UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ___________ to _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name on exchange on which registered | ||
| The Stock Market LLC | ||||
| The
| ||||
| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 13, 2023, there were 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 | $ | $ | ||||||
| Investment in Eton Pharmaceuticals | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Capitalized software costs, net | ||||||||
| Deferred financing costs | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Current portion of operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Accrued expenses, net of current portion | ||||||||
| Notes payable, net of unamortized debt discount | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL HARROW, INC. STOCKHOLDERS’ EQUITY | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 3 |
HARROW, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity in losses of unconsolidated entities | ( | ) | ( | ) | ||||||||||||
| Investment gain (loss) from Eton Pharmaceuticals | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| Other expense, net | ( | ) | ( | ) | ||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Harrow, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net loss per share of common stock | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of shares of common stock outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
HARROW, 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 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | | ||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs | ( | ) | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Public offering, net of offering costs | ||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs and PSUs | ( | ) | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | | ||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Public offering, net of offering costs | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of PSUs | ( | ) | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
HARROW, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| 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 | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Provision for credit losses | ||||||||
| Amortization of debt issuance costs and debt discount | ||||||||
| Investment (gain) loss from investment in Eton | ( | ) | ||||||
| Equity in losses of unconsolidated entities | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on disposal of intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ||||||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Investment in patent and trademark assets | ( | ) | ||||||
| Purchase of product NDAs, marketing authorizations and patents | ( | ) | ||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from 11.875% notes payable, net of costs | ||||||||
| Proceeds from Oaktree Loan, net of costs | ||||||||
| Payment of payroll taxes upon vesting of PSUs, RSUs and exercise of stock options | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from B. Riley senior secured note, net of costs | ||||||||
| Repayment of B. Riley senior secured note | ( | ) | ||||||
| Proceeds from public offering of common stock, net of costs | ||||||||
| Payments on finance lease obligations | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Reclassification of deferred financing costs | $ | $ | ||||||
| Accrual of exit fee related to Oaktree Loan | $ | $ | ||||||
| Insurance premium financed | $ | $ | ||||||
| Purchase of intangible asset included in accounts payable and accrued expenses | $ | $ | ||||||
| Purchase of property, plant and equipment included in accounts payable and accrued expenses | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | $ | ||||||
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
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 $
| Balance at January 1, 2023 | $ | |||
| Change in expected credit losses | ||||
| Write-offs, net of recoveries | ( | ) | ||
| Balance at September 30, 2023 | $ |
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 $
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 | $ | $ | $ | $ | ||||||||||||
| 2027 Notes | $ | $ | $ | $ | ||||||||||||
| Oaktree Loan | $ | $ | $ | $ | ||||||||||||
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 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 and 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 and , respectively.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator – net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator – weighted average number of shares outstanding, basic and diluted | ||||||||||||||||
| Net loss per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
Income Taxes
The
Company’s effective tax rate was (
The
Company’s effective tax rate was (
As
of September 30, 2023 and December 31, 2022, there were
Investment in Eton Pharmaceuticals, Inc.
As
of September 30, 2023, the Company owned shares of Eton common stock (representing less than
| 10 |
Investment in Melt Pharmaceuticals, Inc. – Related Party
As
of September 30, 2023, the Company owns shares of common stock of Melt (representing approximately
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 | $ | $ | ( | ) | $ | $ | $ | - | ||||||||||||
| Note receivable | ( | ) | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||
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 common shares of Surface (representing approximately
The following table summarizes the Company’s investment in Surface as of September 30, 2023:
| Cost | Share of Equity | Net Carrying | ||||||||||
| Basis | Method Losses | Value | ||||||||||
| Common stock | $ | $ | ( | ) | $ | |||||||
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:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Commission revenues | ||||||||||||||||
| Transfer of acquired product sales/profit | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Deferred
revenue and customer deposits at September 30, 2023 and December 31, 2022 were $
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)
The
Company accounted for the VEVYE Acquisition as an acquisition of assets and capitalized the initial payments of $
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 $
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 $
| 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 $
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 $
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 $
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 $
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 $
| 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 $
During
the nine months ended September 30, 2023, Melt sold approximately shares of its Series B Preferred Stock and raised over $
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:
For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
The unaudited condensed balance sheet information of Melt is summarized below:
| At September 30, | At December 31, | |||||||
| 2023 | 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Total preferred stock and stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
| 16 |
Melt Note Receivable
On
September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $
Melt
has granted the Company a security interest in substantially all of its personal property, rights and assets, including intellectual
property rights, to secure the payment of all amounts owed under the Melt Loan Agreement. The Melt Loan Agreement contains customary
representations, warranties and covenants, including covenants by Melt limiting additional indebtedness, liens, mergers and acquisitions,
dispositions, investments, distributions, subordinated debt, and transactions with affiliates. The Melt Loan Agreement includes customary
events of default, and upon the occurrence of an event of default (subject to cure periods for certain events of default), all amounts
owed by Melt thereunder may be declared immediately due and payable by the Company, and the interest rate on the loan may be increased
by
In connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug candidates for a period of five years following the effective date of the Melt Loan Agreement.
The
net funds received by Melt excluded $
NOTE 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 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:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| 17 |
The unaudited condensed balance sheet information of Surface is summarized below:
| At September 30, | At December 31, | |||||||
| 2023 | 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Total preferred stock and stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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 | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
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:
| September 30, 2023 | December 31, 2022 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid computer software licenses and related expenses | ||||||||
| Due from Melt Pharmaceuticals | ||||||||
| Other prepaid expenses | ||||||||
| Prepaid Prescription Drug User fees | ||||||||
| Deposits and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
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 | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Lab and pharmacy equipment | ||||||||
| Leasehold improvements | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and nine months ended September 30, 2023, depreciation related to the property, plant and equipment was $
| 18 |
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 | $ | $ | ||||||
| Acquired third-party software license for internal-use | ||||||||
| Total gross capitalized software for internal-use | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Capitalized internal-use software in process | ||||||||
| $ | $ | |||||||
The
Company recorded amortization expense of $
NOTE 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 | $ | $ | ( | ) | $ | $ | ||||||||||||||
| Licenses | ( | ) | ( | ) | ||||||||||||||||
| Trademarks | ||||||||||||||||||||
| Acquired NDAs | ( | ) | ||||||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||||||
| Trade name | ( | ) | ||||||||||||||||||
| Non-competition clause | ( | ) | ||||||||||||||||||
| State pharmacy licenses | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Amortization expense for intangible assets for the three and nine months ended September 30, 2023 and 2022 was as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Patents | $ | $ | $ | $ | ||||||||||||
| Licenses | ||||||||||||||||
| Acquired NDAs | ||||||||||||||||
| Customer relationships | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Estimated future amortization expense for the Company’s intangible assets at September 30, 2023 was as follows:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ |
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.
| 19 |
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 | $ | $ | ||||||
| Income tax payable | ||||||||
| Accrued insurance premium | ||||||||
| Accrued IHEEZO milestone payments | ||||||||
| Accrued litigation settlements | ||||||||
| Accrued RPC transition payments (see Note 4) | ||||||||
| Accrued managed care commercial rebates | ||||||||
| Accrued interest (see Note 13) | ||||||||
| Accrued exit fee for note payable (see Note 13) | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Non-current total accrued expenses | $ | $ | ||||||
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
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 $
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
| 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 $
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
Interest
expense related to the Oaktree Loan totaled $
HROWM - 11.875% Senior Notes Due 2027
In
December 2022 and in January 2023, the Company closed an offering of $
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
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
Interest
expense related to the 2027 Notes totaled $
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 $
| 21 |
HROWL – 8.625% Senior Notes Due 2026
In
April 2021, the Company closed an offering of $
Prior
to February 1, 2026, the Company may, at its option, redeem the 2026 Notes, in whole at any time or in part from time to time, at a
Interest
expense related to the 2026 Notes totaled $
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 $
| 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
In
January 2023, $
Interest
expense related to the BR Loan totaled $
A summary of the Company’s debt at September 30, 2023 and December 31, 2022 is described as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| 8.625% Senior Notes, due April 2026 | $ | $ | ||||||
| 11.875% Senior Notes, due December 2027 | ||||||||
| Oaktree Loan, due January 2026 | ||||||||
| Less: Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and nine months ended September 30, 2023, the total effective interest rate of the Company’s debt was
At September 30, 2023, future minimum payments under the Company’s debt were as follows:
| Amount | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total minimum payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Notes payable, gross principal amount due | ||||
| Less: unamortized debt issuance costs, net of premium | ( | ) | ||
| Notes payable, net of unamortized debt issuance costs | $ | |||
NOTE 14. LEASES
The
Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining
terms between to
| ● | An
operating lease for |
| ● | An
operating lease for |
| 23 |
| ● | An
operating lease for |
| ● | An
operating lease for |
At
September 30, 2023, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases
held by the Company were
During
the three and nine months ended September 30, 2023, cash paid for amounts included for the operating lease liabilities was $
Future lease payments under operating leases as of September 30, 2023 were as follows:
| Operating Leases | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Total operating lease obligations | ||||
| Less: current portion, operating lease obligations | ( | ) | ||
| Operating lease obligations, net of current portion | $ | |||
Common Stock
In
July 2023, the Company closed a public offering of shares of its common stock at an offering price of $ per share (the “Offering”).
The Company sold shares of its common stock in the Offering, resulting in the Company receiving aggregate net proceeds of $
In
July 2023, the Company settled outstanding PSUs as a result of the achievement of the total stockholder returns (“TSR”)
targets set forth in equity incentive awards (the “PSU Agreements”) previously issued to members of the Company’s management
team in 2021 (the “2021 Awards”). The 2021 Awards were separated into four tranches and required that the Company achieve
and maintain certain levels of TSR ranging from
During the nine months ended September 30, 2023, the Company issued shares of its common stock underlying RSUs held by a director that ceased providing services to the Company. The RSUs had previously vested, including RSUs during the nine months ended September 30, 2023, but the issuance and delivery of the shares were deferred until the director ceased providing services to the Company.
| 24 |
During
the nine months ended September 30, 2023, the Company issued shares of common stock and received proceeds of $
During the nine months ended September 30, 2023, the Company issued shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase shares at an exercise price of $ per share. The Company withheld from Mr. Baum shares as consideration for the cashless exercise and an additional shares for payroll tax obligations totaling $.
During the nine months ended September 30, 2023, the Company issued shares of common stock to Andrew R. Boll, the Company’s Chief Financial Officer, upon the cashless exercise of options to purchase shares at an exercise price of $ per share. The Company withheld from Mr. Boll shares as consideration for the cashless exercise and an additional shares for payroll tax obligations totaling $.
During the nine months ended September 30, 2023, upon vesting of RSUs granted in January 2020 to Andrew R. Boll, the Company’s Chief Financial Officer, the Company issued shares of common stock to Mr. Boll, net of shares of common stock withheld for payroll tax withholdings totaling $.
During the nine months ended September 30, 2023, upon vesting of RSUs granted in January 2020 to Mark L. Baum, the Company’s Chief Executive Officer, the Company issued shares of common stock to Mr. Baum, net of shares of common stock withheld for payroll tax withholdings totaling $.
During the nine months ended September 30, 2023, shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares were deferred until the applicable director ceased providing services to the Company.
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 September 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 September 3, 2021 (as amended, the “2017 Plan” and together with the 2007 Plan, the “Plans”). As of September 30, 2023, the 2017 Plan provided for the issuance of a maximum of shares of the Company’s common stock. The purposes of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the IRC of 1986, as amended, non-qualified stock options, restricted stock units, performance stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had shares available for future issuances under the 2017 Plan at September 30, 2023.
Stock Options
| Number of Shares | Weighted Average Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding – January 1, 2023 | $ | |||||||||||||||
| Options granted | $ | |||||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options cancelled/forfeited | ( | ) | $ | |||||||||||||
| Options outstanding – September 30, 2023 | $ | $ | ||||||||||||||
| Options exercisable | $ | $ | ||||||||||||||
| Options vested and expected to vest | $ | $ | ||||||||||||||
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The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on September 30, 2023, based on the closing price of the Company’s common stock of $ on that date.
During the nine months ended September 30, 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. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of %. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant.
| 2023 | 2022 | |||||||
| Weighted-average fair value of options granted | $ | $ | ||||||
| Expected terms (in years) | - | |||||||
| Expected volatility | - | % | - | % | ||||
| Risk-free interest rate | - | % | - | % | ||||
| Dividend yield | ||||||||
| 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 | ||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
As of September 30, 2023, there was approximately $ 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 years. The stock-based compensation for all stock options was $ and $ during the three and nine months ended September 30, 2023, respectively, and $ and $ during the same periods in 2022, respectively.
The intrinsic value of options exercised during the nine months ended September 30, 2023 was $.
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Restricted Stock Units
RSU awards are granted subject to certain vesting requirements and other restrictions, including time-based 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.
During the nine months ended September 30, 2023, the Company’s board of directors were granted an aggregate time-based vesting RSUs with a fair market value of $, which vest in equal quarterly installments over one year.
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| RSUs unvested - January 1, 2023 | $ | |||||||
| RSUs granted | $ | |||||||
| RSUs vested | ( | ) | $ | |||||
| RSUs cancelled/forfeited | ( | ) | $ | |||||
| RSUs unvested - September 30, 2023 | $ | |||||||
As of September 30, 2023, the total unrecognized compensation expense related to unvested RSUs was approximately $, which is expected to be recognized over a weighted-average period of years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three and nine months ended September 30, 2023 was $ and $, respectively, and $ and $ during the same periods in 2022, respectively.
Performance Stock Units
In April 2023, the Company granted an aggregate of PSUs to members of its senior management including Mark Baum, Chief Executive Officer, Andrew Boll, Chief Financial Officer, and John 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 $ to $ per share, separated into four separate tranches as described further in the table below.
| Tranche | Number of Shares | Target Share Price* | ||||||
| Tranche 1 | $ | |||||||
| Tranche 2 | $ | |||||||
| Tranche 3 | $ | |||||||
| Tranche 4 | $ | |||||||
| * |
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The aggregate fair value of the 2023 PSUs was $ using a Monte Carlo Simulation with a five-year life, % volatility and a risk free interest rate of %. This amount is being amortized over a two-year derived service period.
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| PSUs unvested – January 1, 2023 | $ | |||||||
| PSUs granted | $ | |||||||
| PSUs vested | ( | ) | $ | |||||
| PSUs cancelled/forfeited | $ | |||||||
| PSUs unvested – September 30, 2023 | $ | |||||||
As of September 30, 2023, the total unrecognized compensation expense related to unvested PSUs was approximately $, which is expected to be recognized over a weighted-average period of years, based on estimated and actual vesting schedules of the applicable PSUs. The stock-based compensation for PSUs during the three and nine months ended September 30, 2023 was $ and $, respectively, and $ and $ during the same periods in 2022, respectively.
Stock-Based Compensation Summary
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Employees – selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Employees – research and development | ||||||||||||||||
| Directors – selling, general and administrative | ||||||||||||||||
| Consultants – selling, general and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 faces 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 the matters (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.
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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. The Company expects the trial to take place in 2024.
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 former 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”).
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Injectable Asset Purchase Agreement – Related Party
In December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a former 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”).
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: (1) 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); (2) 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); (3) 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 and nine months ended September 30, 2023, $
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 $
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.
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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 $
Subject to certain limitations, the term of the Wakamoto Agreements is for five years from the date of the FDA’s market approval of MAQ-100 and may be extended for a five-year period 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% (“DEXYCU”) 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.
Pursuant to a mutual termination agreement entered into on October 7, 2022, the Dexycu Agreement terminated on January 1, 2023. 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 would 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 September 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 and nine months ended September 30, 2022, the Company recorded $
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Sales and Marketing Agreements
The Company had 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.
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 accounted for more than 10% of total revenues during the three and nine months ended September
30, 2023. The Company had two and three products that each accounted for more than 10% of total revenues during the three and nine
months ended September 30, 2022, respectively. These products collectively accounted for
As
of September 30, 2023 and December 31, 2022, accounts receivable from a single customer accounted for
The
Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for
NOTE 18. SUBSEQUENT EVENTS
The Company has performed an evaluation of events occurring subsequent to September 30, 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
November 2023, the Company issued shares of common stock and received proceeds of $
In October 2023, the Company transferred the NDAs and marketing authorizations for all of the Santen Products in the U.S. The Company expects Santen to transfer the Canadian marketing authorizations for VERKAZIA and CATIONORM PLUS by March 31, 2024.
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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, 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 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. We own commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in the U.S. that are marketed under our Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. In addition, we have non-controlling equity interests 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 unaudited condensed consolidated financial statements included in this Quarterly Report for additional information about each of these developments.
IHEEZO Reimbursement, Launch and Studies
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 U.S. Food and Drug Administration (“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.
We are also working to ensure our continued access to the Medicare market for the ambulatory surgery center (ASC), hospital and outpatient department (HOPD), and in-office use market for IHEEZO. In this regard, we are designing and intend to execute, during 2024, clinical studies to build data sets that could be presented to Centers for Medicare & Medicaid Services (CMS) to extend our temporary pass-through period for IHEEZO in ASCs and HOPDs. We are also meeting with CMS to clarify policy on anesthesia billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. We intend to request that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case) in the physician’s office setting.
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.
Recently we sponsored an in-vivo (in human) study to compare the effects of IHEEZO with povidone-iodine (PVI) compared to a low-viscosity tetracaine ophthalmic solution with PVI. The primary intent of the study is to show that IHEEZO does not act as a “barrier” to PVI, which had otherwise been shown with other ocular anesthetic gels. Findings from the study are positive showing that IHEEZO demonstrated a similar barrier risk to tetracaine (e.g., a non-gel anesthetic).
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Acquisition of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE
In December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) 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 (nepafenac ophthalmic suspension) 0.3%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. |
| ● | NEVANAC (nepafenac ophthalmic suspension) 0.1%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. |
| ● | VIGAMOX (moxifloxacin hydrochloride ophthalmic solution) 0.5%, a fluoroquinolone antibiotic eye drop for the treatment of bacterial conjunctivitis caused by susceptible strains of organisms. |
| ● | MAXIDEX (dexamethasone ophthalmic suspension) 0.1%, a steroid eye drop for steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the globe. |
| ● | TRIESENCE (triamcinolone acetonide injectable suspension) 40 mg/ml, a steroid injection for the treatment of certain ophthalmic diseases and for visualization during vitrectomy. |
We closed the Fab 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000 at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESCENCE. Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions, for a period that lasted approximately nine months, and prior to the transfer of the Fab 5 Products new drug applications (the “NDAs”) to us, Novartis continued to sell the Products on our behalf and transferred the net profit from the sale of the Products to us. Novartis has agreed to supply certain Products to the Company for a period of time after the NDAs are transferred to us and to assist with technology transfer of the Products manufacturing to other third-party manufacturers, if needed.
On April 28, 2023, we transferred the NDAs for ILEVRO, NEVANAC and MAXIDEX. In July 2023, we transferred the NDA for VIGAMOX, and the NDA for TRIESENCE is expected to transfer upon around the timing of its commercial availability.
Oaktree Credit and Guaranty Agreement
On March 27, 2023, we 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 loan to us with a principal amount of up to $100,000,000. Upon entering into the Oaktree Loan, we drew a principal amount of $65,000,000 from the Oaktree Loan and used the net proceeds to repay all amounts owed by us pursuant to the BR Loan (as defined below). No remaining amounts are due under the BR Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan. The additional principal loan amount of up to $35,000,000 available under the Oaktree Loan (the “Tranche B”) will be made available to the Company upon the commercialization of TRIESENCE.
On July 18, 2023, we 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 we made other changes related to the Santen Products Acquisition. Upon satisfaction of certain conditions to funding, we drew down a principal amount of $12,500,000 (the “Loan Increase”) on August 1, 2023 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 provided in the Oaktree Amendment. Following entry into the Oaktree Amendment and the funding of the Loan Increase upon closing of the Santen Products Acquisition, we have drawn down a total principal loan amount of $77,500,000 under the Oaktree Loan and an additional Tranche B loan amount of up to $35,000,000 remains available to us upon the commercialization of TRIESENCE, provided, that if Tranche B is not drawn by the Company on or before March 27, 2024, the amount available under Tranche B will decrease 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. The Oaktree Loan requires interest-only payments through its term (there is no amortization of the principal amount or excess cash flow sweeps during the term of the Oaktree Loan).
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HROWM – Senior Notes Offering
In December 2022, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several underwriters named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% Senior Notes due 2027 (the “2027 Notes”) plus up to an additional $5,250,000 aggregate principal amount of 2027 Notes pursuant to the option to purchase additional 2027 Notes. In January 2023, the underwriters exercised their option to purchase the additional $5,250,000 aggregate principal amount of 2027 Notes.
Acquisition of VEVYETM U.S. and Canadian Commercial Rights
In July 2023, we acquired commercial rights of VEVYE (cyclosporine ophthalmic solution) 0.1%, an ophthalmic drug product, for the U.S. and Canadian markets (the “VEVYE Acquisition”). VEVYE, which is dispensed topically in a unique ten microliter per one drop and is labeled for twice-daily (BID) dosing, is the first and only cyclosporine-based product indicated for the treatment of both signs and symptoms of dry eye disease (DED). VEVYE was approved on May 30, 2023 by the FDA. We acquired the commercial rights to VEVYE by entering into a license agreement with Novaliq GmbH (“Novaliq”). As consideration, we 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.
Acquisition of Certain U.S. and Canadian Commercial Rights to Santen and Eyevance Products
In July 2023, we 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, we acquired the exclusive commercial rights to assets associated with the following ophthalmic products (collectively, the “Santen Products”):
In the U.S.:
| ● | FLAREX® (fluorometholone acetate ophthalmic suspension) 0.1%, a corticosteroid prepared as a sterile topical ophthalmic suspension indicated for use in the treatment of steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the eye. |
| ● | NATACYN® (natamycin ophthalmic suspension) 5%, a sterile, antifungal drug for the treatment of fungal blepharitis, conjunctivitis, and keratitis caused by susceptible organisms, including Fusarium solani keratitis. |
| ● | TOBRADEX® ST (tobramycin and dexamethasone ophthalmic suspension) 0.3%/0.05%, a topical antibiotic and corticosteroid combination for steroid-responsive inflammatory ocular conditions for which a corticosteroid is indicated and where superficial bacterial ocular infection or a risk of bacterial ocular infection exists. |
| ● | ZERVIATE® (cetirizine ophthalmic solution) 0.24%, a histamine-1 (H1) receptor antagonist indicated for treatment of ocular itching associated with allergic conjunctivitis. |
| ● | FRESHKOTE®, a preservative-free formulation for temporary relief of symptoms of dry eye. |
In the U.S. and Canada:
| ● | VERKAZIA® (cyclosporine ophthalmic emulsion) 0.1%, an orphan designated drug that is a calcineurin inhibitor immunosuppressant indicated for the treatment of vernal keratoconjunctivitis. |
In Canada:
| ● | CATIONORM® PLUS, a preservative-free formulation for dry eye or allergy relief. |
The transactions pursuant to the Santen Agreements are referred to in this Quarterly Report as the “Santen Products Acquisition.”
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Under the terms of the Santen Agreements, we made an initial one-time payment of $8,000,000. In addition, the Santen Agreements provide for various one-time 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, we also assumed certain obligations associated with other third parties that require royalties on sales of FRESHKOTE and ZERVIATE. Immediately following the closing and subject to certain conditions, prior to the transfer of the Santen Product NDAs and other marketing authorizations to us, Santen continued to sell the Santen Products on our behalf and transfer the net profit from the sale of the Santen Products to us. In October 2023, we completed the transfer of the U.S. NDAs and rights of the Santen Products, and expect Santen to transfer the Canadian marketing authorizations of VERKAZIA and CATIONORM PLUS by March 31, 2024.
Common Stock Offering
In July 2023, we closed a public offering of shares of our common stock at an offering price of $17.75 per share (the “Offering”). We sold 3,887,324 shares of our common stock in the Offering, resulting in us receiving aggregate net proceeds of $64,520,000, after deducting underwriting discounts and commissions and other offering expenses of $4,480,000.
B. Riley Loan and Security Agreement – Paid
On December 14, 2022, we entered into a Loan and Security Agreement (the “BR Loan”) with B. Riley Commercial Capital, LLC, as administrative agent for the lenders from time to time party thereto. The proceeds of the Loan were used to finance the Fab 5 Acquisition.
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 and by all assets of the Company and its material subsidiaries. In January 2023, the Company drew $59,750,000 of the BR Loan simultaneously with the consummation of the Fab 5 Acquisition, and subsequently paid back the BR Loan in March 2023 at the time of closing the Oaktree Loan. No remaining amounts are due under the BR Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan.
Results of Operations
The following period-to-period comparisons of our financial results for the three and nine months ended September 30, 2023 and 2022 are not necessarily indicative of results for any future period.
Revenues
Our revenues include amounts recorded from sales of proprietary compounded formulations, sales of branded products to wholesalers through a third-party logistics facility, commissions from third parties and revenues received from royalty payments owed to us pursuant to out-license arrangements.
The following presents our revenues for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, | $ | September 30, | $ | |||||||||||||||||||||
| 2023 | 2022 | Variance | 2023 | 2022 | Variance | |||||||||||||||||||
| Product sales, net | $ | 31,809,000 | $ | 21,575,000 | $ | 10,234,000 | $ | 81,804,000 | $ | 63,433,000 | $ | 18,371,000 | ||||||||||||
| Commission revenues | - | 1,044,000 | (1,044,000 | ) | - | 3,576,000 | (3,576,000 | ) | ||||||||||||||||
| Transfer of profits/sales | 2,456,000 | 204,000 | 2,252,000 | 12,034,000 | 1,257,000 | 10,777,000 | ||||||||||||||||||
| Total revenues | $ | 34,265,000 | $ | 22,823,000 | $ | 11,442,000 | $ | 93,838,000 | $ | 68,266,000 | $ | 25,572,000 | ||||||||||||
The increase in revenues between periods was related to an increase in sales of our branded ophthalmology products, as well as an increase in the transfer of acquired products sales and profits related to the Fab 5 Acquisition and Santen Products Acquisition. This increase in 2023 was offset slightly by a decrease in commissions attributable to sales of DEXYCU® (which agreement terminated January 1, 2023) and a decrease in sales from our non-ophthalmology compounded products as a result of our sale of those assets in the fourth quarter of 2022. During the three and nine months ended September 30, 2023, revenues, including transfer of acquired product sales and profits, from branded products totaled $14,496,000 and $33,863,000, respectively, as compared to $654,000 and $1,896,000 during the same periods in the prior year, respectively.
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Cost of Sales
Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory, amortization of acquired product NDAs, and other related expenses.
The following presents our cost of sales for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||
| 2023 | 2022 | Variance | 2023 | 2022 | Variance | |||||||||||||||||||
| Cost of sales | $ | 10,067,000 | $ | 6,721,000 | $ | 3,346,000 | $ | 28,338,000 | $ | 19,218,000 | $ | 9,120,000 | ||||||||||||
The increase in our cost of sales was largely attributable to the amortization of acquired product NDAs and product licenses which totaled $2,480,000 and $7,174,000 for the three and nine months ended September 30, 2023, respectively, compared to $341,000 and $1,023,000 during the prior year periods, respectively, offset by lesser increases in expenses associated with unit volumes sold and increased direct and indirect costs associated with production of our products.
Gross Profit and Margin
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||
| 2023 | 2022 | Variance | 2023 | 2022 | Variance | |||||||||||||||||||
| Gross profit | $ | 24,198,000 | $ | 16,102,000 | $ | 8,096,000 | $ | 65,500,000 | $ | 49,048,000 | $ | 16,452,000 | ||||||||||||
| Gross margin | 70.62 | % | 70.55 | % | 0.07 | % | 69.80 | % | 71.85 | % | (2.05 | )% | ||||||||||||
The decrease in gross margin between the nine months ended September 30, 2023 and 2022 was primarily attributable to amortization of acquired NDAs from the Fab 5 Acquisition, beginning in January 2023.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.
The following presents our selling, general and administrative expenses for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, | $ | September 30, | $ | |||||||||||||||||||||
| 2023 | 2022 | Variance | 2023 | 2022 | Variance | |||||||||||||||||||
| Selling, general and administrative | $ | 21,033,000 | $ | 15,421,000 | $ | 5,612,000 | $ | 56,878,000 | $ | 43,004,000 | $ | 13,874,000 | ||||||||||||
The increase in selling, general and administrative expenses between periods was primarily attributable to an increase in stock-based compensation expense of $4,476,000 and $11,521,000 for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, including new expenses associated with performance stock units granted in April 2023. Other areas of increased expenses included regulatory enhancements, costs to support the transition of recent product acquisitions, and an increase in expenses related to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the commercial launch of IHEEZO in April 2023.
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Research and Development Expenses
Our research and development (“R&D”) expenses primarily include personnel costs, including wages and stock-based compensation, expenses related to the development of intellectual property, investigator-initiated research and evaluations, formulation development, acquired in-process R&D and other costs related to the clinical development of our assets.
The following presents our research and development expenses for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, | $ | September 30, | $ | |||||||||||||||||||||
| 2023 | 2022 | Variance | 2023 | 2022 | Variance | |||||||||||||||||||
| Research and development | $ | 1,421,000 | $ | 775,000 | $ | 646,000 | $ | 3,316,000 | $ | 2,347,000 | $ | 969,000 | ||||||||||||
The increase in R&D expenses between periods was primarily attributable to increased activity related to product acquisitions, product launches, clinical and medical support.
Interest Expense, Net
Interest expense, net was $5,749,000 and $16,200,000 for the three and nine months ended September 30, 2023, respectively, compared to $1,800,000 and $5,386,000 for the same periods in 2022, respectively. The increase during the periods ended September 30, 2023 compared to the same periods in 2022 was primarily due to an increase in the outstanding principal amount of our debt obligations and amortization of debt issuance costs.
Equity in Losses of Unconsolidated Entities
During the three and nine months ended September 30, 2023, we recorded a loss of $0, related to our share of losses in Melt, compared to $3,504,000 and $9,036,000 for the same periods in 2022, respectively, as the Company reduced the carrying value of its investment in Melt to $0 at the end of 2022.
Investment Gain (Loss) from Eton
During the three and nine months ended September 30, 2023, we recorded a gain of $1,348,000 and $2,676,000, respectively, related to the change in fair market value of Eton’s common stock compared to losses of $(1,031,000) and $(4,341,000) for the same periods in 2022, respectively.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the payoff of the BR Loan.
Other Expense, Net
During the three and nine months ended September 30, 2023, we recorded other expense, net of $195,000 and $344,000, respectively, related primarily to transition services and write-off of inventories associated with the divestment of our non-ophthalmology business.
Tax Expense
During the three and nine months ended September 30, 2023, we recorded income tax expense of $1,539,000 and $1,236,000, respectively, and $35,000 and $75,000, during the same periods in 2022, respectively.
Liquidity and Capital Resources
Liquidity
Our cash and cash equivalents on hand at September 30, 2023 was $65,610,000, compared to $96,270,000 at December 31, 2022.
As of the date of this Quarterly Report, we believe that cash and cash equivalents of $65,610,000 at September 30, 2023 will be sufficient to sustain our planned level of operations and capital expenditures for at least the next 12 months. In addition, we may consider the sale of certain assets including, but not limited to, part of, or all of, our investments in Eton, Surface, and Melt. However, we may pursue acquisitions of revenue generating products, or drug candidates or other strategic transactions that involve large expenditures or we may experience growth more rapidly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing to support our operations.
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We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing drug candidates, compounded formulations and technologies, integrating and developing our operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional drug products, drug candidates, and/or assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities.
Net Cash Flow
The following provides detailed information about our net cash flows for the nine months ended September 30, 2023 and 2022:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash (used in) provided by operating activities | $ | (4,856,000 | ) | $ | 5,417,000 | |||
| Net cash used in investing activities | (152,350,000 | ) | (1,738,000 | ) | ||||
| Net cash provided by (used in) financing activities | 126,546,000 | (887,000 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (30,660,000 | ) | 2,792,000 | |||||
| Cash and cash equivalents at beginning of the period | 96,270,000 | 42,167,000 | ||||||
| Cash and cash equivalents at end of the period | $ | 65,610,000 | $ | 44,959,000 | ||||
Operating Activities
Net cash (used in) provided by operating activities during the nine months ended September 30, 2023 was $(4,856,000) compared to cash provided by operating activities of $5,417,000 during the same period in the prior year. The increase in net cash used in operating activities between the periods was mainly attributed to an increase of $12,287,000 in accounts receivable related to payment terms for our branded product sales during the nine months ended September 30, 2023 compared to an increase of $2,309,000 during the same period in 2022. The increase in net cash used in operating activities was also attributed to an increase in inventory levels, coupled with operating expenses associated with the commercial launch of IHEEZO, product acquisitions and integrations and increased costs of goods sold.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2023 was $(152,350,000) compared to $(1,738,000) during the same period in the prior year. Cash used in investing activities in 2023 was primarily associated with the Fab 5 Acquisition, Santen Products Acquisition and VEVYE Acquisition. Cash used in investing activities in 2022 was primarily associated with equipment and software purchases.
Financing Activities
Net cash provided by (used in) financing activities during the nine months ended September 30, 2023 and 2022 was $126,546,000 and $(887,000), respectively. Cash provided by financing activities during the nine months ended September 30, 2023 was primarily related to proceeds received from the sale of the 2027 Notes, the Oaktree Loan and Oaktree Amendment, and the Offering, offset by payment of payroll taxes upon vesting of PSUs in exchange for shares withheld from employees. Cash used in financing activities during the nine months ended September 30, 2022 was primarily related to payment of payroll taxes upon vesting of RSUs in exchange for shares withheld from the employee.
Sources of Capital
Our principal sources of cash consist of cash provided by operating activities, and in 2022 and 2023, proceeds from the sale of the 2027 Notes, the Offering and the Oaktree Loan and Oaktree Amendment. We may also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries, along with some or all of the remaining portion of our Eton common stock.
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We may acquire new products, product candidates and/or businesses and, as a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results.
We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as they existed on September 30, 2023. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of September 30, 2023, the end of the period covered by this Quarterly Report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report for information on various legal proceedings, which is incorporated into this Item by reference.
Item 1A. Risk Factors
In addition to the other information contained in this Quarterly Report you should consider the risk factors and the other information in our Annual Report on Form 10-K for the year ended December 31, 2022, including our audited financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If any such risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline and you may lose all or part of your investments. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Our sales depend on coverage and reimbursement from government and commercial third-party payers, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability.
Sales of our branded products depend on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. Governments and private payors continue to pursue initiatives to manage drug utilization and contain costs. Further, pressures on healthcare budgets from the pandemic, the economic downturn and inflation continue and are likely to increase across the markets we serve. Payors are increasingly focused on costs, which have resulted, and are expected to continue to result, in lower reimbursement rates for our branded products or narrower populations for which payors will reimburse. Continued intense public scrutiny of the price of drugs and other healthcare costs, together with payor dynamics, have limited, and are likely to continue to limit, our ability to set or adjust the price of our products based on their value, which can have a material adverse effect on our business. In the United States, particularly over the past few years, several legislative and regulatory proposals have been introduced and/or signed into law that attempt to lower drug prices. These include legislation promulgated by the IRA that enables the U.S. government to set prices for certain drugs in Medicare, redesigns Medicare Part D benefits to shift a greater portion of the costs to manufacturers, and enables the U.S. government to impose penalties if drug prices are increased at a rate faster than inflation in addition to rebates imposed on manufacturers associated with drug waste (which could potentially impact sales of TRIESENCE). Additional proposals focused on drug pricing continue to be debated, and additional executive orders focused on drug pricing and competition are likely to be adopted and implemented in some form. Government actions or ballot initiatives at the state level also represent a highly active area of policymaking and experimentation, including pursuing proposals that limit drug reimbursement under state-run Medicaid programs based on reference prices or permitting importation of drugs from Canada. Such state policies may also eventually be adopted at the federal level. Relatedly, despite IHEEZO being issued a J-Code for physician-office billing, CMS has an existing policy on anesthesia billing which has historically not allowed for the separate billing of anesthesia services in the physician’s office, which could be viewed in conflict with IHEEZO’s reimbursement status for in-office applications. Because our application for a J-Code for IHEEZO specifically disclosed the likely significant utilization of IHEEZO in the physician’s office setting of care, along with additional communications to this effect, we intend to request that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code is appropriate to be billed for the anesthesia itself (i.e., IHEEZO in our case) in the physician’s office setting. If CMS disagrees with our position, it is possible the separate reimbursement of IHEEZO would be limited to the surgical setting only (e.g., ASCs).
We cannot predict which or how many policy, regulatory, administrative, or legislative changes may ultimately be or effectively estimate the consequences to our business if, enacted and implemented. However, to the extent that payer actions further decrease or modify the coverage or reimbursement available for our products require that we pay increased rebates or shift other costs to us, limit or affect our decisions regarding the pricing of or otherwise reduce the use of our products, such actions could have a material adverse effect on our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Harrow, Inc. | ||
| Dated: November 13, 2023 | By: | /s/ Mark L. Baum |
| Mark L. Baum | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ Andrew R. Boll | |
| Andrew R. Boll | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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EXHIBIT 10.2
SECOND AMENDMENT TO LICENSE AND SUPPLY AGREEMENT
This Second Amendment (the “Second Amendment”) is made and entered into as of the _4_th day of August, 2023 (the “Second Amendment Effective Date”) by and between Sintetica S.A., a Swiss corporation having its principal place of business at Via Penate 5, 6850 Mendrisio, Switzerland, (“Sintetica”), and Harrow IP LLC, a Delaware limited liability company having its principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 USA, (“Harrow”). Sintetica and Harrow are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”
WHEREAS Sintetica and Harrow previously entered into a License and Supply Agreement with a Signing Date of July 25, 2021, as amended on November 15, 2022 (the “Agreement”);
WHEREAS Harrow wishes to pay Sintetica and Sintetica wishes to receive from Harrow the milestone payments for Milestone Numbers 7.2(a)(ii)(b) and 7.2(a)(ii)(c) in advance and at a discounted amount; and
WHEREAS, Sintetica and Harrow desire to amend the Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and with the specific intent to be bound hereby, the parties hereby agree as follows:
| 1. | All capitalized terms used in this Second Amendment but not defined shall have the meanings ascribed to them under the terms of the Agreement. |
| 2. | Replace Section 7.2(d) in its entirety with the following: |
| (d) As of the Second Amendment Effective Date, Harrow has paid to Sintetica and Sintetica has received from Harrow the milestone payments for Milestone Numbers 7.2(a)(i) and 7.2(a)(ii)(a), and the conditions for payment of Milestone Numbers 7.2(a)(ii)(b) and 7.2(a)(ii)(c) are deemed to have been met. On or before August 7, 2023, Harrow shall pay to Sintetica an amount equal to four million four hundred fifty thousand dollars ($4,450,000.00) for full satisfaction of the milestone payments for Milestone Numbers 7.2(a)(ii)(b) and 7.2(a)(ii)(c) (“Final Milestone Payment”). Once Sintetica receives the Final Milestone Payment, no additional amounts shall be due from Harrow to Sintetica pursuant to Section 7.2. | |
| 3. | Replace Section 11.7(v) in its entirety with the following: |
| (v) Notwithstanding 11.7(iii), for any and all terminations by Sintetica under Section 11.2, or Section 11.3, Section 11.6(a), Section 11.6(d) or Section 11.6(e), all amounts due in accordance with Section 7.2(a)(ii)(b) and Section 7.2(a)(ii)(c), if not already paid, shall become immediately due and payable, as shall the first regulatory milestone, if not already paid, set forth in Section 7.2 if Sintetica has already made the PDUFA filing fee payment pursuant to Section 4.2. | |
| 4. | Replace Section 11.7(vi) in its entirety with the following: |
| (vi) Harrow shall have the right to sell or otherwise dispose of any inventory of the Product on hand at the time of such termination, subject to Harrow making any payments to Sintetica in accordance with Section 7.2(a)(ii)(b) and Section 7.2(a)(ii)(c) or Section 7.4, if not already paid. | |
| 5. | In all other respects, the terms and conditions of the Agreement will remain in full force and effect as written; provided, however, that the terms and conditions of this Second Amendment will control over the terms and conditions of the Agreement to the extent there are any inconsistencies between this Second Amendment and the Agreement. |
Page 1 of 2 |
IN WITNESS WHEREOF, the Parties have executed this Second Amendment as of the Second Amendment Effective Date.
| Sintetica S.A. | ||
| By: | /s/ Nicola Caronzolo | |
| Name: | Nicola Caronzolo | |
| Title: | Corporate CEO | |
| Sintetica S.A. | ||
| By: | /s/ Luca Casella | |
| Name: | Luca Casella | |
| Title: | Corporate CFO | |
| Harrow IP LLC | ||
| By: | /s/ Andrew Boll | |
| Name: | Amdrew Boll | |
| Title: | CFO | |
Page 2 of 2 |
EXHIBIT 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mark L. Baum, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of Harrow, Inc.; | |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 13, 2023 | /s/ Mark L. Baum |
| Mark L. Baum | |
| Chief Executive Officer | |
| Principal Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Andrew R. Boll, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of Harrow, Inc.; | |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 13, 2023 | /s/ Andrew R. Boll |
| Andrew R. Boll | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION REQUIRED BY
SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as the specified officer of Harrow, Inc. (the “Company”), that, to the best of his knowledge, the Quarterly Report of the Company on Form 10-Q for the fiscal quarter ended September 30, 2023 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
| Date: November 13, 2023 | |
| /s/ Mark L. Baum | |
| Mark L. Baum Chief Executive Officer | |
| (Principal Executive Officer) |
| Date: November 13, 2023 | |
| /s/ Andrew R. Boll | |
| Andrew R. Boll Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.