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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 September 30, 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, 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 November 13, 2023, there were 35,117,746 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 

 

 

HARROW, 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 33
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
     
Item 4. Controls and Procedures 41
     
Part II OTHER INFORMATION 42
     
Item 1. Legal Proceedings 42
     
Item 1A. Risk Factors 42
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 43
     
Item 6. Exhibits 43
     
  Signatures 44

 

2

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HARROW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2023   2022 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $65,610,000   $96,270,000 
Investment in Eton Pharmaceuticals   8,265,000    5,589,000 
Accounts receivable, net   18,468,000    6,249,000 
Inventories   8,924,000    6,541,000 
Prepaid expenses and other current assets   9,011,000    3,611,000 
Total current assets   110,278,000    118,260,000 
Property, plant and equipment, net   3,629,000    3,486,000 
Capitalized software costs, net   2,151,000    2,112,000 
Deferred financing costs       1,950,000 
Operating lease right-of-use assets, net   6,972,000    7,513,000 
Intangible assets, net   162,703,000    23,725,000 
Goodwill   332,000    332,000 
TOTAL ASSETS  $286,065,000   $157,378,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $12,772,000   $13,771,000 
Accrued payroll and related liabilities   5,319,000    4,025,000 
Deferred revenue and customer deposits   153,000    113,000 
Current portion of operating lease obligations   785,000    723,000 
Total current liabilities   19,029,000    18,632,000 
Operating lease obligations, net of current portion   6,735,000    7,332,000 
Accrued expenses, net of current portion   2,713,000     
Notes payable, net of unamortized debt discount   182,186,000    104,174,000 
TOTAL LIABILITIES   210,663,000    130,138,000 
Commitments and contingencies   -    - 
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 50,000,000 shares authorized, 35,117,621 and 29,901,530 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively   35,000    30,000 
Additional paid-in capital   200,478,000    137,058,000 
Accumulated deficit   (124,756,000)   (109,493,000)
TOTAL HARROW, INC. STOCKHOLDERS’ EQUITY   75,757,000    27,595,000 
Noncontrolling interests   (355,000)   (355,000)
TOTAL STOCKHOLDERS’ EQUITY   75,402,000    27,240,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $286,065,000   $157,378,000 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3

 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Revenues:                
Product sales, net  $31,809,000   $21,575,000   $81,804,000   $63,433,000 
Other revenues   2,456,000    1,248,000    12,034,000    4,833,000 
Total revenues   34,265,000    22,823,000    93,838,000    68,266,000 
Cost of sales   (10,067,000)   (6,721,000)   (28,338,000)   (19,218,000)
Gross profit   24,198,000    16,102,000    65,500,000    49,048,000 
Operating expenses:                    
Selling, general and administrative   21,033,000    15,421,000    56,878,000    43,004,000 
Research and development   1,421,000    775,000    3,316,000    2,347,000 
Total operating expenses   22,454,000    16,196,000    60,194,000    45,351,000 
Income (loss) from operations   1,744,000    (94,000)   5,306,000    3,697,000 
Other (expense) income:                    
Interest expense, net   (5,749,000)   (1,800,000)   (16,200,000)   (5,386,000)
Equity in losses of unconsolidated entities   -    (3,504,000)   -    (9,036,000)
Investment gain (loss) from Eton Pharmaceuticals   1,348,000    (1,031,000)   2,676,000    (4,341,000)
Loss on extinguishment of debt   -    -    (5,465,000)   - 
Other expense, net   (195,000)   -    (344,000)   - 
Total other expense, net   (4,596,000)   (6,335,000)   (19,333,000)   (18,763,000)
Loss before income taxes   (2,852,000)   (6,429,000)   (14,027,000)   (15,066,000)
Income tax expense   (1,539,000)   (35,000)   (1,236,000)   (75,000)
Net loss attributable to Harrow, Inc.  $(4,391,000)  $(6,464,000)  $(15,263,000)  $(15,141,000)
Basic and diluted net loss per share of common stock  $(0.13)  $(0.24)  $(0.48)  $(0.55)
Weighted average number of shares of common stock outstanding, basic and diluted   34,255,197    27,349,642    31,689,947    27,293,756 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4

 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the periods ended September 30, 2023 and 2022

 

                   Total   Total     
   Common Stock   Additional       Harrow, 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 consultant stock-based options   4,054    -    -    -    -    -    - 
Exercise of employee stock-based options   92,261    -    7,000    -    7,000    -    7,000 
Vesting of RSUs   185,000    1,000    (1,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   (109,771)   (1,000)   (875,000)   -    (876,000)   -    (876,000)
Stock-based compensation expense   -    -    5,941,000    -    5,941,000    -    5,941,000 
Net loss   -    -    -    (15,141,000)   (15,141,000)   -    (15,141,000)
Balance at September 30, 2022   27,074,307   $27,000   $111,738,000   $(110,548,000)  $1,217,000   $(355,000)  $862,000 
                                    
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:                                   
Public offering, net of offering costs   3,887,324    4,000    64,516,000    -    64,520,000    -    64,520,000 
Exercise of consultant stock-based options   10,000    -    85,000    -    85,000    -    85,000 
Exercise of employee stock-based options   219,246    -    270,000    -    270,000    -    270,000 
Vesting of RSUs and PSUs   1,810,673    2,000    (2,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   (711,152)   (1,000)   (12,970,000)   -    (12,971,000)   -    (12,971,000)
Stock-based compensation expense   -    -    11,521,000    -    11,521,000    -    11,521,000 
Net loss   -    -    -    (15,263,000)   (15,263,000)   -    (15,263,000)
Balance at September 30, 2023   35,117,621   $35,000   $200,478,000   $(124,756,000)  $75,757,000   $(355,000)  $75,402,000 

 

                   Total   Total     
   Common Stock   Additional       Harrow, Inc.   Noncontrolling   Total 
       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at June 30, 2022   27,069,978   $27,000   $109,806,000   $(104,084,000)  $      5,749,000   $(355,000)  $       5,394,000 
                                    
Issuance of common stock in connection with:                                   
Exercise of consultant stock-based options   4,054    -    -    -    -    -    - 
Exercise of employee stock-based options   275    -    -    -    -    -    - 
Stock-based compensation expense   -    -    1,932,000    -    1,932,000    -    1,932,000 
Net loss   -    -    -    (6,464,000)   (6,464,000)   -    (6,464,000)
Balance at September 30, 2022   27,074,307   $27,000   $111,738,000   $(110,548,000)  $1,217,000   $(355,000)  $862,000 
                                    
Balance at June 30, 2023   30,276,938   $30,000   $142,742,000   $(120,365,000)  $22,407,000   $(355,000)  $22,052,000 
                                    
Issuance of common stock in connection with:                                   
Public offering, net of offering costs   3,887,324    4,000    64,516,000    -    64,520,000    -    64,520,000 
Exercise of employee stock-based options   2,430    -    18,000    -    18,000    -    18,000 
Vesting of PSUs   1,567,913    2,000    (2,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   (616,984)   (1,000)   (11,272,000)   -    (11,273,000)   -    (11,273,000)
Stock-based compensation expense   -    -    4,476,000    -    4,476,000    -    4,476,000 
Net loss   -    -    -    (4,391,000)   (4,391,000)   -    (4,391,000)
Balance at September 30, 2023   35,117,621   $35,000   $200,478,000   $(124,756,000)  $75,757,000   $(355,000)  $75,402,000 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5

 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   2023   2022 
   For the Nine Months Ended 
   September 30, 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(15,263,000)  $(15,141,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and amortization of property, plant and equipment, and software development costs   1,095,000    1,090,000 
Amortization of intangible assets   7,634,000    1,200,000 
Amortization of operating lease right-of-use assets   541,000    435,000 
Provision for credit losses   68,000    36,000 
Amortization of debt issuance costs and debt discount   2,568,000    585,000 
Investment (gain) loss from investment in Eton   (2,676,000)   4,341,000 
Equity in losses of unconsolidated entities   -    9,036,000 
Loss on extinguishment of debt   5,465,000    - 
Loss on disposal of intangible assets   22,000    - 
Stock-based compensation   11,521,000    5,941,000 
Changes in assets and liabilities:          
Accounts receivable   (12,287,000)   (2,309,000)
Inventories   (2,383,000)   (1,066,000)
Prepaid expenses and other current assets   (4,079,000)   (716,000)
Accounts payable and accrued expenses   1,584,000    1,534,000 
Accrued payroll and related liabilities   1,294,000    352,000 
Deferred revenue and customer deposits   40,000    99,000 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES   (4,856,000)   5,417,000 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Investment in patent and trademark assets   -    (19,000)
Purchase of product NDAs, marketing authorizations and patents   (151,084,000)   - 
Purchases of property, plant and equipment   (1,266,000)   (1,719,000)
NET CASH USED IN INVESTING ACTIVITIES   (152,350,000)   (1,738,000)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from 11.875% notes payable, net of costs   4,961,000    - 
Proceeds from Oaktree Loan, net of costs   73,552,000    - 
Payment of payroll taxes upon vesting of PSUs, RSUs and exercise of stock options   (12,971,000)   (876,000)
Proceeds from exercise of stock options   355,000    7,000 
Proceeds from B. Riley senior secured note, net of costs   55,879,000    - 
Repayment of B. Riley senior secured note   (59,750,000)   - 
Proceeds from public offering of common stock, net of costs   64,520,000    - 
Payments on finance lease obligations   -    (18,000)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   126,546,000    (887,000)
NET CHANGE IN CASH AND CASH EQUIVALENTS   (30,660,000)   2,792,000 
CASH AND CASH EQUIVALENTS, beginning of period   96,270,000    42,167,000 
CASH AND CASH EQUIVALENTS, end of period   $65,610,000   $44,959,000 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $-   $75,000 
Cash paid for interest  $12,279,000   $4,851,000 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Reclassification of deferred financing costs  $1,950,000   $- 
Accrual of exit fee related to Oaktree Loan  $2,713,000   $- 
Insurance premium financed  $1,321,000   $906,000 
Purchase of intangible asset included in accounts payable and accrued expenses  $-   $5,000,000 
Purchase of property, plant and equipment included in accounts payable and accrued expenses  $11,000   $86,000 
Right-of-use assets obtained in exchange for new operating lease obligations  $-   $2,188,000 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

6

 

 


HARROW, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2023 and 2022

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Company and Background

 

Harrow, Inc. (together with its consolidated subsidiaries, unless the context indicates or otherwise requires, the “Company” or “Harrow”) is a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. The Company owns commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in the U.S. that are marketed under its Harrow name. The Company also owns and operates ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses.

 

The Company owns non-controlling equity interests 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.

 

Effective September 29, 2023, the Company changed its corporate name from Harrow Health, Inc. to Harrow, Inc. pursuant to a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware.

 

Basis of Presentation

 

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 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 notes 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. The Company consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) VIEs for which the Company is deemed to be the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following represents an update for the three and nine months ended September 30, 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.

 

7

 

 

Credit Losses

 

The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables. Management considers historical collection rates, the current financial status of the Company’s 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, management 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.

 

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 management determined that risk profile of the Company’s customers is consistent based on the type and industry in which they operate, mainly in the pharmaceuticals 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 pharmaceuticals 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 September 30, 2023 was $18,468,000, net of $108,000 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 September 30, 2023:

 

Balance at January 1, 2023  $73,000 
Change in expected credit losses   68,000 
Write-offs, net of recoveries   (33,000)
Balance at September 30, 2023  $108,000 

 

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 Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

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. 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.

 

8

 

 

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 to the acquiring entity or 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 clearly evident and 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 for substantially the full term of the assets or liabilities.
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 September 30, 2023 and December 31, 2022, the Company measured its investment in Eton Pharmaceuticals, Inc. (“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 September 30, 2023 and December 31, 2022, the fair market value of the Company’s investment in Eton was $8,265,000 and $5,589,000, respectively.

 

The Company’s 2026 Notes (as defined in Note 13) are carried at face value, including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes (as described in Note 13) are carried at face value less unamortized debt issuance costs, and the Oaktree Loan (as defined in Note 13) is carried at face value less the original issue discount and unamortized debt issuance costs on the condensed consolidated balance sheets and the Company 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 Oaktree Loan is classified as a Level 2 instrument and its fair value is determined through an income approach that considers collateral coverage, yield calibration, yield analysis and any adjustments to implied yield associated with the Company’s fundamental measures.

 

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

 

   September 30, 2023   December 31, 2022 
   Carrying Value   Fair Value   Carrying Value   Fair Value 
2026 Notes  $73,020,000   $71,760,000   $72,436,000   $71,550,000 
2027 Notes  $37,234,000   $41,297,000   $31,738,000   $35,112,000 
Oaktree Loan  $71,932,000   $75,973,000   $-   $- 

 

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 lease liabilities. The carrying amount of these financial instruments, except for operating 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 value of the operating lease liabilities approximate their respective fair values.

 

9

 

 

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 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”), performance stock units (“PSUs”), and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs, unvested PSUs and warrants were 4,588,982 and 5,622,997 at September 30, 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 shares underlying vested RSUs at September 30, 2023 and 2022 was 244,352 and 303,454, respectively.

 

The following table shows the computation of basic net loss per share of common stock for the three and nine months ended September 30, 2023 and 2022:

   2023   2022   2023   2022 
   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2023   2022   2023   2022 
                 
Numerator – net loss  $(4,391,000)  $(6,464,000)  $(15,263,000)  $(15,141,000)
Denominator – weighted average number of shares outstanding, basic and diluted   34,255,197    27,349,642    31,689,947    27,293,756 
Net loss per share, basic and diluted  $(0.13)  $(0.24)  $(0.48)  $(0.55)

 

Income Taxes

 

The Company’s effective tax rate was (8.81)% and (0.50)% for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 differs from the U.S. federal statutory tax rate of 21% due to state taxes, permanent book-tax differences related to Internal Revenue Code of 1986, as amended (“IRC”), Section 162(m) excess officer compensation limitation and share-based compensation and the change in valuation allowance.

 

The Company’s effective tax rate was (53.96)% and (0.54)% for the three months ended September 30, 2023, and 2022, respectively. The Company’s effective tax rate for the three months ended September 30, 2023, and 2022 differs from the U.S. federal statutory tax rate of 21% due to state taxes, permanent book-tax differences related to IRC Section 162(m) excess officer compensation limitation and share-based compensation and change in valuation allowance.

 

As of September 30, 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 September 30, 2023, the Company owned 1,982,000 shares of Eton common stock (representing less than 10% of the equity interests of Eton as of such date). At September 30, 2023, the fair market value of Eton’s common stock was $4.17 per share. In accordance with ASC 321, Investments — Equity Securities, the Company recorded unrealized holding gains (losses) from its Eton common stock position of $1,348,000 and $2,676,000 during the three and nine months ended September 30, 2023, respectively, and $(1,031,000) and $(4,341,000) during the same periods in 2022, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of September 30, 2023, the fair market value of the Company’s investment in Eton was $8,265,000.

 

10

 

 

Investment in Melt Pharmaceuticals, Inc. – Related Party

 

As of September 30, 2023, the Company owns 3,500,000 shares of common stock of Melt (representing approximately 36% of the equity interests of Melt as of such date). 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 September 30, 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.

 

The following table summarizes the Company’s investments in Melt as of September 30, 2023:

 

   Cost   Share of Equity Method   Paid-in-Kind   In-substance Capital  

Net

Carrying

 
   Basis   Losses   Interest   Contributions   Value 
Common stock  $5,810,000   $(5,810,000)  $-   $    $-
Note receivable   13,500,000    (13,500,000)   4,265,000    (4,265,000)   - 
   $19,310,000   $(19,310,000)  $4,265,000   $(4,265,000)  $    - 

 

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

 

Investment in Surface Ophthalmics, Inc. – Related Party

 

As of September 30, 2023, the Company owned 3,500,000 common shares of Surface (representing approximately 20% of the equity interests of Surface as of such date) 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 condensed 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 and no other requirements to advance funds to Surface.

 

The following table summarizes the Company’s investment in Surface as of September 30, 2023:

 

SCHEDULE OF INVESTMENT

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

 

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

 

11

 

 

Recently Adopted Accounting Pronouncements

 

In September 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, investment portfolio, 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 consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of September 30, 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.

 

Accounting Guidance Issued but Not Adopted at September 30, 2023

 

In August 2023, FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) and requires joint ventures to initially measure all contributions received upon formation at fair value. The new guidance does not impact accounting by the venturers. The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. Joint ventures formed prior to the effective date may elect to apply the new guidance retrospectively back to their original formation date. We will apply the guidance in ASU 2023-05 prospectively to any future arrangements meeting the definition of a joint venture.

 

NOTE 3. REVENUES

 

The Company accounts for contracts with customers in accordance with ASC 606, Revenue from Contracts with Customers. The Company has three primary streams of revenue: (1) revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission agreement with a third party, and (3) revenue recognized from intellectual property licenses and asset purchase agreements.

 

Product Revenues

 

The Company sells prescription medications directly through its pharmacy, outsourcing facility and 3PL partner. Revenue from the Company’s pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other discounts paid back to the client, (ii) the price paid to the Company by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the following:

 

1. Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled.
   
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. For shipping and handling activities under ASC 606, 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.

 

12

 

 

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 Sales and Profits

 

The Company has entered into agreements whereby it purchased the exclusive commercial rights to assets associated with certain ophthalmic products from other pharmaceutical companies (the “Sellers”). During a temporary, transition period, the Sellers continue 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 Sellers 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 Sellers invoice 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 sales and profit transferred. The estimated Chargebacks are recorded as a reduction in revenues from transfer of acquired product sales and profits in the Company’s condensed consolidated statements of operations, and recorded as a reduction to accounts receivable in the condensed consolidated balance sheets, at the time the revenue is recognized.

 

Intellectual Property License Revenues

 

The Company currently holds five intellectual property licenses and related agreements pursuant to which the Company has agreed to license or sell to a customer with the right to access the Company’s intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point in time that the performance obligation is met.

 

Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are 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.

 

13

 

 

Revenue disaggregated by revenue source for the three and nine months ended September 30, 2023 and 2022 consisted of the following:

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Product sales, net  $31,809,000   $21,575,000   $81,804,000   $63,433,000 
Commission revenues   -    1,044,000    -    3,576,000 
Transfer of acquired product sales/profit   2,456,000    204,000    12,034,000    1,257,000 
Total revenues  $34,265,000   $22,823,000   $93,838,000   $68,266,000 

 

Deferred revenue and customer deposits at September 30, 2023 and December 31, 2022 were $153,000 and $113,000, respectively. All deferred revenue and customer deposit amounts at December 31, 2022 were recognized as revenue during the nine months ended September 30, 2023.

 

NOTE 4. RECENT PRODUCT ACQUISITIONS, LICENSES AND DIVESTITURES

 

Acquisition of VEVYETM U.S. and Canadian Commercial Rights

 

In July 2023, the Company acquired commercial rights of VEVYE (cyclosporine ophthalmic solution) 0.1%, an ophthalmic drug product, for the U.S. and Canadian markets (the “VEVYE Acquisition”). The Company acquired the commercial rights to VEVYE by entering into a license agreement with Novaliq GmbH (“Novaliq”). As consideration, the Company made initial payments to Novaliq totaling $8,000,000 and will pay low double-digit royalties on net sales of VEVYE along with potential commercial milestone payments.

 

The Company accounted for the VEVYE Acquisition as an acquisition of assets and capitalized the initial payments of $8,000,000 and costs of $70,000 associated with the transaction.

 

Acquisition of Certain U.S. and Canadian Commercial Rights to Santen and Eyevance Products

 

In July 2023, the Company entered into an Asset Purchase Agreement with Eyevance Pharmaceuticals, LLC and a License Agreement with Santen S.A.S. (collectively, the “Santen Agreements”), each a subsidiary of Santen Pharmaceuticals Co., Ltd. (collectively, “Santen”). Pursuant to the Santen Agreements, the Company acquired the exclusive commercial rights to assets associated with the following ophthalmic products (collectively, the “Santen Products”): FLAREX, NATACYN, ZERVIATE, VERKAZIA and FRESHKOTE in the US, and VERKAZIA and CATIONORM PLUS in Canada.

 

The transactions pursuant to the Santen Agreements are referred to in these notes as the “Santen Products Acquisition.”

 

Under the terms of the Santen Agreements, the Company made an initial one-time payment of $8,000,000. In addition, the Santen Agreements provide for various one-time contingent milestone payments associated with certain manufacturing-related events as well as low-double digit royalty payments on net sales of VERKAZIA and high-single digit royalty payments on net sales of CATIONORM PLUS. Under the Santen Agreements, the Company also assumed certain obligations associated with other third parties that require mid-single digit royalties on sales of FRESHKOTE and ZERVIATE. Immediately following the closing and subject to certain conditions, prior to the transfer of the Santen Products new drug applications (“NDAs”) and other marketing authorizations to the Company, Santen continued to sell the Santen Products on the Company’s behalf and transfer the net profit from the sale of the Santen Products to the Company. See Note 18 regarding the transfer of certain marketing authorizations of the Santen Products.

 

The assets acquired in the Santen Products Acquisition are identifiable intangible asset groups in similar asset classes and all directly related to the product NDAs and marketing authorizations acquired. The developed technology is within one major intangible asset class. No workforce/employees were included in the Santen Products Acquisition and the Company is required to utilize its own business inputs/processes to transfer and commercialize the Santen Products.

 

The Company incurred $139,000 in costs associated with the Santen Products Acquisition, and including such acquisition costs, the payment of $8,000,000 at closing and a near term milestone of $500,000. The total purchase price of the Santen Products Acquisition was $8,639,000 and was accounted for as an asset acquisition. At the time of the Santen Products Acquisition and as of September 30, 2023, the remaining contingent consideration due was not considered probable and reasonably estimable and therefore, no amount was included in the purchase price of the Santen Products Acquisition. At the time the contingent consideration due 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.

 

14

 

 

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 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.

 

The Company incurred $558,000 in costs associated with the Fab 5 Acquisition and including such acquisition costs and the payment of $130,000,000 at closing. The total purchase price of the Fab 5 Acquisition was $130,558,000 and was accounted for as an asset acquisition. At the time of the Fab 5 Acquisition and as of September 30, 2023, the contingent consideration due related to the commercial availability of TRIESENCE was not considered probable and reasonably estimable and, 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.

 

Divestiture of Non-Ophthalmic Assets

 

In October 2022, wholly-owned subsidiaries of the Company (collectively, “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 nine 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 estimable.

 

In connection with the RPC Agreement, Imprimis entered into a separate transition services agreement (the “RPC TSA”) with the Buyer related to providing ongoing services associated with the RPC Assets, such as procuring and dispensing prescription orders, providing accounting and billing services and collecting accounts receivable. Imprimis provided transition services to the Buyer for approximately nine months following the effective date of the RPC Agreement and expects to wind down transition services in subsequent periods. 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 sheet as of September 30, 2023 includes accounts receivable of $59,000 for cash to be collected on behalf of the Buyer for sales of RPC Assets sold through September 30, 2023.

 

There were no amount due from the Buyer for reimbursement of services performed under the RPC TSA as of September 30, 2023. The receivable amount of $59,000 was additionally recorded within accrued expenses on the condensed consolidated balance sheet as of September 30, 2023, and represents a payable to the Buyer. The Company recorded a loss from the RPC TSA and disposition and sale of certain related assets and unusable inventory of $159,000 and $330,000 during the three and nine months ended September 30, 2023, respectively, which is presented in other expense, net on the condensed consolidated statements of operations.

 

15

 

 

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 (the “Melt APA”) with Melt. Pursuant to the terms of the Melt APA, 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 APA, 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 entered into a Management Service Agreement with Melt (the “Melt MSA”), whereby the Company provided to Melt certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt was required to pay the Company a monthly amount of $10,000. The Melt MSA was terminated effective July 1, 2023. During the three and nine months ended September 30, 2023 and 2022, the Company recorded $0 and $89,000, and $30,000 and $100,000, respectively, 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 September 30, 2023 and December 31, 2022, the Company was due $228,000 and $139,000, respectively, from Melt for reimbursable expenses and amounts due under the Melt MSA. The Company made a cash advance to Melt of $500,000 and Melt repaid the $500,000 cash advance during the nine months ended September 30, 2023.

 

During the nine months ended September 30, 2023, Melt sold approximately 2,000,000 shares of its Series B Preferred Stock and raised over $17,000,000 in gross proceeds from third party investors.

 

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 consisted of five members, including Mr. Baum, who is the only representative of the Company on Melt’s board of directors.

 

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

 

   2023   2022 
  

For the Nine Months Ended

September 30,

 
   2023   2022 
Revenues, net  $-   $- 
Loss from operations  $(3,663,000)  $(9,064,000)
Net loss  $(5,407,000)  $(10,562,000)

 

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

 

   2023   2022 
   At September 30,   At December 31, 
   2023   2022 
Current assets  $13,011,000   $655,000 
Non-current assets   31,000    107,000 
Total assets  $13,042,000   $762,000 
           
Total liabilities  $20,733,000   $19,056,000 
Total preferred stock and stockholders’ deficit   (7,691,000)   (18,294,000)
Total liabilities and stockholders’ deficit  $13,042,000   $762,000 

 

16

 

 

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 September 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. The Melt Loan Agreement is currently in default due to non-payment on September 1, 2023. The Company and Melt are involved in ongoing discussions to resolve the default.

 

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 September 30, 2023 and December 31, 2022, aggregate principal and accrued interest payable to the Company pursuant to the Melt Loan Agreement amounted to $17,765,000 and $15,984,000, respectively. In accordance with ASC 323, Investments – Equity Method and Joint Ventures, the carrying amount of the note receivable has been reduced by the Company’s allocated share of Melt’s losses based on its ownership of Melt’s total indebtedness (see Note 2).

 

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 (together, the “Surface License Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface is required to make mid-single digit royalty payments to the Company on net sales of the Surface Products while any patent rights remain outstanding.

 

As of September 30, 2023, the Company owned 3,500,000 shares of Surface common stock. Perry J. Sternberg, a director of the Company, is a director of Surface. 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 on March 31, 2023.

 

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

 

   2023   2022 
   For the Nine Months Ended
September 30,
 
   2023   2022 
Revenues, net  $-   $- 
Loss from operations  $(4,723,000)  $(5,338,000)
Net loss  $(4,463,000)  $(5,338,000)

 

17

 

 

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

 

   At September 30,   At December 31, 
   2023   2022 
Current assets  $11,140,000   $15,350,000 
Non-current assets   780,000    652,000 
Total assets  $11,920,000   $16,002,000 
           
Total liabilities  $1,392,000   $1,586,000 
Total preferred stock and stockholders’ equity   10,528,000    14,416,000 
Total liabilities and stockholders’ equity  $11,920,000   $16,002,000 

 

NOTE 7. INVENTORIES

 

Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of September 30, 2023 and December 31, 2022 was as follows:

 

   September 30, 2023   December 31, 2022 
Raw materials  $5,289,000   $3,707,000 
Work in progress   113,000    38,000 
Finished goods   3,522,000    2,796,000 
Total inventories  $8,924,000   $6,541,000 

 

NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at September 30, 2023 and December 31, 2022 consisted of the following:

 

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS

   September 30, 2023   December 31, 2022 
Prepaid insurance  $1,817,000   $858,000 
Prepaid computer software licenses and related expenses   768,000    1,165,000 
Due from Melt Pharmaceuticals   228,000    139,000 
Other prepaid expenses   1,766,000    937,000 
Prepaid Prescription Drug User fees   4,314,000    394,000 
Deposits and other current assets   118,000    118,000 
Total prepaid expenses and other current assets  $9,011,000   $3,611,000 

 

NOTE 9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at September 30, 2023 and December 31, 2022 consisted of the following:

 

   September 30, 2023   December 31, 2022 
Property, plant and equipment, net:          
Computer hardware  $1,228,000   $979,000 
Furniture and equipment   915,000    860,000 
Lab and pharmacy equipment   4,636,000    4,259,000 
Leasehold improvements   6,654,000    6,449,000 
Property, plant and equipment, gross   13,433,000    12,547,000 
Accumulated depreciation   (9,804,000)   (9,061,000)
Property, plant and equipment, net  $3,629,000   $3,486,000 

 

For the three and nine months ended September 30, 2023, depreciation related to the property, plant and equipment was $290,000 and $743,000, respectively, compared to $171,000 and $928,000 during the same periods in 2022, respectively.

 

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NOTE 10. CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs at September 30, 2023 and December 31, 2022 consisted of the following:

 

   September 30, 2023   December 31, 2022 
Capitalized software costs          
Capitalized internal-use software development costs  $2,746,000   $1,413,000 
Acquired third-party software license for internal-use   159,000    159,000 
Total gross capitalized software for internal-use   2,905,000    1,572,000 
Accumulated amortization   (1,145,000)   (793,000)
Capitalized internal-use software in process   391,000    1,333,000 
Total finite lived intangible assets net  $2,151,000   $2,112,000 

 

The Company recorded amortization expense of $115,000 and $352,000 related to capitalized software costs during the three and nine months ended September 30, 2023, respectively, and $76,000 and $162,000 during the same periods in 2022, respectively.

 

NOTE 11. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets at September 30, 2023 consisted of the following:

 

  

Amortization

Periods

(in years)

   Cost  

Accumulated

Amortization

   Disposal  

Net

Carrying Value

 
Patents   17-19   $980,000   $(226,000)  $-   $754,000 
Licenses   20    100,000    (30,000)   (22,000)   48,000 
Trademarks   Indefinite    268,000    -    -    268,000 
Acquired NDAs   4-15    170,353,000    (8,889,000)   -    161,464,000 
Customer relationships   3-15    596,000    (498,000)   -    98,000 
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 
        $172,430,000   $(9,705,000)  $(22,000)  $162,703,000 

 

Amortization expense for intangible assets for the three and nine months ended September 30, 2023 and 2022 was as follows:

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Patents  $22,000   $22,000   $65,000   $65,000 
Licenses   2,000    2,000    7,000    13,000 
Acquired NDAs   2,551,000    341,000    7,526,000    1,023,000 
Customer relationships   9,000    33,000    36,000    99,000 
Amortization of intangible assets  $2,584,000   $398,000   $7,634,000   $1,200,000 

 

Estimated future amortization expense for the Company’s intangible assets at September 30, 2023 was as follows:

 

      
Remainder of 2023  $2,458,000 
2024   13,792,000 
2025   13,792,000 
2026   13,792,000 
2027   13,501,000 
Thereafter   105,100,000 
Intangible assets  $162,435,000 

 

There were no changes to the carrying value of the Company’s goodwill during the three and nine months ended September 30, 2023 and 2022.

 

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NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at September 30, 2023 and December 31, 2022 consisted of the following:

 

   September 30,   December 31, 
   2023   2022 
Accounts payable  $6,025,000   $6,440,000 
Income tax payable   

1,221,000

    - 
Accrued insurance premium   1,321,000    575,000 
Accrued IHEEZO milestone payments   -    5,000,000 
Accrued litigation settlements   49,000    49,000 
Accrued RPC transition payments (see Note 4)   59,000    453,000 
Accrued managed care commercial rebates   2,118,000    - 
Accrued interest (see Note 13)   1,979,000    1,254,000 
Accrued exit fee for note payable (see Note 13)   2,713,000    - 
Total accounts payable and accrued expenses  $15,485,000   $13,771,000 
Less: current portion   (12,772,000)   (13,771,000)
Non-current total accrued expenses  $2,713,000   $- 

 

The Company financed all insurance policies for the policy terms of August 17, 2022 through August 16, 2023 and August 17, 2023 through August 16, 2024. The financing agreements have an interest rate of 4.13% and 7.48% per annum, respectively, and require eight monthly payments of $114,000 and nine monthly payments of $169,000, respectively.

 

NOTE 13. DEBT

 

Oaktree Loan Due 2026

 

In March 2023, the Company entered into a Credit Agreement and Guaranty, (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 Note 13. 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. If Tranche B is not drawn by the Company on or before March 27, 2024, the amount available under Tranche B will be decreased 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 has a maturity date of January 19, 2026 and carries an interest rate equal to the Secured Overnight Financing Rate plus 6.5% per annum (totaling 11.90% at September 30, 2023). From proceeds, the Company paid fees, and offering expenses, and the Oaktree Loan was issued at an original issue discount of $3,415,000, in aggregate. The Oaktree Loan also carries an exit fee equal to 3.5% of the aggregate principal amount owed and the Company accrued $2,275,000 related to the exit fee. The original issue discount, fees and expenses (including the exit fee) are being amortized over the term of the Oaktree Loan using the effective interest rate method. The Oaktree Loan requires quarterly interest-only payments with all of the unpaid principal, interest and fees due on the maturity date, January 19, 2026.

 

20

 

 

In July 2023, the Company entered into the First Amendment to Credit Agreement and Guaranty and Consent (the “Oaktree Amendment”) to the Oaktree Loan. Under the Oaktree Amendment, the overall credit facility size was increased from $100,000,000 to $112,500,000, and the Company made other changes related to the Santen Products Acquisition (see Note 4). Upon satisfaction of certain conditions to funding, the Company drew down a principal amount of $12,500,000 (the “Loan Increase”) to fund the initial one-time payment associated with the Santen Products Acquisition and for other working capital and general corporate purposes. No other material changes to the Oaktree Loan were made pursuant to the Oaktree Amendment. Following entry into the Oaktree Amendment and the funding of the Loan Increase upon closing of the Santen Products Acquisition, the Company has drawn down a total principal loan amount of $77,500,000 under the Oaktree Loan and an additional principal loan amount of up to $35,000,000 remains available to the Company upon the commercialization of TRIESENCE. The Oaktree Loan exit fee was increased from $2,275,000 to $2,713,000 pursuant to the Oaktree Amendment. The exit fee is equal to 3.50% of the amended aggregate principal amount owed and the Company accrued an additional $438,000 in the three months ended September 30, 2023 related to the exit fee.

 

The Oaktree Loan contains customary guarantees and covenants, including financial covenants related to minimum liquidity and minimum net revenues. At September 30, 2023, the Company was in compliance with these covenants. 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 $2,995,000 and $5,660,000 for the three and nine months ended September 30, 2023, respectively, and included the amortization of debt issuance costs and discount of $567,000 and $1,093,000, respectively.

 

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 other offering 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 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 $1,375,000 and $4,141,000 for the three and nine months ended September 30, 2023, respectively, and included amortization of debt issuance costs and debt discount of $180,000 and $556,000, respectively.

 

Our Chief Executive Officer, Mark L. Baum, Chief Financial Officer, Andrew R. Boll, and former directors R. Lawrence Van Horn and Dr. Richard Lindstrom, in the aggregate, purchased $950,000 in principal amount of the 2027 Notes at the time of their offering.

 

21

 

 

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 other offering expenses of $3,091,000. In September 2021, in a further issuance of the April Notes, the Company sold an additional $20,000,000 aggregate principal amount of such notes (the “September Notes,” and together with the April Notes, the “2026 Notes”), at a price of $25.75 per September Note, with interest of $278,000 on the September Notes being accrued from April 20, 2021, the date of issuance of the April Notes. The September offering resulted in net proceeds to the Company of approximately $19,164,000 after deducting underwriting discounts and commissions and other offering expenses of $1,158,000 and a premium on note issuance of $322,000. The September 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.

 

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 $1,814,000 and $5,436,000 and $1,814,000 and $5,436,000 for the three and nine months ended September 30, 2023 and 2022, respectively, and included amortization of debt issuance costs and discounts of $197,000 and $585,000 and $197,000 and $585,000 for three and nine months ended September 30, 2023 and 2022, 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 (the “Maturity Date”), at an interest rate of 10.875% per annum.

 

22

 

 

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 amount had been funded or the prepayment or repayment occurred (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 BR 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 (see Note 4). In March 2023, the Company repaid all amounts owed under the BR Loan, in connection with the Oaktree Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan pursuant to a side letter agreement among the parties.

 

Interest expense related to the BR Loan totaled $1,565,000 for the nine months ended September 30, 2023, and included amortization of debt issuance costs and debt discount of $356,000. The Company recorded a loss of $5,465,000 related to the early extinguishment of debt associated with the BR Loan.

 

A summary of the Company’s debt at September 30, 2023 and December 31, 2022 is described as follows:

 

 SCHEDULE OF LONG TERM DEBT

   September 30,   December 31, 
   2023   2022 
8.625% Senior Notes, due April 2026  $75,000,000   $75,000,000 
11.875% Senior Notes, due December 2027   40,250,000    35,000,000 
Oaktree Loan, due January 2026   77,500,000    - 
Notes payable gross   192,750,000    110,000,000 
Less: Unamortized debt issuance costs   (10,564,000)   (5,826,000)
Notes payable net  $182,186,000   $104,174,000 

 

For the three and nine months ended September 30, 2023, the total effective interest rate of the Company’s debt was 10.78%, and 10.91%, respectively, and 8.88% and 8.96% for the same periods in the prior year, respectively.

 

At September 30, 2023, future minimum payments under the Company’s debt were as follows:

  

   Amount 
Remainder of 2023  $5,347,000 
2024   21,159,000 
2025   20,550,000 
2026   159,894,000 
2027   45,030,000 
Total minimum payments   251,980,000 
Less: amount representing interest payments   (59,230,000)
Notes payable, gross principal amount due   192,750,000 
Less: unamortized debt issuance costs, net of premium   (10,564,000)
Notes payable, net of unamortized debt issuance costs  $182,186,000 

 

NOTE 14. LEASES

 

The Company leases office and laboratory space under non-cancelable operating leases listed belo