061,000)
Property, plant and equipment, net  $3,586,000   $3,486,000 

 

For the three months ended March 31, 2023 and 2022, depreciation expense related to the property, plant and equipment was $225,000 and $376,000, respectively.

 

NOTE 10. CAPITALIZED SOFTWARE DEVELOPMENT COSTS

 

Capitalized software development costs at March 31, 2023 and December 31, 2022 consisted of the following:

 

   March 31, 2023   December 31, 2022 
Capitalized internal-use software development costs  $1,415,000   $1,413,000 
Acquired third-party software license for internal-use   159,000    159,000 
Total gross capitalized software for internal-use   1,574,000    1,572,000 
Accumulated amortization   (860,000)   (793,000)
Capitalized internal-use software in process   1,563,000    1,333,000 
Total finite lived intangible assets net  $2,277,000   $2,112,000 

 

The Company recorded amortization expense of $67,000 and $43,000 related to capitalized software development costs during the three months ended March 31, 2023 and 2022, respectively.

 

NOTE 11. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets at March 31, 2023 consisted of the following:

 

  

Amortization

Periods

(in years)

   Cost    Accumulated Amortization   Impairment   Net Carrying Value 
Patents   7-19    $981,000   $(183,000)  $        -   $798,000 
Licenses   20    100,000    (25,000)   -    75,000 
Trademarks   Indefinite    267,000    -    -    267,000 
Acquired NDAs   10-15    154,193,000    (3,533,000)   -    150,660,000 
Customer relationships   3-15    596,000    (475,000)   -    121,000 
Trade name   5    75,000    (5,000)   -    70,000 
Non-competition clause   3-4    50,000    (50,000)   -    - 
State pharmacy licenses   25    8,000    (7,000)   -    1,000 
        $156,270,000   $(4,278,000)  $-   $151,992,000 

 

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Amortization expense for intangible assets for the three months ended March 31, 2023 and 2022 was as follows:

 

   2023   2022 
   For the 
   Three Months Ended 
   March 31, 
   2023   2022 
Patents  $22,000   $22,000 
Licenses   2,000    8,000 
Acquired NDAs   2,170,000    341,000 
Customer relationships   13,000    33,000 
Amortization of intangible assets  $2,207,000   $404,000 

 

Estimated future amortization expense for the Company’s intangible assets at March 31, 2023 is as follows:

 

      
Remainder of 2023  $8,777,000 
2024   11,673,000 
2025   11,652,000 
2026   11,652,000 
2027   11,652,000 
Thereafter   96,319,000 
Intangible assets  $151,725,000 

 

NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at March 31, 2023 and December 31, 2022 consisted of the following:

 

   2023   2022 
   March 31,   December 31, 
   2023   2022 
Accounts payable  $6,237,000   $6,440,000 
Accrued insurance premium   237,000    575,000 
Accrued IHEEZO milestone payment (see Note 16)   5,000,000    5,000,000 
Accrued RPC transition payments (see Note 4)   307,000    453,000 
Accrued litigation settlements   49,000    49,000 
Accrued exit fee for note payable (see Note 13)   2,275,000    - 
Accrued interest   1,964,000    1,254,000 
Total accounts payable and accrued expenses  $16,069,000   $13,771,000 
Less: Current portion   (13,794,000)   (13,771,000)
Non-current total accrued expenses  $2,275,000   $- 

 

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 4.13% per annum and requires eight monthly payments of $114,000.

 

NOTE 13. DEBT

 

Oaktree Loan

 

In March 2023, the Company entered into a Credit and Guaranty Agreement (the “Oaktree Loan”) with Oaktree Fund Administration, LLC, as administrative agent for the lenders (together, “Oaktree”), providing for a senior secured term loan facility to the Company with a principal amount of up to $100,000,000. Upon entering into the Oaktree Loan, the Company drew a principal amount of $65,000,000 (“Tranche A”) from the Oaktree Loan and used the net proceeds to repay all amounts owed by the Company pursuant to the Loan and Security Agreement the Company previously entered into with B. Riley Commercial Capital, LLC on December 14, 2022 (the “B. Riley Loan”) – see subheading B. Riley Loan and Security Agreement – Paid in Full within this footnote. The additional principal loan amount of up to $35,000,000 available under the Oaktree Loan (“Tranche B”) will be made available to the Company upon the commercialization of TRIESENCE (see Note 4). If Tranche B is not drawn by the Company on or before March 27, 2024, the additional principal loan amount available under the Oaktree Loan is reduced to $30,000,000.

 

The Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries. The Oaktree Loan which has a maturity date of January 19, 2026, and bears interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 6.5% per annum (totaling 11.398% at March 31, 2023). Interest is payable quarterly in arrears on March 31, June 30, September 30, and December 31, of each year. From the proceeds, the Company paid fees and offering expenses of $915,000, and the Oaktree Loan was issued at an original issue discount of $2,500,000. The Oaktree Loan also requires the Company to pay an exit fee equal to 3.50% of the aggregate principal amount owed upon any payment or prepayment in full or in part, on or after the maturity date, and accordingly, the Company accrued $2,275,000 related to the exit fee. The original issue discount, fees and expenses (including the exit fee) totaling $5,690,000 have been recorded as a debt discount, which is being amortized over the term of the Oaktree Loan using the effective interest rate method. The Oaktree Loan requires interest-only payments through the maturity date.

 

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The Oaktree Loan contains customary guarantees and covenants, including financial covenants related to minimum liquidity and minimum net revenues. As of the end of the fiscal quarter ending December 31, 2024, if the Company’s Total Leverage Ratio (as defined in the Oaktree Loan) is greater than or equal to five times, but less than seven times, the Company will be required to issue to Oaktree warrants to purchase 375,000 shares of the Company’s common stock, and if the Total Leverage Ratio is greater than or equal to seven times, the Company will be required to issue to Oaktree warrants to purchase an additional 375,000 shares of the Company’s common stock (equaling 750,000 shares in aggregate). If the Total Leverage Ratio as of the end of the fiscal quarter ending December 31, 2024 is less than five times, no warrants will be issued to Oaktree. Based on current projections, the Company does not expect to issue any warrants related to the Oaktree Loan.

 

Interest expense related to the Oaktree Loan totaled $95,000 for the three months ended March 31, 2023, and included the amortization of debt issuance costs and discount of $12,000.

 

HROWM - 11.875% Senior Notes Due 2027

 

In December 2022 and in January 2023, the Company closed an offering of $35,000,000 and $5,250,000, respectively, aggregate principal amount of 11.875% senior notes due in December 2027 (the “2027 Notes”). The 2027 Notes were sold to investors at a par value of $25.00 per 2027 Note, and the offering resulted in net proceeds to the Company of approximately $36,699,000 after deducting underwriting discounts and commissions and expenses of $3,551,000.

 

The 2027 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The 2027 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 2027 Notes bear interest at the rate of 11.875% per annum. Interest on the 2027 Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on January 31, 2023. The 2027 Notes will mature on December 31, 2027.

 

At any time prior to December 31, 2024, the Company may, at its option, redeem the 2027 Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2027 Notes for cash in whole or in part at any time at its option (i) on or after December 31, 2024 and prior to December 31, 2025, at a price equal to $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after December 31, 2025 and prior to December 31, 2026, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after December 31, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, the Company is required to redeem the 2027 Notes, for cash, in whole but not in part, at the price of $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, upon occurrence of certain events including (i) the occurrence of a Material Change, as defined in the Second Supplemental Indenture. The 2027 Notes trade on the Nasdaq Stock Market LLC under the symbol “HROWM”.

 

Interest expense related to the 2027 Notes totaled $1,395,000 for the three months ended March 31, 2023, and included amortization of debt issuance costs and debt discount of $200,000.

 

Our Chief Executive Officer, Mark L. Baum, Chief Financial Officer, Andrew R. Boll along with directors Dr. Richard Lindstrom and R. Lawrence Van Horn, in aggregate, own $950,000 in principal amount of the 2027 Notes.

 

HROWL - 8.625% Senior Notes Due 2026

 

In April 2021, the Company closed an offering of $50,000,000 aggregate principal amount of 8.625% senior notes due April 2026, and in May 2021 issued an additional $5,000,000 of such notes pursuant to the full exercise of the underwriters’ option to purchase additional notes (collectively, the “April Notes”). The April Notes were sold to investors at a par value of $25.00 per April Note and the offering resulted in net proceeds to the Company of approximately $51,909,000 after deducting underwriting discounts and commissions and expenses of $3,091,000. In June 2021, in a further issuance of the April Notes, the Company sold an additional $20,000,000 aggregate principal amount of such notes (the “June Notes,” and together with the April Notes, the “2026 Notes”), at a price of $25.75 per June Note, with interest of $278,000 on the June Notes being accrued from April 20, 2021 as of the date of issuance. The June offering resulted in net proceeds to the Company of approximately $19,164,000 after deducting underwriting discounts and commissions and expenses of $1,158,000 and a premium on note issuance of $322,000. The June Notes are treated as a single series with the April Notes under the indenture governing the April Notes, dated as of April 20, 2021, and have the same terms as the April Notes (other than the initial offering price and issue date). The 2026 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. The 2026 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 2026 Notes bear interest at a rate of 8.625% per annum. Interest on the 2026 Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The 2026 Notes will mature on April 30, 2026. The issuance costs were recorded as a debt discount and are being amortized as interest expense, net of the amortization of the premium on note issuance, over the term of the 2026 Notes using the effective interest rate method.

 

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Prior to February 1, 2026, the Company may, at its option, redeem the 2026 Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2026 Notes for cash in whole or in part at any time at our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. The 2026 Notes trade on the Nasdaq Stock Market LLC under the symbol “HROWL”.

 

Interest expense related to the 2026 Notes totaled $1,810,000 and $1,810,000 for the three months ended March 31, 2023 and 2022, respectively, and included amortization of debt issuance costs and debt discount of $193,000 and $193,000, respectively.


B. Riley Loan and Security Agreement – Paid in Full

 

On December 14, 2022 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “BR Loan”) with B. Riley Commercial Capital, LLC, as Administrative Agent for the Lenders. The BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate of 10.875% per annum.

 

The BR Loan was secured by an intellectual property security agreement entered into in connection with the BR Loan, and by all assets of the Company and its material subsidiaries. The outstanding balance of the BR Loan was due in full on the maturity date. The BR Loan provided for voluntary prepayment subject to no prepayment fee if no loan had been funded or the prepayment or repayment occured (other than as a result of acceleration of the BR Loan) on or prior to the date that was 90 days following the Effective Date and up to 3.00% of the amount of the loan based on other payment dates.

 

In January 2023, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation of the Fab 5 Acquisition. In March 2023, the Company repaid all amounts owed under the BR Loan, including accrued interest of $1,200,000, from proceeds received in connection with the Oaktree Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan.

 

Interest expense related to the BR Loan totaled $1,565,000 for the three months ended March 31, 2023, and included amortization of debt issuance costs and debt discount of $356,000. The Company recorded $5,465,000 related to the write off of the remaining unamortized debt issuance costs and debt discount in connection with the early extinguishment of debt associated with the BR Loan.

 

At March 31, 2023, future minimum payments under the Company’s debt are as follows:

 

   Amount 
Remainder of 2023  $14,145,000 
2024   18,695,000 
2025   18,695,000 
2026   147,325,000 
2027   45,030,000 
Total minimum payments   243,890,000 
Less: amount representing interest payments   (63,640,000)
Notes payable, gross   180,250,000 
Less: unamortized discount, net of premium   (11,400,000)
Notes payable, net of unamortized discount  $168,850,000 

 

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NOTE 14. 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.

 

  An operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 and will expire in March 2025.
     
  An operating lease for 35,326 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2026, with an option to extend the term for two additional five-year periods. This includes an amendment, which was made effective July 2020, that extended the term of the original lease and added 1,400 of additional square footage to the lease, and another amendment entered into in May 2021 that extended the term of the lease to July 2027 and added 8,900 square feet of space.
     
  An operating lease for 5,500 square feet of office space in Nashville, Tennessee that expires November 30, 2024, with an option to extend the term for two additional five-year periods.
     
  An operating lease for 11,552 square feet of lab and office space in Nashville, Tennessee which commenced in June 2022 and will expire in June 2027.

 

At March 31, 2023, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.61% and 10.72 years, respectively.

 

During the three months ended March 31, 2023 and 2022, cash paid for amounts included for the operating lease liabilities was $306,000 and $166,000, respectively. During the three months ended March 31, 2023 and 2022, the Company recorded operating lease expense of $309,000 and $238,000, respectively, which is included in selling, general and administrative expenses.

 

Future lease payments under operating leases as of March 31, 2023 were as follows:

 

   Operating Leases 
Remainder of 2023  $925,000 
2024   1,262,000 
2025   1,093,000 
2026   1,114,000 
2027   972,000 
Thereafter   5,829,000 
Total minimum lease payments   11,195,000 
Less: amount representing interest payments   (3,314,000)
 Total operating lease liabilities   7,881,000 
Less: current portion, operating lease liabilities   (744,000)
Operating lease liabilities, net of current portion  $7,137,000 

 

NOTE 15. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Common Stock

 

During the three months ended March 31, 2023, the Company issued 33,063 shares of common stock and received proceeds of $148,000 upon the exercise of options to purchase 33,063 shares of common stock with exercise prices ranging from $3.50 to $7.60 per share.

 

During the three months ended March 31, 2023, 23,000 RSUs granted in January 2020 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and in January 2023, the Company issued 13,398 shares of common stock to Mr. Boll, net of 9,602 shares of common stock withheld for payroll tax withholdings totaling $142,000.

 

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During the three months ended March 31, 2023, 88,000 RSUs granted in January 2020 to Mark L. Baum, the Company’s Chief Executive Officer, vested, and in January 2023, the Company issued 52,821 shares of common stock to Mr. Baum, net of 35,179 shares of common stock withheld for payroll tax withholdings totaling $519,000.

 

During the three months ended March 31, 2023, the Company issued 55,558 shares of common stock to Mr. Boll, upon the cashless exercise of options to purchase 90,000 shares at an exercise price of $6.00 per share. The Company withheld from Mr. Boll 25,521 shares as consideration for the cashless exercise and an additional 8,921 shares for payroll tax obligations totaling $189,000.

 

During the three months ended March 31, 2023, 16,405 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 March 31, 2023, the 2017 Plan provides for the issuance of a maximum of 6,000,000 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 2,145,767 shares available for future issuances under the 2017 Plan at March 31, 2023.

 

Stock Options

 

A summary of stock option activity under the Plans for the three months ended March 31, 2023 is as follows:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life   Aggregate Intrinsic Value 
Options outstanding – January 1, 2022   3,027,701   $5.90           
Options granted   28,500   $17.40           
Options exercised   (123,063)  $5.54           
Options cancelled/forfeited   (42,112)  $5.61           
Options outstanding – March 31, 2023   2,891,026   $6.03    4.30   $43,730,000 
Options exercisable   2,589,182   $5.73    3.77   $39,941,000 
Options vested and expected to vest   2,848,713   $5.99    4.23   $43,219,000 

 

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 March 31, 2023, based on the closing price of the Company’s common stock of $21.16 on that date.

 

During the three months ended March 31, 2023, 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 ten years. Vesting terms for options granted to employees during the three months ended March 31, 2023 included the following vesting schedule: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. 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.

 

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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 10%. 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.

 

The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees:

 

   2023 
Weighted-average fair value of options granted  $10.58 
Expected terms (in years)   5.50-6.11 
Expected volatility   69-70%
Risk-free interest rate   3.64-3.76%
Dividend yield   - 

 

The following table summarizes information about stock options outstanding and exercisable at March 31, 2023:

 

   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

 
$1.47 - $1.73   298,112    4.71   $1.72    298,112   $1.72 
$2.23 - $2.60   309,068    3.61   $2.26    309,068   $2.26 
$3.95   310,000    2.93   $3.95    310,000   $3.95 
$4.08 - $6.30   409,850    5.66   $5.99    398,194   $6.00 
$6.75 - $7.30   402,000    7.43   $7.18    279,500   $7.29 
$7.37 - $7.79   260,323    5.13   $7.53    166,760   $7.50 
$7.87   600,000    2.33   $7.87    600,000   $7.87 
$7.89 - $12.38   274,173    2.57   $9.12    227,548   $8.84 
$15.17   7,500    9.84   $15.17    -   $- 
$18.35   20,000    9.82   $18.35    -   $- 
$1.47 - $18.35   2,891,026    4.30   $6.03    2,589,182   $5.73 

 

As of March 31, 2023, there was approximately $1,441,000 of total unrecognized compensation expense related to unvested stock options granted under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of 3.0 years. The stock-based compensation for all stock options was $341,000 and $272,000 during the three months ended March 31, 2023 and 2022, respectively.

 

The intrinsic value of options exercised during the three months ended March 31, 2023 was $1,819,000.

 

Restricted Stock Units/Performance Stock Units

 

RSU awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria. The grant date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the grant date, is expensed over the vesting period of the RSUs.

 

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A summary of the Company’s RSU activity (including performance stock units) and related information for the three months ended March 31, 2023 is as follows:

 

   Number of RSUs   Weighted Average Grant Date Fair Value 
RSUs unvested - January 1, 2023   2,061,719   $6.88 
RSUs granted   -   $- 
RSUs vested   (127,405)  $7.34 
RSUs cancelled/forfeited   (75,000)  $5.83 
RSUs unvested - March 31, 2023   1,859,314   $6.82 

 

As of March 31, 2023, the total unrecognized compensation expense related to unvested RSUs was approximately $2,476,000, which is expected to be recognized over a weighted-average period of 0.4 years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three months ended March 31, 2023 and 2022 was $1,292,000 and $1,744,000, respectively.

 

Stock-Based Compensation Summary

 

The Company recorded stock-based compensation related to equity instruments granted to employees, directors and consultants as follows:

 

   2023   2022 
   For the 
   Three Months Ended March 31, 
   2023   2022 
Employees - selling, general and administrative  $1,328,000   $1,676,000 
Employees - R&D   163,000    186,000 
Directors - selling, general and administrative   125,000    100,000 
Consultants - R&D   17,000    54,000 
Total  $1,633,000   $2,016,000 

 

NOTE 16. COMMITMENTS AND CONTINGENCIES

 

Legal

 

General and Other

 

In the ordinary course of business, the Company is involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. The Company describes legal proceedings and other matters that are/were significant or that it believes could become significant in this footnote.

 

The Company records accruals for loss contingencies to the extent that it concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of a liability that has been accrued previously.

 

The Company’s legal proceedings involve various aspects of its business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. Typically, a number of the matters pending against the Company are at early stages of the legal process, which in complex proceedings of the sort the Company face often extend for several years. While it is not possible to accurately predict or determine the eventual outcomes of matters that have not concluded, an adverse determination in one or more of matter (whether discussed in this footnote or not) currently pending may have a material adverse effect on the Company’s condensed consolidated results of operations, financial position or cash flows.

 

Ocular Science, Inc. et. al

 

In July 2021, ImprimisRx, LLC, a subsidiary of the Company, filed a lawsuit against Ocular Science, Inc. and OSRX, Inc. (together, “OSRX”) in the U.S. District Court for the Southern District of California, asserting claims for copyright infringement, trademark infringement, unfair competition and false advertising (Lanham Act). ImprimisRx is seeking damages from OSRX. Since July 2021, the complaint has been amended and OSRX added counterclaims alleging ImprimisRx, LLC is violating the Lanham Act with false advertising. Both parties are seeking damages from the other. Discovery is currently ongoing and trial is set to take place in the fourth quarter of 2023.

 

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Product and Professional Liability

 

Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written.

 

Indemnities

 

In addition to the indemnification provisions contained in the Company’s governing documents, the Company generally enters into separate indemnification agreements with each of the Company’s directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. The Company indemnifies Oaktree for certain claims and losses associated with the Oaktree Loan. The Company also indemnifies its lessors in connection with its facility leases for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying condensed consolidated balance sheets.

 

Klarity License Agreement – Related Party

 

The Company entered into a license agreement in April 2017, as amended in April 2018 (the “Klarity License Agreement”), with Richard L. Lindstrom, M.D., a member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic solution Klarity designed to protect and rehabilitate the ocular surface (the “Klarity Product”).

 

Under the terms of the Klarity License Agreement, the Company is required to make royalty payments to Dr. Lindstrom ranging from 3% to 6% of net sales, dependent upon the final formulation of the Klarity Product sold. In addition, the Company is required to make certain milestone payments to Dr. Lindstrom including: (i) an initial payment of $50,000 upon execution of the Klarity License Agreement, (ii) a second payment of $50,000 following the first $50,000 in net sales of the Klarity Product; and (iii) a final payment of $50,000 following the first $100,000 in net sales of the Klarity Product. All of the above referenced milestone payments were payable at the Company’s election in cash or shares of the Company’s restricted common stock. Payments totaling $71,000 and $30,000 were made during the three months ended March 31, 2023 and 2022, respectively. Royalty expenses were $75,000 and $71,000 during the three months ended March 31, 2023 and 2022, respectively, and were included in accounts payable to Dr. Lindstrom.

 

Injectable Asset Purchase Agreement – Related Party

 

In December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a member of its Board of Directors. Pursuant to the terms of the Lindstrom APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic injectable product (the “Lindstrom Product”).

 

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Under the terms of the Lindstrom APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 3% of net sales, dependent upon the final formulation and patent protection of the Lindstrom Product sold. In addition, the Company is required to make certain milestone payments to Dr. Lindstrom including an initial payment of $33,000 upon execution of the Lindstrom APA. Dr. Lindstrom was paid $9,000 and $8,000 in cash during the three months ended March 31, 2023 and 2022, respectively. The Company incurred $8,000 and $7,000 for royalty expenses related to the Lindstrom APA during the three months ended March 31, 2023 and 2022, respectively.

 

Other Asset Purchase, License and Related Agreements

 

The Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related parties (the “Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission agreements. In general, these agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for the acquired intellectual property and that the Company will use commercially reasonable efforts to research, develop and commercialize a product based on the acquired intellectual property. In addition, the Company has acquired a right of first refusal on additional intellectual property and drug development opportunities presented by these Inventors.

 

In consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based on the completion of certain milestones, generally consisting of: (i) a payment payable within 30 days after the issuance of the first patent in the United States arising from the acquired intellectual property (if any); (ii) a payment payable within 30 days after the Company files the first investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”) for the first product arising from the acquired intellectual property (if any); (iii) for certain of the Inventors, a payment payable within 30 days after the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual property (if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or licensing of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement, the Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a study where data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired intellectual property, the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign the acquired technology to the Inventors. During the three months ended March 31, 2023 and 2022, $293,000 and $213,000 were incurred under these agreements as royalty expenses, respectively.

 

Sintetica Agreement

 

In July 2021, the Company entered into a License and Supply Agreement (the “Sintetica Agreement”) with Sintetica S.A. (“Sintetica”), pursuant to which Sintetica granted the Company the exclusive license and marketing rights to its patented ophthalmic drug candidate (“IHEEZO”) in the U.S. and Canada.

 

Pursuant to the Sintetica Agreement, the Company agreed to pay Sintetica a per unit transfer price to supply IHEEZO, along with a per unit royalty for units sold. The Company is required to pay Sintetica up to $18,000,000 in one-time milestone payments including a $5,000,000 payment (the “Upfront Payment”) due within 30 days of signing the Sintetica Agreement and the balance of payments due upon achievement of certain regulatory and commercial milestones. Under the terms of the Sintetica Agreement, Sintetica was responsible for regulatory filings for IHEEZO in the U.S. As of March 31, 2023 and December 31, 2022, the Company had accrued $5,000,000 under the Sintetica Agreement related to a milestone payment, which was capitalized as an intangible asset.

 

Subject to certain limitations, the Sintetica Agreement has a ten-year term, and allows for a ten-year extension if certain sales thresholds are met.

 

Wakamoto Agreement

 

In August 2021, the Company entered into a License Agreement and a Basic Sale and Purchase Agreement (together, the “Wakamoto Agreements”) with Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”), pursuant to which Wakamoto granted the Company the exclusive license and marketing rights to its ophthalmic drug candidate (“MAQ-100”) in the U.S. and Canada.

 

Pursuant to the Wakamoto Agreements, Wakamoto will supply MAQ-100 to the Company, and the Company will pay Wakamoto a per unit transfer price to supply MAQ-100. In addition, the Company is required to pay Wakamoto various one-time milestone payments totaling up to $2,000,000 upon the achievement of certain regulatory milestones and up to $6,200,000 upon the achievement of certain commercial milestones. Under the terms of the Agreements, the Company will be responsible for regulatory filings and fees for MAQ-100 in the U.S. and Canada. Through March 31, 2023, no amounts have been paid or accrued under the Wakamoto agreement.

 

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Subject to certain limitations, the term of the Agreements is for five years from the date of the FDA’s market approval of MAQ-100 and allows for a five-year extension if certain unit sales thresholds are met.

 

Eyepoint Commercial Alliance Agreement - Terminated

 

In August 2020, the Company, through its wholly owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint pays the Company a fee calculated based on the quarterly sales of DEXYCU in excess of predefined volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu Agreement, the Company agreed to use commercially reasonable efforts to promote and market DEXYCU in the U.S.

 

Following the preliminary Hospital Outpatient Prospective Payment System (HOPPS) rule proposed by the Centers for Medicare & Medicaid Services (CMS) in July of 2022, which did not contain an extension of the pass-through payment period for Dexycu beyond December 31, 2022, the Company entered into a Mutual Termination Agreement (the “Termination Agreement”) with Eyepoint on October 7, 2022, pursuant to which Eyepoint and the Company agreed (a) that the Company will continue to support the sale of Dexycu through the fourth quarter of 2022, consistent with the Company’s level of effort during the January through June 2022 period, (b) to decrease the required minimum quarterly sales levels based on Dexycu unit demand for the fourth quarter of 2022, and (c) to terminate the Dexycu Agreement, along with ancillary letter agreements, effective January 1, 2023.

 

During the three months ended March 31, 2022, the Company recorded $1,320,000 in commission revenues related to the Dexycu Agreement.

 

Sales and Marketing Agreements

 

The Company has entered various sales and marketing agreements with certain organizations to provide exclusive and non-exclusive sales and marketing representation services to Harrow in select geographies in the U.S. in connection with the Company’s ophthalmic pharmaceutical compounded formulations or related products.

 

Under the terms of the sales and marketing agreements, the Company is generally required to make commission payments equal to 10% to 14% of net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to make periodic milestone payments to certain organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms. Commission expenses of $130,000 and $1,047,000 were incurred under these agreements during the three months ended March 31, 2023 and 2022, respectively.

 

NOTE 17. SEGMENTS AND CONCENTRATIONS

 

The Company operates its business on the basis of a single reportable segment, which is the business of discovery, development, and commercialization of innovative ophthalmic therapies. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the Company as a single operating segment.

 

The Company has two products that each comprised more than 10% of total revenues during the three months ended March 31, 2023 and 2022. These products collectively accounted for 36% and 32% of revenues during the three months ended March 31, 2023 and 2022, respectively.

 

The Company sells its products and compounded formulations to a large number of customers. There were no customers who comprised more than 10% of the Company’s total product sales during the three months ended March 31, 2023 and 2022.

 

The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 90% and 74% of active pharmaceutical ingredient purchases during the three months ended March 31, 2023 and 2022, respectively.

 

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NOTE 18. SUBSEQUENT EVENTS

 

The Company has performed an evaluation of events occurring subsequent to March 31, 2023 through the filing date of this Quarterly Report on Form 10-Q. Based on its evaluation, no events other than those described below need to be disclosed.

 

In April 2023, the Company issued 62,367 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase 180,000 shares at an exercise price of $8.99 per share. The Company withheld from Mr. Baum 77,167 shares as consideration for the cashless exercise and an additional 40,466 shares for payroll tax obligations totaling $849,000.

 

In April 2023, the Company issued 3,260 shares of common stock upon the exercise of options to purchase 3,260 shares of common stock at exercise prices ranging from $1.70 to $7.52 per share.

 

In April 2023, the Company granted 1,567,913 performance stock units to members of its senior management including Mark L. Baum, Chief Executive Officer, Andrew R. Boll, Chief Financial Officer, and John P. Saharek, Chief Commercial Officer, which are subject to the satisfaction of certain market-based and continued service conditions (the “2023 PSUs”). The vesting of the 2023 PSUs require (i) a minimum of a two-year service period, and (ii) during a five-year term, the achievement and maintenance of Company common stock price targets ranging between $25 to $50, broken out into four separate tranches as described further in the table below.

 

Tranche   Number of Shares   Target Share Price
Tranche 1   223,988   $25
Tranche 2   335,981   $35
Tranche 3   447,975   $45
Tranche 4   559,969   $50

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). Our condensed consolidated financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion and analysis is presented, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and subsequent reports, which discuss our business in greater detail. As used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow,” “we,” “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries, consisting of ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, and Harrow Eye, LLC. In this discussion and analysis, we refer to our consolidated subsidiaries ImprimisRx, LLC, ImprimisRx NJ, LLC and Imprimis NJOF, LLC collectively as “ImprimisRx.”

 

In addition to historical information, the following discussion contains forward-looking statements regarding future events and our future performance. In some cases, you can identify forward-looking statements by terminology such as “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or the negative of these terms or other comparable terminology. All statements made in this Quarterly Report other than statements of historical fact are forward-looking statements. These forward-looking statements involve risks and uncertainties and reflect only our current views, expectations and assumptions with respect to future events and our future performance. If risks or uncertainties materialize or assumptions prove incorrect, actual results or events could differ materially from those expressed or implied by such forward-looking statements. Risks that could cause actual results to differ from those expressed or implied by the forward-looking statements we make include, among others, risks related to: liquidity or results of operations; our ability to successfully implement our business plan, develop and commercialize our products, product candidates and proprietary formulations in a timely manner or at all, identify and acquire additional products, manage our pharmacy operations, service our debt, obtain financing necessary to operate our business, recruit and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions and any other acquisitions and collaborative arrangements we may pursue; competition from pharmaceutical companies, outsourcing facilities and pharmacies; general economic and business conditions, including inflation and supply chain challenges; regulatory and legal risks and uncertainties related to our pharmacy operations and the pharmacy and pharmaceutical business in general; physician interest in and market acceptance of our current and any future formulations and compounding pharmacies generally; and the other risks and uncertainties described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and in our other filings with the SEC. You should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation to revise or publicly update any forward-looking statement for any reason.

 

Overview

 

We are an ophthalmic-focused pharmaceutical company. Our business specializes in the development, production, sale, and distribution of innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries and deconsolidated companies. We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals and innovative compounded prescription medicines that are accessible and affordable. We own the U.S. commercial rights to ten branded ophthalmic pharmaceutical products, including IHEEZO™, IOPIDINE® (both approved concentrations), MAXITROL® eye drops, MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®. We own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name. In addition, we also have non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from our financial statements. We also own royalty rights in certain drug candidates being developed by Surface and Melt.

 

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Factors Affecting Our Performance

 

We believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital Resources” below.

 

Recent Developments

 

The following describes certain developments in 2023 to date that are important to understand our financial condition and results of operations. See the notes to our condensed consolidated financial statements included in this Quarterly Report for additional information about each of these developments.

 

IHEEZO Reimbursement and Launch

 

In February 2023, we announced that the Centers for Medicare & Medicaid Services (“CMS”) had issued a permanent, product specific J-code for IHEEZO (J2403) which became effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023, which physicians can use for reimbursement purposes of that product. New drugs approved by the FDA that are used in surgeries performed in hospital outpatient departments or ambulatory surgical centers may receive a transitional pass-through reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant” cost criterion. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B, which consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee that a manufacturer may charge for the drug. Under current regulations of CMS, pass-through status applies for a period of three years; which is measured from the date Medicare makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into the cataract bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement for IHEEZO was awarded by CMS and made effective in April 2023.

 

At the beginning of April 2023, we initiated a regional and targeted launch of IHEEZO (chloroprocaine HCL ophthalmic gel) 3%. In early May 2023, our full commercial launch of IHEEZO occurred, with the product being highlighted by our commercial team at the ASCRS (American Society of Cataract and Refractive Surgery) Annual Meeting during May 5 – 8, 2023.

 

Acquisition of Ilevro, Nevanac, Vigamox, Maxidex and Triesence