NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the years ended December 31, 2018 and 2017
(all
dollar amounts are expressed in thousands, except share and per share data)
NOTE
1. ORGANIZATION
Harrow
Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates
or otherwise requires, the “Company” or “Harrow”) specializes in the development, production and sale
of innovative medications that offer unique competitive advantages and serve unmet needs in the marketplace. Prior to 2017, the
Company’s business was primarily focused on its ImprimisRx business, the nation’s leading ophthalmology pharmaceutical
compounding business, and Park Compounding, Inc. (“Park”), a leading health and wellness compounding business. Since
2017, in addition to wholly-owning ImprimisRx and Park, the Company also has equity positions in Eton Pharmaceuticals, Inc. (“Eton”),
Surface Pharmaceuticals, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”). In 2018, the Company
also founded its subsidiaries Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Radley Pharmaceuticals, Inc. (“Radley”).
The Company owns royalty rights in certain 505(b)(2) drug candidates being developed by Eton, Surface, Melt, Radley and Mayfield.
In
December 2018, the Company amended its restated certificate of incorporation to change its corporate name from “Imprimis
Pharmaceuticals, Inc.” to “Harrow Health, Inc.”.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Harrow
has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in
the United States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management are, among
others, allowance for doubtful accounts and contractual adjustments, realizability of inventories, valuation of investments in
equity securities, deferred taxes, goodwill and intangible assets, recoverability of long-lived assets and goodwill, valuation
of contingent acquisition obligations and deferred acquisition obligations, valuation of notes payable,
and valuation of stock-based transactions with employees and non-employees. Actual results could differ from those estimates.
Liquidity
The
Company has incurred significant operating losses and negative cash flows from operations since its inception. The Company incurred
operating losses of $5,217 and $12,163 for the years ended December 31, 2018 and 2017, respectively, and had an accumulated
deficit of $74,211 and $88,836 as of December 31, 2018 and 2017, respectively. In addition, cash provided by (used in)
operating activities were $687 and $(8,803) for the years ended December 31, 2018 and 2017, respectively.
While
there is no assurance, the Company believes its existing cash resources, restricted cash and marketable securities of approximately
$28,258 at December 31, 2018 will be sufficient to sustain the Company’s planned level of operations for at least the next
twelve months. However, estimates of operating expenses and working capital requirements could be incorrect, and the Company could
use its cash resources faster than anticipated. Further, some or all of the ongoing or planned activities may not be successful
and could result in further losses.
The
Company may seek to increase liquidity and capital resources by one or more of the following which may include, but are not limited
to: the sale of assets and/or businesses, obtaining financing through the issuance of equity, debt, or convertible securities;
and working to increase revenue growth through sales. There is no guarantee that the Company will be able to obtain capital when
needed on terms it deems as acceptable, or at all.
Revenue
Recognition and Deferred Revenue
The
Company recognizes revenue at the time of transfer of promised goods to customers in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for those goods or services.
(see Note 3).
Cost
of Sales
Cost
of sales includes direct and indirect costs to manufacture formulations and other products sold, including active pharmaceutical
ingredients, personnel costs, packaging, storage, royalties (see Note 18), shipping and handling costs and the write-off of obsolete
inventory.
Research
and Development
The
Company expenses all costs related to research and development as they are incurred. Research and development expenses consist
of expenses incurred in performing research and development activities, including salaries and benefits, other overhead expenses,
and costs related to clinical trials, contract services and outsourced contracts.
Debt
Issuance Costs and Debt Discount
Debt
issuance costs and the debt discount are recorded net of notes payable and capital lease obligations in the consolidated balance
sheets. Amortization expense of debt issuance costs and the debt discount is calculated using the effective interest method over
the term of the debt and is recorded in interest expense in the accompanying consolidated statements of operations.
Intellectual
Property
The
costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and
milestone payments, are charged to research and development expense as incurred in situations where the Company has not identified
an alternative future use for the acquired rights, and are capitalized in situations where we have identified an alternative future
use for the acquired rights. Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits
of such patents and trademarks become more certain (see Goodwill and Intangible Assets). The Company began capitalizing certain
costs associated with acquiring intellectual property rights during 2015, if costs are not capitalized they are expensed as incurred.
Income
Taxes
As
part of the process of preparing the Company’s consolidated financial statements, the Company must estimate the actual current
tax liabilities and assess permanent and temporary differences that result from differing treatment of items for tax and accounting
purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated
balance sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future taxable income
and, to the extent the Company believes that recovery is not more likely than not, a valuation allowance must be established which
reduces the amount of deferred tax assets recorded on the consolidated balance sheets. To the extent the Company establishes a
valuation allowance or increase or decrease this allowance in a period, the impact will be included in income tax expense in the
consolidated statement of operations.
The
Company accounts for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting
Standards Codification (“ASC”) 740, “Income Taxes”, or ASC 740. As of December 31, 2018, and 2017, there
were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective
tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
The Company had no accrual for interest or penalties in its consolidated balance sheets at December 31, 2018 and 2017, and has
not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2018 and
2017. The Company is subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey, New York, and
Wisconsin. The Company’s tax years since 2000 may be subject to examination by the federal and state tax authorities due
to the carryforward of unutilized net operating losses.
Cash
and Cash Equivalents
Cash
equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.
Concentrations
of Credit Risk
The
Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance
Corporation (“FDIC”) provides basic deposit coverage with limits up to $250 per owner. From time to time the Company
has cash deposits in excess of FDIC limits.
Investment
in Eton Pharmaceuticals, Inc.
In
April 2017, the Company formed Eton as a wholly owned subsidiary. In June 2017 the Company lost voting and ownership control of
Eton and it ceased consolidating Eton’s financial statements. At the time of deconsolidation, the Company recorded a gain
of $5,725 and adjusted the carrying value in Eton to reflect the increased valuation of Eton and the Company’s new ownership
percent in accordance with ASC 810-10-40-4(c),
Consolidation
. At the time of deconsolidation, the Company used the equity
method of accounting as management determined that the Company had the ability to exercise significant influence over the operating
and financial decisions of Eton. Under this method, the Company recognized earnings and losses of Eton in its consolidated financial
statements and adjusted the carrying amount of its investment in Eton accordingly. During the years ended December 31, 2018 and
2017, the Company recorded equity in net loss of Eton of $3,507 and $2,218, respectively.
In November 2018, Eton closed on an initial
public offering of 4,140,000 shares of its common stock at $6.00 per share for gross proceeds of approximately $24,800 (the “Eton
IPO”).
Following the close of the Eton IPO,
the Company’s common stock position in Eton equaled 19.98% of the equity and voting interests issued and outstanding
of Eton, and it ceased using the equity method of accounting for its investment in Eton. The Company recognizes earnings and losses
of Eton in its consolidated financial statements based on the fair market value of the shares owned and adjust the carrying
amount of the Company’s investment in Eton accordingly. Eton’s common stock currently trades on the NASDAQ
Global Market exchange. At December 31, 2018, the fair market value of Eton’s common stock was $6.12 per share, the closing
share price of Eton common stock on that day. In accordance with ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
, for the year ended December 31, 2018, the Company
recorded a net investment gain from Eton of $17,913, which consisted of a gain of $21,420 related to the change in fair market
value of the Company’s investment in Eton less an equity in net loss of Eton of $3,507. As of December 31, 2018, the fair
market value of the Company’s investment in Eton was $21,420.
Accounts
Receivable
Accounts
receivable are stated net of allowances for doubtful accounts and contractual adjustments. The accounts receivable balance primarily
includes amounts due from customers the Company has invoiced or from third-party providers (e.g., insurance companies and governmental
agencies), but for which payment has not been received. Charges to bad debt are based on both historical write-offs and specifically
identified receivables. Accounts receivable are presented net of allowances for doubtful accounts and contractual adjustments
in the amount of $270 and $275 as of December 31, 2018 and 2017, respectively.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The Company evaluates
the carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective
markets compared with historical cost. Write-downs of inventories are considered to be permanent reductions in the cost basis
of inventories.
The
Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such
factors as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf
life of products and active pharmaceutical ingredients on hand. The Company establishes reserves for excess and obsolete inventories
as required based on its analyses.
Investment
in Surface Pharmaceuticals, Inc.
In
April 2017, the Company formed Surface as a wholly owned subsidiary. In May and July 2018, Surface entered into and closed on
definitive stock purchase agreements with an institutional investor for the purchase of Surface’s Series A Preferred Stock
(the “Surface Series A Stock”) that resulted in total proceeds to Surface of approximately $21,000. At the time of
the first closing in May 2018, the Company lost voting and ownership control of Surface and it ceased consolidating Surface’s
financial statements. The Surface Series A Stock (i) was issued at a purchase price of $3.30 per share; (ii) will vote together
with the common stock and all other shares of stock of Surface having general voting power; (iii) will be entitled to the number
of votes equal to the number of shares of preferred stock held; (iv) will hold liquidation preference over all other equity interests
in Surface; and (v) will have mandatory conversion requirements into Surface common stock upon events including an underwritten
initial public offering of Surface common stock or similar transaction.
At
the time of deconsolidation, the Company recorded a gain of $5,320 and adjusted the carrying value in Surface to reflect the increased
valuation of Surface and the Company’s new ownership percent in accordance with ASC 810-10-40-4(c).
The
Company owns 3,500,000 common shares (which is approximately 30% of the equity interest as of December 31, 2018, and calculated
after the second closing of the sale Series A Preferred Stock in July 2018) of Surface and uses the equity method of accounting
for this investment, as management has determined that the Company has the ability to exercise significant influence over the
operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses of Surface in its
consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s
share of earnings and losses are based on the shares of common stock and in-substance common stock of Surface held by the Company.
Any intra-entity profits and losses are eliminated. During the year ended December 31, 2018, the Company recorded equity in net
loss of Surface of $373 (which, net of the equity in net loss of Surface totaled an investment gain from Surface of $4,947 during
the year ended December 31, 2018). As of December 31, 2018, the carrying value of the Company’s investment in Surface was
$4,947.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated
using the straight-line method over the estimated useful life of the asset. Leasehold improvements and capital lease equipment
are amortized over the estimated useful life or remaining lease term, whichever is shorter. Computer software and hardware and
furniture and equipment are depreciated over three to five years.
Business
Combinations
The
Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair values on the acquisition date. The purchase price allocation process requires management
to make significant estimates and assumptions, especially with respect to intangible assets, estimated contingent consideration
payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets the Company
has acquired or may acquire in the future include but are not limited to:
|
●
|
future
expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed
technologies and patents; and
|
|
|
|
|
●
|
discount
rates utilized in valuation estimates.
|
Unanticipated
events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date,
including changes from events after the acquisition date, such as changes in our estimates of relevant revenue or other targets,
will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related
contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have
a material effect on the consolidated financial position, statements of operations or cash flows in the period of the change in
the estimate.
Goodwill
and Intangible Assets
Patents
and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks
become more certain. At that time, the Company capitalizes third-party legal costs and filing fees associated with obtaining and
prosecuting claims related to its patents and trademarks. Once the patents have been issued, the Company amortizes these costs
over the shorter of the legal life of the patent or its estimated economic life, generally 20 years, using the straight-line method.
Trademarks are an indefinite life intangible asset and are assessed for impairment based on future projected cash flows as further
described below.
The
Company reviews its goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event
or a change in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes
in circumstances considered as impairment indicators include but are not limited to the following:
|
●
|
significant
underperformance of the Company’s business relative to expected operating results;
|
|
|
|
|
●
|
significant
adverse economic and industry trends;
|
|
|
|
|
●
|
significant
decline in the Company’s market capitalization for an extended period of time relative to net book value; and
|
|
|
|
|
●
|
expectations
that a reporting unit will be sold or otherwise disposed.
|
The
goodwill impairment test consists of a two-step process as follows:
Step
1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair
value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting
unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount,
relative revenues or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its
fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company then performs the second
step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.
Step
2. If further analysis is required, the Company compares the implied fair value of the reporting unit’s goodwill, determined
by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase
price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value,
an impairment loss will be recognized in an amount equal to the excess.
Impairment
of Long-Lived Assets
Long-lived
assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated
balance sheet, if material (See Note 9).
Third
Party Billing and Collection Agreements
In
connection with its acquisition of Park, the Company entered into a billing and collection agreement with a third party to assist
in the billing and collection of workers’ compensation claims. Under the terms of the agreement, the Company is obligated
to pay a fixed fee to the third party equal to 55% of the amounts billed and collected under the workers’ compensation claims.
The Company accrues for such fees in accounts payable and accrued expenses in the accompanying consolidated balance sheets. Total
billing and collection management expense under this agreement for the years ended December 31, 2018 and 2017 was $1 and $0, respectively,
and is included in selling and marketing expenses in the accompanying consolidated statements of operations. The amount due under
the agreement as of December 31, 2018 and 2017 was $25 and $41, respectively.
Deferred
Rent
The
Company accounts for rent expense related to its operating leases by determining total minimum rent payments on the leases over
their respective periods and recognizing the rent expense on a straight-line basis. The difference between the actual amount paid
and the amount recorded as rent expense in each fiscal year and interim periods within each fiscal year is recorded as an adjustment
to deferred rent (see Note 18).
Fair
Value Measurements
Fair
value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value
hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:
●
|
Level
1: Applies to assets or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in
active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure
fair value whenever available.
|
●
|
Level
2: Applies to assets or liabilities for which there are significant other observable inputs other than Level 1 prices, such
as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
|
●
|
Level
3: Applies to assets or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s
own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level
3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.
|
At
December 31, 2017, the Company did not have any financial assets or liabilities that are measured on a recurring basis. At December
31, 2018, the Company measured its investment in Eton on a recurring basis. The Company’s investment in Eton is classified
as Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of
December 31, 2018, the fair market value of the Company’s investment in Eton was $21,420.
The
Company’s financial instruments included cash and cash equivalents, restricted short-term investments, investment in Eton,
accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred revenue and customer
deposits, deferred acquisition obligations, notes payable and capital leases. The carrying amount of these financial instruments,
except for deferred acquisition obligations, notes payable and capital leases, approximates fair value due to the short-term maturities
of these instruments. The Company’s restricted short-term investments are carried at amortized cost, which approximates
fair value. Based on borrowing rates currently available to the Company, the carrying values of the deferred acquisition obligations,
notes payable and capital leases, approximate their respective fair values.
Stock-Based
Compensation
All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units
(“RSUs”) and restricted stock, are recognized in the consolidated financial statements based upon their estimated
fair values. The Company uses the Black-Scholes-Merton option pricing model and Monte Carlo Simulation to estimate the fair value
of stock-based awards. The estimated fair value is determined at the date of 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.
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows FASB guidance. The measurement date for the estimated fair value of the equity instruments issued is the earlier of (i)
the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the estimated fair value of
the equity instrument is primarily recognized over the term of the consulting agreement. According to FASB guidance, an asset
acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified
as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly,
the Company records the estimated fair value of nonforfeitable equity instruments issued for future consulting services as prepaid
stock-based consulting expenses in its consolidated balance sheets.
Basic
and Diluted Net Income (Loss) per Common Share
Basic
net income (loss) per common share is computed by dividing income (loss) attributable to common stockholders for the period by
the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing
the income (loss) attributable to common stockholders for the period by the weighted average number of common and common equivalent
shares, such as stock options and warrants, outstanding during the period.
Basic
and diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during
the period. Common stock equivalents (using the treasury stock or “if converted” method) from deferred acquisition
obligations, convertible note payable, stock options, unvested restricted stock units (“RSUs”) and warrants were 6,201,355
and 9,980,454 at December 31, 2018 and 2017, respectively, and, for the year ended December 31, 2017 are excluded from the calculation
of diluted net (loss) per share for the period presented, because the effect is anti-dilutive for that time period. Included in
the basic and diluted net income (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 December 31,
2018 and 2017 was 236,693 and 137,067, respectively.
The
following table shows the computation of basic net income (loss) per share of common stock for the years ended December 31, 2018
and 2017:
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
Numerator – net income (loss)
|
|
$
|
14,625
|
|
|
$
|
(11,985
|
)
|
Denominator – weighted average number of shares outstanding, basic
|
|
|
21,917,570
|
|
|
|
20,027,712
|
|
Net income (loss) per share, basic
|
|
$
|
0.67
|
|
|
$
|
(0.60
|
)
|
For
the year end December 31, 2018, the Company computed diluted net income per share using the weighted-average number of common
shares and dilutive common equivalent shares outstanding during that period. Diluted common equivalent shares for the year ended
December 31, 2018, consisted of the following:
|
|
For the Year Ended
|
|
|
|
December 31, 2018
|
|
|
|
Shares
|
|
Diluted shares related to:
|
|
|
21,917,570
|
|
Warrants
|
|
|
1,844,272
|
|
Restricted stock units
|
|
|
-
|
|
Stock options
|
|
|
50,203
|
|
Dilutive common equivalent shares
|
|
|
23,812,045
|
|
The
following table shows the computation of diluted net income (loss) per share using the weighted-average number of common shares
and dilutive common equivalent shares outstanding for the years ended December 31, 2018 and 2017:
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
Numerator – net income (loss)
|
|
$
|
14,625
|
|
|
$
|
(11,985
|
)
|
Weighted average number of shares outstanding, basic
|
|
|
21,917,570
|
|
|
|
20,027,712
|
|
Dilutive common equivalents
|
|
|
1,894,475
|
|
|
|
-
|
|
Denominator – number of shares used for diluted earnings per share computation
|
|
|
23,812,045
|
|
|
|
20,027,712
|
|
Net income (loss) per share, diluted
|
|
$
|
0.61
|
|
|
$
|
(0.60
|
)
|
Reclassification
Certain
amounts in the 2017 consolidated financial statements have been reclassified to conform to the classifications used to prepare
the 2018 consolidated financial statements. These reclassifications had no material impact on the Company’s financial position,
results of operations, or cash flow as previously reported.
Recently
Adopted Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
and has subsequently issued several amendments
to ASU 2014-09. This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance.
The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the
transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The standard’s stated core principle is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions
within its five-step model that includes identifying the contract with a customer, identifying the performance obligations in
the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing
revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The
new standard became effective for the Company beginning January 1, 2018 and permits two methods of adoption: the full retrospective
method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which
requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption.
The Company adopted the standard using the modified retrospective method. There was no effect for any adjustments to retained
earnings upon adoption of the standard on January 1, 2018. Adoption of the new standard resulted in additional revenue-related
disclosures in the footnotes to the Company’s consolidated financial statements (see Note 3).
In
January 2016, the FASB issued ASU 2016-01 , which requires that investments in equity securities (excluding equity method investments)
be measured at fair value with changes in fair value recognized in net earnings. Under previous guidelines, changes in fair value
of available-for-sale equity securities are recorded in other comprehensive income. The Company adopted ASU 2016-01 as of January
1, 2018. As of that date, a
doption of the standard
did not have an effect on the Company’s financial position, results of operations and cash flows because
the
Company did not have any investments in equity securities (at January 1, 2018) that were not equity method investments.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations, Clarifying the Definition of a Business
, which revises
the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business.
The Company adopted the standard on January 1, 2018. Adoption of the standard did not have an impact on the Company’s financial
position, results of operations and cash flows.
In
August 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Classification Restricted Cash
, which requires that
a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The Company adopted the standard on January 1, 2018 by using the retrospective transition
method. Adoption of the standard effected the presentation of cash equivalents in Company’s consolidated statements of cash
flows and related disclosures, restricted cash of $200 has been reclassified within that financial statement for the periods presented
as a cash equivalent.
In
May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
. The amendments
in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting under Topic 718. An entity should account for effects of a modification unless all of the following
are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original
award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award
immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability
instrument is the same as the classification of the original award immediately before the original award is modified. The Company
adopted this standard on January 1, 2018. Adoption of the standard did not have an effect on the Company’s financial position,
results of operations and cash flows.
In
June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment
Accounting
which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from
expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods
and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. The amendments specify
that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not
apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with
selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.
The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including
interim periods within that fiscal year. Early adoption is permitted. The Company adopted this standard on July 1, 2018. Adoption
of the standard did not have an effect on the Company’s financial position, results of operations and cash flows.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02,
Leases
(Topic 842). This new guidance
was initiated as a joint project with the International Accounting Standards Board to simplify lease accounting and improve the
quality of and comparability of financial information for users. This new guidance would eliminate the concept of off-balance
sheet treatment for “operating leases” for lessees for the vast majority of lease contracts. Under ASU No. 2016-02,
at inception, a lessee must classify all leases with a term of over one year as either finance or operating, with both classifications
resulting in the recognition of a defined “right-of-use” asset and a lease liability on the balance sheet. However,
recognition in the income statement will differ depending on the lease classification, with finance leases recognizing the amortization
of the right-of-use asset separate from the interest on the lease liability and operating leases recognizing a single total lease
expense. Lessor accounting under ASU No. 2016-02 would be substantially unchanged from the previous lease requirements under GAAP.
ASU No. 2016-02 will take effect for public companies in fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early adoption is permitted and for leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition
approach. During the year ended December 31, 2017, the Company evaluated this new accounting standard and engaged professionals
in the new lease accounting implementation to assist in determining the effect of the new standard as of January 1, 2018 with
respect to the Company’s real estate leases. The Company currently has three real estate leases and evaluated each of these
leases in accordance with the new lease accounting standard under ASC Topic 842. As of December 31, 2018, the Company estimates
that the right of use asset to be recorded on its consolidated balance sheet would be approximately $2,106 and that the related
lease liability would be approximately $2,624 related to operating leases. The difference between the right of use asset and related
lease liability is predominantly deferred rent and other related lease expenses under the new lease accounting standard. The Company
will continue this effort with respect to equipment leases and any other leases contemplated under Topic 842 in a manner to be
appropriately prepared for its implementation on January 1, 2019.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other
. This guidance simplifies the accounting for
goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment
test under ASC 350. The updated standard eliminates the requirement to calculate a goodwill impairment charge using Step 2. If
a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference.
The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for
reporting periods beginning after December 31, 2019 on a prospective basis, and early adoption is permitted. The Company does
not expect ASU 2017-04 to have a material effect on the Company’s financial position, results of operations and cash flows.
NOTE
3. REVENUES
On
January 1, 2018, the Company adopted ASU 2014-09, using the modified retrospective transition method. There was no effect for
any adjustments to retained earnings upon adoption of the standard on January 1, 2018. The Company has two primary streams of
revenue: (1) revenue recognized from our sale of products within our pharmacy services and (2) revenue recognized from intellectual
property license and asset purchase agreements.
Product
Revenues from Pharmacy Services
The
Company sells prescription drugs directly through our pharmacy and outsourcing facility network. Revenue from our pharmacy services
divisions includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts
paid back to the client, (ii) the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy
network. Sales taxes are not included in revenue. Following the core principle of ASU 2014-09, we have identified the following:
1.
|
Identify
the contract(s) with a customer: A contract exists with a customer at the time the prescription or order is received by the
Company.
|
|
|
2.
|
Identify
the performance obligations in the contract: The order received contains the performance obligations to be met, in almost
all cases the product the customer is wishing to receive. If we are unable to be meet the performance obligation the customer
is notified.
|
|
|
3.
|
Determine
the transaction price: the transaction price is based on the product being sold to the customer, and any related customer
discounts. These amounts are pre-determined and built into our order management software.
|
|
|
4.
|
Allocate
the transaction price to the performance obligations in the contract: The transaction price associated with the product(s)
being ordered is allocated according to the pre-determined amounts.
|
|
|
5.
|
Recognize
revenue when (or as) the entity satisfies a performance obligation: At the time of shipment from the pharmacy or outsourcing
facility the performance obligation has been met.
|
The
following revenue recognition policy has been established for the pharmacy services division:
Revenues
generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription
is shipped. At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its
client contracts and does not experience a significant level of returns or reshipments. Determination of criteria (3) and (4)
is based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability
of those amounts. The Company records reductions to revenue for discounts at the time of the initial sale. Estimated returns and
allowances and other adjustments are provided for in the same period during which the related sales are recorded and are based
on actual returns history. The rate of returns is analyzed annually to determine historical returns experience. If the historical
data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made
in the period in which such a determination is made and revenues in that period could be materially affected. The Company will
defer any revenues received for a product that has not been delivered or is subject to refund until such time that the Company
and the customer jointly determine that the product has been delivered and no refund will be required.
Intellectual
Property License Revenues
The
Company currently holds five intellectual property license and related agreements in which the Company has promised to grant a
license or sale which provides a customer with 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, each of which revenue is recognized at the point of time the performance obligation is met.
Non-refundable
fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the
part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug
preparation and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations,
design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action,
and rights to the patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable
fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction
with the non-refundable fee has no utility to the licensee and that are separate and independent of the Company’s performance
under the other elements of the arrangement. In addition, if the Company’s continued involvement is required, through research
and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be
performed by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement.
Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.
Revenue
disaggregated by revenue source for the year ended December 31, 2018 and 2017, consists of the following:
|
|
For the year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Product sales, net
|
|
$
|
41,334
|
|
|
$
|
26,684
|
|
License revenues
|
|
|
38
|
|
|
|
90
|
|
Total revenues
|
|
$
|
41,372
|
|
|
$
|
26,774
|
|
Deferred
revenue and customer deposits at December 31, 2018 and 2017, was $119 and $29, retrospectively. All deferred revenue and
customer deposit amounts at December 31, 2017 were recognized as revenue during the year ended December 31, 2018.
NOTE
4. INVESTMENT IN ETON PHARMACEUTICALS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS
In
May 2017, the Company entered into two asset purchase and license agreements (the “Eton License Agreements”) with
its previously wholly owned subsidiary, Eton. Pursuant to the terms of the Eton License Agreements, the Company assigned
and licensed to Eton certain intellectual property and related rights to develop, formulate, make, sell, and sub-license formulations
of synthetic corticotropin and injectable pentoxifylline (collectively, the “Eton Products”). Eton is required to
make royalty payments to the Company of six percent (6%) of net sales of the Eton Products while any patent rights remain outstanding
and then three percent (3%) of net sales in the event patent claims are not issued. In addition, Eton is required to make certain
milestone payments to the Company including payments of $50 upon initial patent issuances for each Eton Product. The Eton License
Agreements were conditioned upon Eton receiving net proceeds of the sale of its equity securities of not less than $10,000, which
occurred in June 2017. See also Note 2, under the subheading
Investment in Eton Pharmaceuticals, Inc.
On
May 1, 2017, the Company and Eton entered into a Management Services Agreement (the “MSA”), whereby the Company provided
to Eton certain administrative services and support, including bookkeeping, web services and human resources related activities,
and Eton will pay the Company a monthly amount of $10. A 30-day notice of termination was delivered to the Company on August 29,
2017. Eton paid the Company $40 for services under the MSA.
As
of December 31, 2018, the Company held 3.5 million shares in Eton at a fair market value of $6.12 per share. In November 2018,
the Company entered into a lock-up agreement, that prohibits the sale of any of our Eton common stock until November 2019, without
the approval of National Securities Corporation. As of December 31, 2018, the carrying value of the Company’s investment
in Eton was $21,420.
The
Company owns 19.98% of the voting interests in Eton (3,500,000 shares of Eton common stock). The Company’s
Chief Executive Officer, Mark L. Baum, is a director of Eton, and several employees of the Company (including Mr. Baum and the
Company’s Chief Financial Officer, Andrew R. Boll) previously entered into consulting agreements with Eton.
NOTE
5. INVESTMENT IN SURFACE PHARMACEUTICALS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS
In
2017 and amended in April 2018, the Company entered into two asset purchase and license agreements (the “Surface License
Agreements”) with its previously wholly owned subsidiary, Surface. Pursuant to the terms of the Surface License Agreements,
the Company assigned and licensed to Surface certain intellectual property and related rights to develop, formulate, make, sell,
and sub-license formulations of certain topical eye drop formulations that utilize a proprietary delivery vehicle and a proprietary
doxycycline capsule (collectively, the “Surface Products”). Surface is required to make royalty payments to the Company
of four to six percent (4%-6%) of net sales of the Surface Products while any patent rights remain outstanding. Certain of the
Surface License Agreements were conditioned upon Surface receiving net proceeds of the sale of its equity securities of not less
than $10,000, which occurred in May 2018. See also Note 2, under the subheading
Investment in Surface Pharmaceuticals, Inc
.
In
January 2018, the Company and Surface entered into an amended Management Services Agreement (the “MSA”), whereby the
Company provided to Surface certain administrative services and support, including bookkeeping, web services and human resources
related activities, and Surface paid the Company a monthly amount of $10. The MSA was terminated effective July 31, 2018.
As
of December 31, 2018, the Company was due $50 from Surface for reimbursable expenses and amounts due under the MSA and included
in prepaid expenses and other current assets on the accompanying consolidated balance sheets.
As
of December 31, 2018, the Company owned 3,500,000 shares of Surface common stock (approximately 30% issued and outstanding equity
interests). One of the Company’s directors, Richard L. Lindstrom, and the Company’s Chief Executive Officer, Mark
L. Baum, are directors of Surface. In addition, the Company’s Chief Financial Officer, Andrew R. Boll, was a director of
Surface and resigned as a director of Surface concurrent with the sale of the Surface Series A Stock. Several employees and a
director of the Company (including Mr. Baum, Dr. Lindstrom and Mr. Boll) previously entered into consulting agreements and provided
consulting services to Surface. Surface is required to make royalty payments to Dr. Lindstrom of 3% of net sales of certain Surface
products while certain patent rights remain outstanding. Dr. Lindstrom is also a principal of Flying L Partners, an affiliate
of the funding investor.
The
unaudited condensed results of operations information of Surface is summarized below:
|
|
For the Year Ended
|
|
|
|
December 31, 2018
|
|
Revenues, net
|
|
$
|
-
|
|
Loss from operations
|
|
|
1,370
|
|
Net loss
|
|
$
|
(1,370
|
)
|
The
unaudited condensed balance sheet information of Surface is summarized below:
|
|
At
|
|
|
|
December 31, 2018
|
|
Current assets
|
|
$
|
19,699
|
|
Non current assets
|
|
|
50
|
|
Total assets
|
|
|
19,749
|
|
|
|
|
|
|
Total liabilities
|
|
|
165
|
|
Total stockholders equity
|
|
|
19,584
|
|
Total liabilities and stockholders’ equity
|
|
$
|
19,749
|
|
NOTE
6. RESTRICTED CASH
The
restricted cash at December 31, 2018 and 2017 consisted of funds held in a money market account. At December 31, 2018 and 2017,
the restricted cash was recorded at amortized cost, which approximates fair value.
At
December 31, 2018 and 2017, the funds held in a money market account of $200 were classified as a current asset. The money market
account funds are required as collateral as additional security for the Company’s New Jersey facility lease.
NOTE
7. INVENTORIES
Inventories
are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, commercial pharmaceutical
products, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of December 31,
2018 and 2017 was as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
1,119
|
|
|
$
|
956
|
|
Work in progress
|
|
|
6
|
|
|
|
-
|
|
Finished goods
|
|
|
709
|
|
|
|
1,293
|
|
Total inventories
|
|
$
|
1,834
|
|
|
$
|
2,249
|
|
NOTE
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Prepaid insurance
|
|
$
|
328
|
|
|
$
|
164
|
|
Other prepaid expenses
|
|
|
334
|
|
|
|
426
|
|
Receivable due from Surface
|
|
|
50
|
|
|
|
-
|
|
Deposits and other current assets
|
|
|
125
|
|
|
|
124
|
|
Total prepaid expenses and other current assets
|
|
$
|
837
|
|
|
$
|
714
|
|
NOTE
9. ASSET SALES AND NOTE RECEIVABLE
On
June 27, 2017, the Company entered into an Asset Purchase Agreement (the “PA Agreement”) with Creative Pharmacy Solutions
Central, LLC (the “Buyers”), which closed in July 2017. U
nder the terms of the
PA Agreement, the Company sold substantially all its assets associated with its sinus related business, including but not limited
to, certain
intellectual property rights, trademarks, copyrights, inventories, equipment, customer lists, databases, permits,
licenses, and assignment of
the Company’s lease obligation for its Pennsylvania based
pharmacy (the “PA Assets”), for a total purchase price of approximately $450.
Under
the terms of the PA Agreement, the Buyers, upon closing, paid to the Company an aggregate cash amount of $40. In addition, the
Buyers are obligated to pay the remaining $410 pursuant to a note bearing interest at 6% per annum (the “Sellers Note”).
The Buyers are required to make forty-eight monthly cash payments to the Company of $10 following the closing, totaling $462;
provided however, that the Buyer had the option to make a one-time payment of $365 any time prior to December 31, 2017, and the
Company would waive any remaining amounts due on the Sellers Note. The principal amount of the Sellers Note was also subject to
post-closing adjustment through December 31, 2017, if certain criteria were met, however, that period ended and no adjustments
were made. There was $397 due under the Sellers Note as of December 31, 2017, which has not yet been paid.
The
Company recorded a loss of $69 during the year ended December 31, 2017, related to the sale of the PA Assets.
The
Company recorded a loss of $393, which was recorded in other expense, net, during the year ended December 31, 2018, related to
the impairment and write-off of all amounts owed to it under its note receivable. The write-off is due to the Company’s
estimate of collectability of the asset.
In
June 2017, in a separate transaction, the Company entered into an agreement to sell certain equipment to a third party for amount
of $60 and closed the transaction in July 2017. The Company recorded a loss related to equipment of $52 during the year ended
December 31, 2017.
Assets
sold during the year ended December 31, 2017 consisted of the following:
|
|
December 31, 2017
|
|
Inventories
|
|
$
|
413
|
|
Furniture and equipment
|
|
|
226
|
|
|
|
|
639
|
|
Loss on asset sale
|
|
|
(127
|
)
|
Assets sold
|
|
$
|
512
|
|
In
February 2017, the Company entered into a stock purchase agreement (the “SPA”) with Livernois & London, LLC (“Livernois”).
Pursuant to the terms of the SPA, the Company sold to Livernois 100% of the issued and outstanding shares of common stock of its
Texas based subsidiary, ImprimisRx TX, Inc. dba ImprimisRx (“Imprimis TX”). The SPA did not transfer to Livernois
any of the Company’s rights to intellectual property, products, clients, nor any of its existing business operations. As
consideration for the purchase of Imprimis TX, Livernois paid the Company $10 and the Company assigned, and Livernois assumed,
the remaining lease obligation totaling $113 for the Texas based facility. The Company recorded a loss of $173 from the sale of
Imprimis TX for the year ended December 31, 2017, which is included in the accompanying consolidated statements of operations.
NOTE
10. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at December 31, 2018 and 2017 consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Computer software and hardware
|
|
$
|
1,662
|
|
|
$
|
1,239
|
|
Furniture and equipment
|
|
|
397
|
|
|
|
377
|
|
Lab and pharmacy equipment
|
|
|
3,184
|
|
|
|
2,545
|
|
Leasehold improvements
|
|
|
5,496
|
|
|
|
4,810
|
|
|
|
|
10,739
|
|
|
|
8,971
|
|
Accumulated depreciation and amortization
|
|
|
(4,364
|
)
|
|
|
(2,756
|
)
|
|
|
$
|
6,375
|
|
|
$
|
6,215
|
|
The
Company recorded depreciation and amortization expense of $1,608 and $1,401 during the years ended December 31, 2018 and 2017,
respectively.
NOTE
11. INTANGIBLE ASSETS AND GOODWILL
The
Company’s intangible assets at December 31, 2018 consisted of the following:
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
periods
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Net
|
|
|
|
(in years)
|
|
Cost
|
|
|
amortization
|
|
|
Impairment
|
|
|
Carrying value
|
|
Patents
|
|
17-19 years
|
|
$
|
755
|
|
|
$
|
(49
|
)
|
|
$
|
-
|
|
|
$
|
706
|
|
Licenses
|
|
20 years
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
Trademarks
|
|
Indefinite
|
|
|
320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
320
|
|
Customer relationships
|
|
3-15 years
|
|
|
2,998
|
|
|
|
(1,014
|
)
|
|
|
(15
|
)
|
|
|
1,969
|
|
Trade name
|
|
5 years
|
|
|
16
|
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
2
|
|
Non-competition clause
|
|
3-4 years
|
|
|
294
|
|
|
|
(274
|
)
|
|
|
(20
|
)
|
|
|
-
|
|
State pharmacy licenses
|
|
25 years
|
|
|
45
|
|
|
|
(5
|
)
|
|
|
(28
|
)
|
|
|
12
|
|
|
|
|
|
$
|
4,478
|
|
|
$
|
(1,355
|
)
|
|
$
|
(64
|
)
|
|
$
|
3,059
|
|
Amortization
expense for intangible assets for the year ended December 31 was as follows:
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Patents
|
|
$
|
28
|
|
|
$
|
15
|
|
Licenses
|
|
|
-
|
|
|
|
-
|
|
Customer relationships
|
|
|
201
|
|
|
|
257
|
|
Trade name
|
|
|
4
|
|
|
|
3
|
|
Non-competition clause
|
|
|
1
|
|
|
|
87
|
|
State pharmacy licenses
|
|
|
2
|
|
|
|
2
|
|
|
|
$
|
235
|
|
|
$
|
364
|
|
Estimated
future amortization expense for the Company’s intangible assets at December 31, 2018 is as follows:
Years ending December 31,
|
|
|
|
2019
|
|
$
|
244
|
|
2020
|
|
|
242
|
|
2021
|
|
|
242
|
|
2022
|
|
|
242
|
|
Thereafter
|
|
|
2,089
|
|
|
|
$
|
3,059
|
|
There
have been no changes in the carrying value of the Company’s goodwill during the year ended December 31, 2018.
NOTE
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at December 31, 2018 and 2017 consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Accounts payable
|
|
$
|
5,606
|
|
|
$
|
3,241
|
|
Deferred rent
|
|
|
388
|
|
|
|
388
|
|
Accrued interest (see Note 13)
|
|
|
256
|
|
|
|
256
|
|
Accrued exit fee for note payable (see Note 13)
|
|
|
800
|
|
|
|
800
|
|
Total accounts payable and accrued expenses
|
|
|
7,050
|
|
|
|
4,685
|
|
Less: Current portion
|
|
|
(6,250
|
)
|
|
|
(3,885
|
)
|
Non-current total accrued expenses
|
|
$
|
800
|
|
|
$
|
800
|
|
NOTE
13. DEBT
LSAF
Senior Note
During
2015 and 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with IMMY Funding LLC,
an affiliate of Life Sciences Alternative Funding LLC (“LSAF”), as lender and collateral agent. Pursuant to the terms
of the Loan Agreement, as amended in January 2016 and December 2016, LSAF made available to the Company a term loan in the aggregate
principal amount of up to $10,000, all of which was drawn on May 11, 2015. The term loan bore interest at a fixed per-annum rate
of 12.5% and allowed for 2% of the interest to be paid-in-kind until December 2016. The Loan Agreement included a final fee of
5% of the aggregate principal amount of the term loan and prepayment fees of up to 1% of the principal balance were due on January
1, 2019. In connection with the Loan Agreement, the Company issued a warrant to purchase up to 125,000 shares of the Company’s
common stock to LSAF. The Company then entered into subsequent amendments and related note payable agreements with LSAF related
to the Loan Agreement and its warrants during 2016, including a convertible note agreement and note exchange agreement. Beginning
January 1, 2017, the Company owed LSAF $13,332 under the Loan Agreement, its subsequent amendments and related agreements, including
any interest that has been paid in kind of the principal balance, in aggregate.
SWK
Senior Note and LSAF Payoff – 2017
In
July 2017, the Company entered into a term loan and security agreement in the principal amount of $16,000 (the “SWK Loan
Agreement” or “SWK Loan”) with SWK Funding LLC and its partners (“SWK”), as lender and collateral
agent. The SWK Loan Agreement was fully funded at closing with a five-year term, however, such term may be reduced to four years
if certain revenue requirements are not achieved. Concurrently with the funding, the Company utilized a portion of the SWK Loan
funds as full payment to an affiliate of LSAF to terminate all amounts due to LSAF in connection with the LSAF Agreement. In total,
including previously made principal payments, the Company made payments of $13,999 to pay-off the LSAF Agreement and expenses,
which also included the previously accrued exit fee, interest paid in kind and other expenses related to the payoff. The Company
also recorded a loss on early extinguishment of debt during the year ended December 31, 2017 of $884 related to the pay-off.
The
SWK Loan bears interest at a variable rate equal to the three-month London Inter-Bank Offered Rate (subject to a minimum of 1.50%
and maximum of 3.00%), plus an applicable margin of 10.50%. The SWK Loan Agreement permits the Company to pay interest only on
the principal amount loaned thereunder for the first six payments (payments are due on a quarterly basis), which interest-only
period could have been reduced to four payments if the Company had not met certain minimum revenue requirements.
Following the interest-only period, the Company will be required to pay interest, plus repayments of the principal amount loaned
under the SWK Loan Agreement, in quarterly payments, which shall not exceed $750 per quarter. All amounts owed under the SWK Loan
Agreement, including a final fee equal to 5% of the aggregate principal amount loaned thereunder, will be due and payable on July
19, 2022. The Company may elect to prepay all, but not less than all, of the amounts owed under the SWK Loan Agreement prior to
the maturity date at any time after July 19, 2019. The Company is also obligated under the SWK Loan Agreement to pay for certain
expenses incurred by the SWK Lender through and after the date of the SWK Loan Agreement, including certain fees and expenses
relating to the preparation and administration of the SWK Loan Agreement. The Company incurred expenses and final fee of approximately
$1,282 in connection with the SWK Loan Agreement. The final fee and expenses are being amortized as interest expense over the
term of the SWK Loan using the effective interest rate method and the related liability of $800 for the final fee is included
in accrued expenses (see Note 12) in the accompanying consolidated balance sheets as of December 31, 2018 and 2017.
In
connection with the SWK Loan Agreement, the Company issued to SWK warrants to purchase up to 415,586 shares of the Company’s
common stock (the “Lender Warrants”) with an exercise price of $3.08. In August 2017, the Company and SWK amended
the warrants, to allow for the purchase up to 615,386 warrants with an exercise price of $2.08. The Lender Warrants are exercisable
immediately, and have a term of 7 years. The Lender Warrants are subject to a cashless exercise feature, with the exercise price
and number of shares issuable upon exercise subject to change in connection with stock splits, dividends, reclassifications and
other conditions. The relative fair value of the Lender Warrants was approximately $982 and was estimated using the Black-Scholes-Merton
option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $2.08 per share;
seven-year contractual term; 113.5% volatility; 0% dividend rate; and a risk-free interest rate of 1.77%.
For
the years ended December 31, 2018 and 2017, debt discount amortization related to notes payable were $520 and $811, respectively.
Notes
payable at December 31, 2018 were as follows:
|
|
December 31, 2018
|
|
SWK note
|
|
$
|
16,000
|
|
Less: Discount on note
|
|
|
(1,472
|
)
|
Less: Current portion
|
|
|
(2,529
|
)
|
Long-term portion
|
|
$
|
11,999
|
|
Future
minimum payments under notes payable outstanding at December 31, 2018 are as follows:
|
|
Amount
|
|
2019
|
|
$
|
5,018
|
|
2020
|
|
|
4,402
|
|
2021
|
|
|
4,033
|
|
2022
|
|
|
7,410
|
|
Total minimum payments
|
|
|
20,863
|
|
Less: amount representing interest
|
|
|
(4,863
|
)
|
Notes payable, gross
|
|
|
16,000
|
|
Less: unamortized discount
|
|
|
(1,472
|
)
|
Less: current portion, net of unamortized discount
|
|
|
(2,529
|
)
|
Note payable, net of current portion and unamortized debt discount
|
|
$
|
11,999
|
|
NOTE
14. CAPITAL LEASE OBLIGATION
On
August 9, 2016, the Company entered into a commercial lease agreement (the “Lease Agreement”) with Essex Capital Corporation
(“Essex”). Pursuant to the terms of the Lease Agreement, the Company sold certain equipment (the “Equipment”)
to Essex for a total purchase price of approximately $2,000, which was then leased back to the Company under a thirty-six month
term net basis lease with monthly payments of approximately $64. The fair value of equipment sold and then leased under the Lease
Agreement totaled approximately $2,000. The lease term may be extended for an additional twelve month period in the event the
Company achieves certain financial milestones. The Company has the right to purchase the Equipment from Essex upon the expiration
of the Lease Agreement for a purchase price equal to the Equipment’s then fair market value, with such fair market value
not to exceed fifteen percent of the original Equipment value on August 9, 2016. If the Equipment is not purchased at the end
of the term, the Company may automatically extend the lease on a month-to-month basis or return the Equipment and terminate the
Lease Agreement. The Company expects to purchase the Equipment at the end of the term of the lease and has accrued the final payment
amount of $300. The Company also incurred expenses of approximately $67 in connection with the Lease Agreement. The issuance costs
were recorded as a discount. The discount is being amortized as interest expense over the term of the lease using the effective
interest method. The Company used an interest rate of 16.8% for calculation of the present value of the future minimum payments
under the Lease Agreement. For the years ended December 31, 2018 and 2017, debt discount amortization related to the Lease Agreement
was $93 and $167, respectively, and is included in interest expense in the accompanying consolidated statement of operations.
At
December 31, 2018, future payments under the Company’s capital lease were as follows:
|
|
Amount
|
|
2019
|
|
$
|
751
|
|
Total minimum lease payments
|
|
|
751
|
|
Less: amount representing interest payments
|
|
|
(15
|
)
|
Present value of future minimum lease payment
|
|
|
736
|
|
Less: unamortized discount
|
|
|
(16
|
)
|
|
|
|
720
|
|
Less: current portion, net of unamortized discount
|
|
|
(720
|
)
|
Capital lease obligation net of current portion and unamortized discount
|
|
$
|
-
|
|
The
cost of the equipment under capital leases as of December 31, 2018 and 2017 was $2,070, with related accumulated depreciation
of $729 and $444, respectively.
NOTE
15. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Common
Stock
At
December 31, 2018 and 2017, the Company had 50,000,000 and 90,000,000 shares of common stock, $0.001 par value, authorized, respectively.
On July 10, 2018, the Company amended its amended and restated certificate of incorporation to reduce the number of authorized
shares of common stock from 90,000,000 to 50,000,000.
Issuances
During the Year Ended December 31, 2017
In
March 2017, we entered into securities purchase agreements with two accredited investors, which provided for the sale by the Company
of 1,312,500 shares of its common stock, at a price of $2.40 per share (the “Registered Offering”). We received net
proceeds of $2,940 after deducting the underwriter discount of 6% of the gross proceeds from the Registered Offering and other
related expenses.
In
March 2017, the Company issued 25,000 shares of its restricted common stock, with a fair value of $60, as payment for investor
relations related services.
In
April 2017, the Company issued 100,000 shares of common stock as a result of warrant exercises. The Company received cash proceeds
of $179 upon the exercise of the warrants with an exercise price of $1.79.
In
November 2015, the Company entered into a Controlled Equity Offering
SM
sales agreement (the “Sales Agreement”)
with Cantor Fitzgerald & Co., as agent (“Cantor Fitzgerald”), pursuant to which the Company may offer and sell,
from time to time through Cantor Fitzgerald, shares of our common stock having an aggregate offering price as set forth in the
Sales Agreement and a related prospectus supplement filed with the Securities and Exchange Commission. The Company agreed to pay
Cantor Fitzgerald a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement.
The Company sold 557,714 shares of common stock and received net proceeds of $1,124, after deducting $35 for sales commission
and offering expenses, under the Sales Agreement during the year ended December 31, 2017.
During
the year ended December 31, 2017, 56,822 shares of the Company’s common stock underlying RSUs issued to directors vested,
but the issuance and delivery of these shares are deferred until the director resigns.
Issuances
During the Year Ended December 31, 2018
In
January 2018, the Company issued 25,273 shares of its restricted common stock, with a fair value of $44, in lieu of a cash payment
for accrued royalty expenses.
RSUs
granted in February 2015 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and in February 2018, 30,000
shares the Company’s common stock were issued to Mr. Boll.
RSUs
granted in February 2015 to John P. Saharek, the President of ImprimisRx (formerly, the Company’s Chief Commercial Officer),
vested, and in February 2018, 30,000 shares the Company’s common stock were issued to Mr. Saharek.
In
March 2018, the Company issued 35,427 shares of its restricted common stock, with a fair value of $64, in lieu of a cash payment
for accrued royalty expenses.
In
December 2018, the Company issued 15,000 shares of its restricted common stock, with a fair value of $42, related to a milestone
payment due under a sales and marketing agreement.
The
Company sold 305,619 shares of common stock and received net proceeds of $642, after deducting $20 for sales commission and
offering expenses, under the Sales Agreement during the nine months ended September 30, 2018. In November 2018, the
Company terminated the Sales Agreement.
During
the year ended December 31, 2018, the Company issued 2,364,889 shares of its common stock related to the exercise of common stock
warrants with an exercise price of $1.79, and received net proceeds of $4,233.
During
the year ended December 31, 2018, the Company issued 910,273 shares of its common stock related to the cashless exercise of 1,576,665
common stock warrants with an exercise price of $1.79.
During
the year ended December 31, 2018, 99,626 shares of the Company’s common stock underlying RSUs issued to directors vested,
but the issuance and delivery of these shares are deferred until the director resigns.
Preferred
Stock
At
December 31, 2018 and 2017, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares of
preferred stock issued and outstanding.
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 still outstanding and previously issued under the 2007 Plan will remain outstanding until
they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of
Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan (the “2017 Plan” together
with the 2007 Plan, the “Plan”). As of December 31, 2018, the 2017 Plan provide for the issuance of a maximum of 2,000,000
shares of the Company’s common stock. The purpose of the Plan is 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 Plan, the Company is authorized to
issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, non-qualified stock options,
restricted stock units and restricted stock. The Plan is administered by the Compensation Committee of the Company’s Board
of Directors. The Company had 1,572,640 shares available for future issuances under the 2017 Plan at December 31, 2018.
Stock
Options
A
summary of stock option activity under the Plan for the year ended December 31, 2018 is as follows:
|
|
Number of shares
|
|
|
Weighted Avg. Exercise Price
|
|
|
Weighted Avg. Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
Options outstanding - January 1, 2018
|
|
|
2,259,979
|
|
|
$
|
5.50
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
296,500
|
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Options cancelled/forfeit
|
|
|
(74,470
|
)
|
|
$
|
4.29
|
|
|
|
|
|
|
|
|
|
Options outstanding - December 31, 2018
|
|
|
2,482,009
|
|
|
$
|
5.10
|
|
|
|
5.51
|
|
|
$
|
3,990
|
|
Options exercisable
|
|
|
1,337,780
|
|
|
$
|
4.94
|
|
|
|
6.22
|
|
|
$
|
3,525
|
|
Options vested and expected to vest
|
|
|
2,368,925
|
|
|
$
|
5.09
|
|
|
|
5.53
|
|
|
$
|
3,805
|
|
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 options with an exercise
price lower than the market price on December 31, 2018, based on the closing price of the Company’s common stock of $5.69
on that date.
During
2018 and 2017, the Company granted stock options to certain employees, directors and consultants. 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 ranging from five to 10 years. Vesting
terms for options granted in 2018 and 2017 to employees and consultants typically included one of the following vesting schedules:
25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining
75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years;
quarterly vesting over three years. Certain option awards provide for accelerated vesting if there is a change in control (as
defined in the Plan) 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. Beginning
on April 1, 2018, the Company began calculating expected volatility based solely on the historical volatilities of the common
stock of the Company. In the past, the expected volatility was based on the historical volatilities of the common stock of the
Company and comparable publicly traded companies, the Company previously utilized this methodology based on its estimate that
it had limited relevant historical data regarding the volatility of its stock price on which to base a meaningful estimate of
expected volatility. The expected volatility is based on the historical volatilities of the common stock of the Company and comparable
publicly traded companies based on the Company’s belief that it currently has limited relevant historical data regarding
the volatility of its stock price on which to base a meaningful estimate of expected volatility. The expected term of options
granted was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical
data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on
the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial
statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from
those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These factors could
change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these
assumptions, the fair value is determined at the date of grant.
The
table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following
assumptions used for valuing options granted to employees:
|
|
2018
|
|
|
2017
|
|
Weighted-average fair value of options granted
|
|
$
|
1.42
|
|
|
$
|
2.04
|
|
Expected terms (in years)
|
|
|
5.77 - 6.11
|
|
|
|
5.81 - 6.11
|
|
Expected volatility
|
|
|
76 - 126
|
%
|
|
|
112 - 117
|
%
|
Risk-free interest rate
|
|
|
2.05 -
3.00
|
%
|
|
|
1.77 - 2.01
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
following table summarizes information about stock options outstanding and exercisable at December 31, 2018:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Prices
|
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$1.47 - $2.60
|
|
|
|
837,375
|
|
|
|
7.74
|
|
|
$
|
2.04
|
|
|
|
420,774
|
|
|
$
|
2.16
|
|
$3.04 - $4.50
|
|
|
|
536,622
|
|
|
|
6.97
|
|
|
$
|
3.96
|
|
|
|
415,784
|
|
|
$
|
3.98
|
|
$5.49 - $6.36
|
|
|
|
99,350
|
|
|
|
4.52
|
|
|
$
|
5.97
|
|
|
|
97,784
|
|
|
$
|
5.97
|
|
$6.64 - $8.99
|
|
|
|
1,003,632
|
|
|
|
2.98
|
|
|
$
|
7.98
|
|
|
|
398,408
|
|
|
$
|
8.16
|
|
$42.80
|
|
|
|
5,030
|
|
|
|
1.62
|
|
|
$
|
42.80
|
|
|
|
5,030
|
|
|
$
|
42.80
|
|
$1.47 - $42.80
|
|
|
|
2,482,009
|
|
|
|
5.51
|
|
|
$
|
5.10
|
|
|
|
1,337,780
|
|
|
$
|
4.94
|
|
As
of December 31, 2018, there was approximately $1,888 of total unrecognized compensation expense related to unvested stock options
granted under the Plan. That expense is expected to be recognized over the weighted-average remaining vesting period of 1.9 years.
The stock-based compensation for all stock options was $1,317 and $1,672 during the years ended December 31, 2018 and 2017, respectively.
Restricted
Stock Units
RSU
awards are granted subject to certain vesting requirements and other restrictions, including performance and market based vesting
criteria. The grant-date fair value of the RSUs, which has been determined based upon the market value of the Company’s
common stock on the grant date, is expensed over the vesting period of the RSUs. Unvested portions of RSUs issued to consultants
are remeasured on an interim basis until vesting criteria is met.
Grants
During the Year Ended December 31, 2017
During
the year ended December 31, 2017, the Company granted an aggregate of 62,892 RSUs to its non-employee directors valued at $200.
These RSUs vest in equal quarterly installments over a one-year period subject to the director’s continued service at the
vesting date, but the issuance and delivery of these shares are deferred until the director resigns.
A
summary of the Company’s RSU activity and related information for the year ended December 31, 2017 is as follows:
|
|
Number of RSUs
|
|
|
Weighted Average Grant Date Fair Value
|
|
RSUs unvested - January 1, 2017
|
|
|
1,292,876
|
|
|
$
|
2.43
|
|
RSUs granted
|
|
|
62,892
|
|
|
|
3.18
|
|
RSUs vested
|
|
|
(56,822
|
)
|
|
|
3.94
|
|
RSUs cancelled/forfeit
|
|
|
-
|
|
|
|
|
|
RSUs unvested at December 31, 2017
|
|
|
1,298,946
|
|
|
$
|
2.42
|
|
Grants
During the Year Ended December 31, 2018
During
the year ended December 31, 2018, the Company granted an aggregate of 136,360 RSUs to its non-employee directors valued at $300.
These RSUs vest in equal quarterly installments over a one-year period subject to the director’s continued service at the
vesting date, but the issuance and delivery of these shares are deferred until the director resigns.
A
summary of the Company’s RSU activity and related information for the year ended December 31, 2018 is as follows:
|
|
Number of RSUs
|
|
|
Weighted Average Grant Date Fair Value
|
|
RSUs unvested - January 1, 2018
|
|
|
1,298,946
|
|
|
$
|
2.42
|
|
RSUs granted
|
|
|
136,360
|
|
|
|
2.20
|
|
RSUs vested
|
|
|
(159,626
|
)
|
|
|
3.94
|
|
RSUs cancelled/forfeit
|
|
|
-
|
|
|
|
|
|
RSUs unvested at December 31, 2018
|
|
|
1,275,680
|
|
|
$
|
2.16
|
|
As
of December 31, 2018, the total unrecognized compensation expense related to unvested RSUs was approximately $441 which is expected
to be recognized over a weighted-average period of 0.1 years, based on estimated vesting schedules. The stock-based compensation
for RSUs was $1,149 and $1,211 during the years ended December 31, 2018 and 2017, respectively.
Subsidiary
Stock-Based Transactions
During
the year ended December 31, 2018 the Company recognized $21 in stock-based compensation related to equity instruments
granted by Surface and Melt to consultants, the Company’s employees and directors, including its CEO, Mark Baum, CFO,
Andrew Boll, and a director, Richard Lindstrom,.
The
Company recorded stock-based compensation (including issuance of common stock for services and accrual for stock-based compensation)
related to equity instruments granted to employees, directors and consultants as follows:
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Employees - selling and marketing
|
|
$
|
82
|
|
|
$
|
449
|
|
Employees - general and administrative
|
|
|
2,169
|
|
|
|
2,229
|
|
Directors - general and administrative
|
|
|
235
|
|
|
|
205
|
|
Consultants - selling and marketing
|
|
|
150
|
|
|
|
60
|
|
Total
|
|
$
|
2,636
|
|
|
$
|
2,943
|
|
Warrants
From
time to time, the Company issues warrants to purchase shares of the Company’s common stock to investors, lenders (see Note
13), underwriters and other non-employees for services rendered or to be rendered in the future.
A
summary of warrant activity during the year ended December 31, 2018 is as follows:
|
|
Number of Shares Subject to Warrants Outstanding
|
|
|
Weighted Avg.
Exercise Price
|
|
|
|
|
|
|
|
|
Warrants outstanding - January 1, 2018
|
|
|
6,264,215
|
|
|
$
|
1.91
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(3,941,554
|
)
|
|
|
1.79
|
|
Expired
|
|
|
(115,688
|
)
|
|
|
6.94
|
|
Warrants outstanding and exercisable - December 31, 2018
|
|
|
2,206,973
|
|
|
$
|
1.91
|
|
Weighted average remaining contractual life of the outstanding warrants in years - December 31, 2018
|
|
|
2.60
|
|
|
|
|
|
The
table below illustrates the fair value per share determined by the Black-Scholes-Merton option pricing model with the following
assumptions used for valuing warrants granted during the year ended December 31, 2017 related to loan agreements:
|
|
2017
|
|
Weighted-average fair value of warrants granted
|
|
$
|
1.70
|
|
Expected terms (in years)
|
|
|
7.00
|
|
Expected volatility
|
|
|
113.5
|
%
|
Risk-free interest rate
|
|
|
1.77
|
%
|
Dividend yield
|
|
|
-
|
|
All
warrants outstanding as of December 31, 2018 are included in the following table:
|
|
Warrants Outstanding
|
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Warrants
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
|
Expiration
|
|
Warrant Series
|
|
Issue Date
|
|
|
Outstanding
|
|
|
|
Price
|
|
|
|
Exercisable
|
|
|
|
Date
|
|
Lender warrants
|
|
5/11/2015
|
|
|
125,000
|
|
|
$
|
1.79
|
|
|
|
125,000
|
|
|
|
5/11/2025
|
|
Settlement warrants
|
|
8/16/2016
|
|
|
40,000
|
|
|
$
|
3.75
|
|
|
|
40,000
|
|
|
|
8/16/2021
|
|
PIPE Investor and Placement Agent Warrants
|
|
12/27/2016
|
|
|
1,426,587
|
|
|
$
|
1.79
|
|
|
|
1,426,587
|
|
|
|
12/27/2019
|
|
Lender warrants (see Note 13)
|
|
7/19/2017
|
|
|
615,386
|
|
|
$
|
2.08
|
|
|
|
615,386
|
|
|
|
7/19/2024
|
|
|
|
|
|
|
2,206,973
|
|
|
$
|
1.91
|
|
|
|
2,206,973
|
|
|
|
|
|
NOTE
16. INCOME TAXES
The
Company is subject to taxation in the United States, California, New Jersey, Texas and Pennsylvania. The provision for income
taxes for the years ended December 31, 2018 and 2017 are summarized below:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
6
|
|
|
|
5
|
|
Total current
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,294
|
|
|
$
|
6,474
|
|
State
|
|
|
440
|
|
|
|
(283
|
)
|
Change in valuation allowance
|
|
|
(3,734
|
)
|
|
|
(7,126
|
)
|
Total deferred
|
|
|
-
|
|
|
|
(935
|
)
|
Income tax provision (benefit)
|
|
$
|
6
|
|
|
$
|
(931
|
)
|
Income
tax expense for the years ended December 31, 2018 and 2017, are recorded in the general and administrative expenses line item
in the accompanying consolidated statements of operations.
A
reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income
taxes to the income tax provision is as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
U.S. federal statutory tax rate
|
|
|
21.00
|
%
|
|
|
35.00
|
%
|
Benefit of lower tax brackets
|
|
|
0.00
|
%
|
|
|
(1.00
|
)%
|
State tax benefit, net
|
|
|
0.04
|
%
|
|
|
1.60
|
%
|
Research and development credits
|
|
|
(0.14
|
)%
|
|
|
0.00
|
%
|
Employee stock-based compensation
|
|
|
0.46
|
%
|
|
|
(0.84
|
)%
|
Loss on debt conversion
|
|
|
0.00
|
%
|
|
|
(2.39
|
)%
|
Change in Rate
|
|
|
0.00
|
%
|
|
|
(62.97
|
)%
|
Other
|
|
|
0.13
|
%
|
|
|
3.04
|
%
|
Valuation allowance
|
|
|
(21.93
|
)%
|
|
|
34.82
|
%
|
Effective income tax rate
|
|
|
(0.44
|
)%
|
|
|
7.27
|
%
|
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred
tax assets are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
NOL’s
|
|
$
|
19,726
|
|
|
$
|
17,405
|
|
Depreciation and amortization
|
|
|
30
|
|
|
|
58
|
|
Other
|
|
|
602
|
|
|
|
351
|
|
Research & development credits
|
|
|
617
|
|
|
|
596
|
|
Deferred stock compensation
|
|
|
3,036
|
|
|
|
2,534
|
|
Basis Difference in Surface
|
|
|
(1,464
|
)
|
|
|
-
|
|
Basis Difference in Eton
|
|
|
(6,340
|
)
|
|
|
(985
|
)
|
Park stock purchase identifiable intangibles
|
|
|
(484
|
)
|
|
|
(501
|
)
|
Total deferred tax assets, net
|
|
|
15,723
|
|
|
|
19,457
|
|
Valuation allowance
|
|
|
(15,723
|
)
|
|
|
(19,457
|
)
|
Net deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $3,700
and increased by approximately $7,100 during 2018 and 2017, respectively.
As
of December 31, 2018, the Company had net operating loss carryforwards for federal income tax purposes of approximately $67,463
and federal research and development tax credits of approximately $375. Under new tax law, federal NOLs can be carried forward
indefinitely. The federal research credits will expire beginning in the year 2026. As of December 31, 2018, the Company had net
operating loss carryforwards for state income tax purposes of approximately $64,629 which expire beginning in the year
2017 and state research and development tax credits of approximately $305 which do not expire.
In
March 2016, the FASB issued ASU 2016-09,
Improvement to Employee Share – Based Payment Accounting
. The new standard
contains several amendments that will simplify the accounting for employee share-based payment transactions. The changes in the
new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies
recognized either in income tax provision or in additional paid-in capital. The Company’s deferred tax asset at December
31, 2018 did not include any excess tax benefits from employee stock option exercises, which are a component of the federal and
state net operating loss carryforwards and on a go forward basis the excess tax benefits will be recognized as a component of
income tax expense.
Utilization
of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of
the net operating losses ad credits before their utilization.
In
June 2006, the FASB issued interpretation ASC 740-10-50,
Accounting for Uncertainty in Income Tax
. This pronouncement clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC
740-10-50,
Accounting for Income Taxes
. This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. ASC
740 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting
in interim periods, disclosure and transaction. The Company adopted ASC 740-10-50 effective January 1, 2009. In accordance with
ASC 740-10-50, the Company is classifying interest and penalties as a component of tax expense.
The
Company did not have any unrecognized tax benefits as of December 31, 2018 and 2017, all of which is offset by a full valuation
allowance. These unrecognized tax benefits, if recognized, would not affect the effective tax rate. There was no interest or penalties
accrued at the adoption date and at December 31, 2017.
A
reconciliation of the change in the UTB balance from January 1, 2018 to December 31, 2017 is as follows:
|
|
|
Fed & State Tax
|
|
Balance at January 1, 2018
|
|
$
|
-
|
|
Additions for tax positions related to current year
|
|
|
-
|
|
Additions/(reductions) for tax positions related to prior years
|
|
|
-
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
-
|
|
|
|
|
|
|
Total unrecognized tax benefits as of December 31, 2018
|
|
$
|
-
|
|
On
December 27, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate
tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income
the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated
and results in a revaluation of deferred tax assets and liabilities recorded on our consolidated balance sheet. Given the current
deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the consolidated balance
sheet. However, when the Company become profitable, it will receive a reduced benefit from such deferred tax assets. The effect
of the legislation was a reduction in the deferred tax assets and the corresponding valuation allowance of approximately $8,059.
NOTE
17. EMPLOYEE SAVINGS PLAN
The
Company has established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code, effective January 1,
2014. The plan allows participating employees to deposit into tax deferred investment accounts up to 100% of their salary, subject
to annual limits. The Company makes certain matching contributions to the plan in amounts up to 4% of the participants’
annual cash compensation, subject to annual limits. The Company contributed approximately $248 and $288 to the plan during the
years ended December 31, 2018 and 2017, respectively.
NOTE
18. COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
May 2014, the Company entered into a lease agreement for 7,565 square feet of office space that commenced on September 1, 2014.
In May 2017, the Company entered into an amended lease agreement, to lease an additional 2,635 square feet (10,200 square feet
in total). Monthly rent following the amendment is $29, with a 3% increase in the base rent amount on an annual basis. The lease
agreement allows for the monthly rent amount to be abated for two months at various times during the lease agreement and expires
on December 31, 2021, and includes an option to extend the lease through December 31, 2027.
In
January 2015, the Company entered into a commercial lease agreement, for the lease to Park of approximately 4,500 square feet
of laboratory and office space. The monthly rent amount is $10 and includes annual increases of approximately 3%. The current
lease term expires on December 31, 2020 and includes 2 options that allow for the lease term to be extended 10 additional years
beyond the stated expiration date.
In
February 2015, the Company entered into a lease agreement for approximately 8,600 square feet of laboratory, warehouse and office
space in Ledgewood, New Jersey. The Company amended the lease agreement in July 2017, to add approximately 7,000 square feet of
additional space and amended the lease agreement again in September 2018, to add approximately 9,400 square feet. The lease term
expires on July 31, 2024, and includes 2 options that allow for the lease term to be extended 10 additional years beyond the stated
expiration date. The monthly rent amount is $25 and includes annual increases of approximately 3.75%, and the lease allowed for
the first five months of rent amounts to be abated.
Rent
expense for the years ended December 31, 2018 and 2017 was $725 and $649, respectively. The following represents future annual
minimum lease payments, as of December 31, 2018:
2019
|
|
|
$
|
797
|
|
2020
|
|
|
|
857
|
|
2021
|
|
|
|
742
|
|
2022
|
|
|
|
320
|
|
2023
|
|
|
|
330
|
|
2024
|
|
|
|
196
|
|
Total
|
|
|
$
|
3,242
|
|
Legal
Dr.
Sobol
In
December 2016, Louis L. Sobol, M.D. (“Sobol”) filed a lawsuit in the U.S. District Court for the Eastern District
of Michigan, Southern Division against the Company, asserting claims on behalf of himself and an as-yet-uncertified class of consumers.
The claims allege violations under the Telephone Consumer Protection Act, 47 U.S.C. § 227 via the Company’s alleged
transmittal of advertisements to its clients via facsimile. In June 2018, Sobol filed a motion for class certification and in
July 2018 the Company filed a response in opposition to the motion for class certification. A hearing on class certification was
heard in October 2018, however, prior to a decision regarding class certification was made, in February 2019, the Company entered
into a proposed settlement agreement to award the proposed class up to $1,400 in damages. Due to the nature of the lawsuit and
claims, the Company expects total damages related to this lawsuit will total approximately $640. The Company expects the Court
will rule to accept the settlement agreement in the spring of 2019. The Company accrued an expense of $640, its estimated damages
related to the settlement agreement, during the year ended December 31, 2018.
Allergan
USA
In
September 2017, Allergan USA, Inc. (“Allergan”) filed a lawsuit in the U.S. District Court for the Central District
of California against Imprimis Pharmaceuticals, Inc., primarily claiming violations under the federal Lanham Act and California’s
Sherman Act. The parties have each filed a motion for summary judgment and Imprimis also filed a motion to stay. The parties’
motions is scheduled to be heard on March 26, 2019. The trial date is currently set for April 2019. The Company believes the claims
are frivolous, and we have previously and will continue to dispute all claims asserted against it and intends to vigorously defend
these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation, it could result in substantial
costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and
the value of its common stock.
Spectrum
In
February 2018, the Company filed a complaint against Spectrum Laboratory Products, Inc., Spectrum Chemical Manufacturing Corp.
and Spectrum Pharmacy Products, Inc. (collectively “Spectrum”) in the Los Angeles County Superior Court asserting
claims for breach of contract, breach of implied covenant of good faith and fair dealing, violation of California Commercial Code
Section 2101 and fraud. The claims stem from prior business dealings between the Company and Spectrum and allege false representation
by Spectrum regarding their products, fraudulent labeling and misrepresentations of approved product usages. The complaint was
filed with the Court and in May 2018, Spectrum filed an answer with the Court. In November 2018, we dismissed, without prejudice,
the Company lawsuit against Spectrum.
Novel
Drug Solutions et al.
In
April 2018, Novel Drug Solutions, LLC and Eyecare Northwest, PA, (collectively “NDS”) filed a lawsuit against the
Company in the U.S. District Court of Delaware asserting claims for breach of contract. The claims stem from an asset purchase
agreement between the Company and NDS entered into in 2013. In July 2018, NDS filed a first amended complaint which added a claim
for fraudulent inducement. In July 2018, the Company filed a motion to dismiss certain causes of action found in the complaint,
and the Company motion to dismiss was denied. In October 2018, the Company filed counterclaims alleging breach of contract and
breach of covenant of good faith and fair dealing and named certain individual defendants. The lawsuit is currently in the discovery
phase. The Company believe the claims are frivolous and have previously and will continue to dispute all claims asserted against
it and intends to vigorously defend these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation,
it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the
Company’s business and the value of its common stock.
California
Board of Pharmacy
In
March 2018, the California Board of Pharmacy filed an accusation against Park related to a compounded formulation the Company
believes was legally dispensed and was, without its knowledge, inappropriately administered to a patient unknown to the Company,
by the prescribing healthcare professional. The Company filed its response to the accusation and has requested a formal hearing.
The Company believes the claims are frivolous and have previously and will continue to dispute all claims asserted against it
and intends to vigorously defend these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation,
it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the
Company’s business and the value of its common stock.
Product
and Professional Liability
Product
and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. The
Company utilizes traditional third-party insurance policies with regard to its 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.
John
Erick et al.
In
January 2018, John Erick and Deborah Ferrell, successors-in-interest and heirs of Jade Erick, (collectively “Erick”)
filed a lawsuit in the San Diego County Superior against Kim Kelly, ND, MPH asserting claims related to death of Jade Erick. In
April 2018, Erick filed an amendment to the lawsuit, naming the Company as a co-defendant. In September 2018, co-defendant Dr.
Kelly filed a cross-complaint against the Company and various Spectrum entities. The cross-complaint seeks indemnity and contribution
from the Company and Spectrum. The Company answered the claims filed by Dr. Kelly in October 2018. The case is currently in the
discovery phase. The Company believe the claims are frivolous and have previously and will continue to dispute all claims asserted
against it and intends to vigorously defend these allegations. Nonetheless, the Company cannot predict the eventual outcome of
this litigation, it could result in substantial costs, losses and a diversion of management’s resources and attention, which
could harm the Company’s business and the value of its common stock.
General
and Other
In
the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make
claims or take legal actions to assert its rights, including intellectual property disputes, contractual disputes and other commercial
disputes. Any of these claims could subject the Company to litigation.
Indemnities
In
addition to the indemnification provisions contained in the Company’s charter 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 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 consolidated balance sheets.
Klarity
License Agreement – Related Party
In
April 2017, the Company entered into a license agreement (the “Klarity License Agreement”) with Richard L. Lindstrom,
M.D., a member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain
intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic
solution Klarity designed to protect and rehabilitate the ocular surface (the “Klarity Product”).
Under
the terms of the Klarity License Agreement, the Company is required to make royalty payments to Dr. Lindstrom ranging from 3%
to 6% of net sales, dependent upon the final formulation of the Klarity Product sold. In addition, the Company is required to
make certain milestone payments to Dr. Lindstrom including: (i) an initial payment of $50 upon execution of the Klarity License
Agreement, (ii) a second payment of $50 following the first $50 in net sales of the Klarity Product; and (iii) a final payment
of $50 following the first $100 in net sales of the Klarity Product. All of the above referenced milestone payments were payable
at the Company’s election in cash or shares of the Company’s restricted common stock. Dr. Lindstrom was paid $122
and $50 in cash during the years ended December 31, 2018 and 2017, respectively, and was due an additional $15 and $19 at December
31, 2018 and 2017, respectively. The Company incurred $118 and $183 for royalty expenses related to the Klarity License Agreement
during the years ended December 31, 2018 and 2017, respectively. Dr. Lindstrom is a member of the Company’s Board of Directors.
Sales
and Marketing Agreements
During
2017 and 2018, the Company entered various sales and marketing agreements with certain organizations, to provide sales and marketing
representation services to ImprimisRx in select geographies in the U.S., in connection with the Company’s ophthalmic compounded
formulations.
Under
the terms of the sales and marketing agreements, the Company is required to make commission payments to equal to 10% - 14%
of net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to make
periodic milestone payments to certain organizations in shares of the Company’s restricted common stock if net sales in
the assigned territory reach certain future levels by the end of their terms, as applicable. The Company accrued $42 related
to stock-based payments for these agreements during the year ended December 31, 2018, and $1,511 and $183 were incurred under
these agreements for commission expenses during the years ended December 31, 2018 and 2017, respectively.
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 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. $245 and $108 were accrued in accounts payable and accrued expenses under these
agreements during the years ended December 31, 2018 and 2017, respectively, and $561 and $153 were incurred under these
agreements as royalty expenses for the years ended December 31, 2018 and 2017, respectively.
NOTE
19. SEGMENT INFORMATION AND CONCENTRATIONS
The
Company operates the business on the basis of a single reportable segment, which is the business of developing proprietary drug
therapies and providing such therapies through sterile and non-sterile pharmaceutical compounding services and drug development.
While the Company is described as having certain individual businesses, in general, those business operations often overlap, decisions
and resources may be intermingled between components and discrete financial information about the businesses, on an individual
basis, is not available. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the
Company as a single operating segment.
The
Company categorizes revenues by geographic area based on selling location. All operations are currently located in the United
States; therefore, total revenues for 2018 and 2017 are attributed to the United States. All long-lived assets at December 31,
2018 and 2017 are located in the United States.
The
Company sells its compounded formulations to a large number of customers. No single customer contributed 10% or more of the Company’s
total pharmacy sales in the years ended December 31, 2018 and 2017.
The
Company receives its active pharmaceutical ingredients from three main suppliers during the years ended December 31, 2018 and
2017. These suppliers collectively accounted for 51% and 68% of drug and chemical purchases during the years ended December 31,
2018 and 2017, respectively.
NOTE
20. SUBSEQUENT EVENTS
The
Company has performed an evaluation of events occurring subsequent to December 31, 2018 through the filing date of this Annual
Report on Form 10-K (the “Annual Report”). Based on its evaluation, nothing other than the events described below
needs to be disclosed.
From
January 1, 2019 through the date of the filing of the Annual Report, the Company issued 52,000 shares of its common stock
related to the exercise of common stock warrants with an exercise price of $1.79 and received net proceeds of $93.
From
January 1, 2019 through the date of the filing of the Annual Report, the Company issued 293,984 shares of its common stock
related to the cashless exercise of 419,800 common stock warrants with an exercise price of $1.79.
Mayfield
and Elle Pharmaceuticals
On
February 1, 2019, the Company entered into an Asset Purchase Agreement (the “May Asset Purchase Agreement”) with Elle
Pharmaceutical, LLC (“Elle”), where the Company acquired intellectual property and related rights from Elle to develop,
formulate, make, sell, and sub-license lidocaine-based gel formulations (collectively, the “May Products”). As consideration,
the Company agreed to pay Elle $25 at the time of signing the May Asset Purchase Agreement and make royalty payments to Elle up
to seven and a half percent (7.5%) of net sales of the Products as compounded drug formulations.
In
connection with the May Asset Purchase Agreement, the Company assigned the May Products to Mayfield, and Mayfield entered into
a separate Royalty Agreement with Elle (the “Elle Royalty Agreement”). Pursuant to the terms of the Elle Royalty Agreement,
Mayfield, is required to make royalty payments to Elle up to seven and a half percent (7.5%) of net sales of the May Products
as commercially available drugs (e.g. a market approved drug via the U.S. Food and Drug Administration 505(b)(2) pathway), while
any patent rights remain outstanding, as well as other conditions. In addition, Mayfield agreed to pay Elle $175 upon Mayfield
receiving third-party financing equal to or greater than $10,000 of gross proceeds. In connection with the May Asset Purchase
Agreement and Elle Royalty Agreement Mayfield issued to Elle 1,000,000 of its common stock.
Segment
of Business Operations
Beginning
on January 1, 2019, the Company began evaluating performance of the Company based on operating segments. Segment performance for
its two operating segments will be based on segment contribution. Our reportable segments consist of (i) our commercial stage
pharmaceutical compounding business (Pharmaceutical Compounding), generally including the operations of our ImprimisRx and Park
Compounding businesses; and (ii) our start-up operations associated with pharmaceutical drug development business (Pharmaceutical
Drug Development). Segment contribution for our segments represents net revenues less cost of sales, research and development,
selling and marketing expenses, and select general and administrative expenses. The Company does not evaluate the following items
at the segment level:
|
●
|
Operating
expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate
initiatives primarily include integration, restructuring, acquisition and other shared costs.
|
|
|
|
|
●
|
Selling,
general and administrative expenses that result from shared infrastructure, including certain expenses associated with legal
matters, our board of directors and principal executive officers, investor relations and other like shared expenses.
|
|
|
|
|
●
|
Other
select revenues and operating expenses including R&D expenses, amortization, and asset sales and impairments, net as not
all such information has been accounted for at the segment level, or such information has not been used by all segments.
|
|
|
|
|
●
|
Total
assets including capital expenditures.
|
For
periods beginning on and after January 1, 2019, results of operations, including segment net revenues, segment operating expenses
and segment contribution, the Company expects to present segment information in a format similar to the table below:
|
|
Pharmaceutical
|
|
|
Pharmaceutical
|
|
|
|
|
|
|
Compounding
|
|
|
Drug Development
|
|
|
Total
|
|
Net revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset sales and impairments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
$
|
|
|